4 Foreign direct investment Flashcards
2 kinds of international investment
foreign portfolio investment: stock & bonds without the active management of foreign assets = foreign indirect interment
foreign direct investment: involving an equity stake of 10% or more in a foreign based enterprise
Horizontal FDI
duplicate its home country-based activities at the same value chain stage in a host country
Vertical FDI
firm moves upstream or downstram in different value chain stages in a host country by way of FDI
FDI flow
amount of FDI moving in a give period in a certain direction
FDI inflow
inbound FDI moving into a country
FDI outflow
outbound FDI moving out of a country
FDI stock
value of foreign owned firm operating in a country, or controlled by a country’s firms abroad
Multinational enterprises / MNE =
firm that engages in FDI
non-MNE firms can also do business abroad but don’t angles FDI
why engage FDI
OLI paradigm opposes that FDI in the most appropriate from of IB if 3 condition are met
O-advantages
L-advantages
I-advantages
Ownership advantages (O)
- Resources of the firm that can be export, and enable the firm to attain competitive advantages abroad
- sharing of resources across business units
- capabilities arising from combining business units in multiple counties
Locational advantages (L)
Advantages enjoyes by firms operating in certain locations
Market location-bound resources, agglomeration, instructions
are not statics
Internalization advantage (I)
advantages of organizing activities within a multinational firm rather than using a market transaction
market as L advantages - why to establish FDI and not just export
- protectionism: jumping over protectionist barriers
- transportation costs: continue to ba a major barrier to trade in some industries , local production allows serving markets at lower costs.
- direct interaction with the customers
- production and sale of some services cannot be physically separate
Resources as L advantage
specific country: natural resources, human capital, infrastructures
agglomeration as L-advantages
agglomeration: clustering of economic activities in certain location especially important for business seeking innovation
knowledge diffused form one firm to other
skilled labor force
poll of specialized suppliers & buyer also in the region
institution as L-advantages
clear and simple rules
low level of corruption
efficient bureaucracy
Key advantage of FDI over other methods
ability to replace external market relationship with one firm (MNE)
owning, controlling and managing activities in two or more countries
FDI vs exporting
Replacing external market relationship with a single organization spanning both counties –> the MNEs thus reduces cross border transaction costs & increase efficiencies –> I advantages
FDI vs Licensing
FDI affords a high degree of managerial control that reduces the risk of risk specific resources & capabilities being opportunistically take advantage of: dissemination risk (unauthorized diffusion of firm specific know-how)
certain type of knowledge may be to difficult to transfer to license without FDI
FDI provides more direct & higher control over foreign operations
FDI vs offshore outsourcing
3 types of problem with offshore outsourcing
- hold up problem due to asset specificity
- unauthorized dissemination of technology
- costs of monitoring quality & standards
national insinuation and FDI: host country institution
consensus is that FDI leads to a win-win situation for both home and host country
most country retain some institution that either restrict the presence of FDI, regulate the operation of FDI
host country restrictive institutions - outright bans of FDI
Rule out FDI completely, either for the entire economy or for specific sectors
were common in developing economies, rare by the 1990s
host country restrictive institutions - case by case approvals of FDI
make every FDI subject to a registration and approval process
host country restrictive institutions - ownership requirements
a specific form of restriction that disallow full foreign ownership bit allows foreign investors to operate in a county if they establish a Join venture with a local firm
Host country regulation institution - FDI specific regulation
some counties make the operation of FDI subject to specific regulation
for ex. local content requirement require a certain proportion of the values of the goods make in the country to originate form that country
Benefits of FDI
Consumers:
access to international quality product and brands
lower prices due to economics of scale & competition
Suppliers:
technology transfer enhancing productivity
opportunity to become an internal supplier
Competitors:
technology spillovers enable learning
competition may trigger upgrading & innovation
Workers:
employment opportunité
higher labour standard than local firms
training & knowledge transfer
Government:
tax revenues
economic growth
Natural environment
MEN often have higher environmental standards than local firms
negative effect of FDI
consumers: reduces variety or traditional local brands (if local firm are crowded out)
suppliers: crowding out by international sourcing
competitors: crowding out by overwhelming competition
workers: often less labor intensive production than local firms
government: costs of subsidies & other incentives
natural environment: MNEs may locate high polluting activities in place with less stringent regulations
shifting barraging power in stage
stage 1: MNE & government negotiate a deal that involves assurances of property right & incentives
stage 2: MNE makes its interment by building the bridge or power plan, in the expectation of recovering the investments from future revenue streams
stage 3: the MNE sells its services & thus recovers its interment & after may earn profits. observing such protist along with perceived high prices for electric or bridge tolls. domestic political group may pressurize government to renegotiation the deal that seems to yield eccessive profit to the foreign firm.
Government’s tactics include changing rules applying to pricing of electric or bridge tolls, demanding a higher share of profits & taxes or even confiscating foreign assets, in other words: extrapolation
how MNEs and host movement bargain
large firm & small firms acting together may have some power to influence institution & political processes
the bargaining between MNEs and FDI is characterized by the tress Cs’:
common interest, conflicting interest & compromises
Severing wealth funds
SWF: state owned investment fund of financial asset such a stock, bonds, real estate or other financial instruments funded by foreign exchange assets
Most SWFs make relatively passive Foreign Portfolio investment
Some SWF undertake FDI - become more active, direct investors as they hold larges stage in recipients.
Differences SWF and Mne
SWF: state owned or controlled
may acquire equity stakes sufficient to influence target forms, yet they do not gel involved in day to day management or integrate operations
SWF debate
may be politically motivated
inadequate transparency
some SWF suffered losses form their investments during the 2008-2009
