CH8 Flashcards
LO 8-1 Recognize current trends regarding foreign direct investment (FDI) in the world economy. LO 8-2 Explain the different theories of FDI. LO 8-3 Understand how political ideology shapes a government’s attitudes toward FDI. LO 8-4 Describe the benefits and costs of FDI to home and host countries. LO 8-5 Explain the range of policy instruments that governments use to influence FDI. LO 8-6 Identify the implications for managers of the theory and government policies associated with FDI.
Foreign Direct Investment (FDI)
Occurs when a firm invests directly in new facilities to produce and/or market in a foreign country (10 percent or more).
- The firm becomes a multinational enterprise.
Flow of FDI
The amount of FDI undertaken over a given time period.
Outflows―flows of FDI out of a country.
Inflows―flows of FDI into a country.
Stock of FDI
The total accumulated value of foreign-owned assets at a given time.
Trends in FDI
Increase in both flow and stock of FDI over past 25 years.
- Growing more rapidly than world trade and world output.
- Way to circumvent trade barriers.
- Political and economic changes.
- Shift towards democratic political institutions and free market economies.
- Globalization
The direction of FDI
Historically, mostly directed at DEVELOPED nations.
- U.S. is a target for FDI inflows.
- Large and wealthy domestic market
- Dynamic and stable economy
- “Favorable political environment” and openness to FDI.
- European inflows mainly from the U.S. and other European nations.
- China has also been a recipient of FDI recently.
Source of FDI
- U.S. is the largest source since WWII.
- 6 countries (U.S., UK, France, Germany, Japan, and the Netherlands) account for 60 percent of all FDI outflows.
_ China became a major foreign investor around 2005, especially in less developed nations.
Greenfield Investment
A type of FDI in which a parent company creates a subsidiary in a different country, building its operations from the ground up.
Aquisitions and Mergers
- Quicker to execute
- Can acquire valuable strategic assets
- Can increase the efficiency of the acquired unit by transferring capital, technology, or management skills.
3 COmplementary Perspectives:
_ Seeks to explain why a firm will favor direct investment as a means of entering a foreign market when two other alternatives, exporting and licensing, are open to it.
_ Attempts to explain the observed pattern of foreign direct investment flows.
_ The eclectic paradigm, attempts to combine the two other perspectives into a single holistic explanation of foreign direct investment.
Limitations of Exporting
- Transportation costs and trade barriers.
- By limiting imports through quotas and tariffs, governments increase the attractiveness of FDI and licensing.
Limitations of Licensing
- Licensing may result in a firm’s giving away valuable technological know-how to a potential foreign competitor.
- Licensing does not give a firm the tight control over production, marketing, and strategy in a foreign country that may be required to maximize its profitability.
- The firm’s competitive advantage is based on the management, marketing, and manufacturing capabilities, which is not amenable to licensing.
Advantages of Foreign Direct Investment
- When transportation costs or trade barriers make exporting unattractive.
- When a firm wishes to maintain control over its technological know-how, or over its operations and business strategy, or when the firm’s capabilities are simply not amenable to licensing.
Oligopoly
A state of limited competition, in which a market is shared by a small number of producers or sellers.
Knickerbocker
Relationship between FDI and rivalry in oligopolistic industries.
The Radical View
- Roots in Marxist political and economic theory.
- The multinational enterprise (MNE) is an instrument of imperialist domination
- Influential view from 1945-1980s
- No longer widely accepted