Chapter 6 Flashcards
Foreign direct investment (FDI):
Investment in, controlling and managing value-added activities
in other countries
Emerging economy MNEs:
MNEs that originate from an emerging economy and are
headquartered there
Foreign portfolio investment (FPI):
Investment in a portfolio if foreign securities such as stocks
and bonds
Joint ventures:
Operations with shared ownership by several domestic or foreign companies
Horizontal FDI:
This is when a company duplicates its home-country operations in another country at the same stage of the value chain.
Vertical FDI:
FDI in operations in different stages
of the value chain, upstream or downstream
Upstream vertical FDI:
FDI in an upstream stage
of the value
The company invests in foreign suppliers of raw materials or inputs.
Downstream vertical FDI:
FDI in a downstream
stage of the value chain in two different countries
The company invests in distribution or retail activities in a foreign country.
FDI flow:
The amount of FDI moving in given period (usually a year) in a certain direction
FDI stock:
The total value of inbound FDI in a country or outbound FDI from a country operating
at a given point in time
OLI paradigm:
A theoretical framework positioning that ownership (O), location (L) and
internalisation (I) advantages combine to induce firms to engage in FDI
Liability of foreigners:
The inherent disadvantage a firm faces when competing with local firms in
a foreign country
Ownership advantages (O-advantages):
Resources of the firm that are transferable across
borders and enable the firm to attain competitive advantages abroad
Location-bound resources:
Resources that cannot be transferred abroad
Location advantage (L-advantage):
An advantage enjoyed by firms operating in certain
locations
Internalisation advantages (I-advantages):
Advantages of organizing activities within a
multinational firm rather than using a market transaction
Types of O-advantages
- resources created in one country that can be exploited in other countries
- capabilities arising from combining business units in multiple countries
- capabilities arising from organizational structures and culture
Types of L-advantages
- Markets
- Location-bound Human Resources
- Natural resources
- Agglomeration
- Institutions
I-advantages: types of market failure
- Asset specificity
- Information assymetry
- Dissemination risk
- Tacit knowledge transfers
=> Its about keeping control in-house to avoid: contractual risk, opportunistic behaviour by foreign partners
- loss of proprietary knowledge
- market failures like poorly functioning legal systems
=> An FDI can overcome market failures, such as firm-specific resources being opportunistically taken advantage of under a licensing contract with a company in a different country
Agglomeration:
The benefits (or external economies) firms obtain by locating near each other. These advantages arise from the clustering of economic activities in particular geographic areas.
Knowledge spillover:
Knowledge diffused from one firm to others among closely located firms
Transaction costs:
The costs of organizing a transaction
Market failure:
Imperfections of the market mechanism that make some transactions prohibitively
costly
Asset specificity:
An investment that is specific to a business relationship
Licensing:
A contract by which a firm allows another firm to use its intellectual property rights in
return for a fee
Franchising:
A contract by which a firm allows another firm to use its branded service or
products in return for a fee
Dissemination risk:
The risk associated with unauthorised diffusion of firm-specific know-how
Tacit knowledge:
Knowledge that is no-codifiable and whose acquisition and transfer require
hands-on practice
Local content requirements:
Requirement that a certain proportion of the value of the goods
made in a country originated from that country
Tax avoidance:
Reducing tax liability by legally moving profits to jurisdiction where tax rates are
lower
Bargaining power:
The ability of one party in a negotiation to influence the terms and extract favorable outcomes based on its relative strengths, resources, or alternatives
Obsolescing bargain:
Refers to the deal struck by MNEs and host governments which change their requirements after the initial FDI entry Sunk costs: Up-front investments that are non-recoverable if the project is abandoned
Expropriation:
Government confiscation of private (foreign-owned) assets
State-owned enterprise (SOEs):
Companies with direct ownership by the state
Soft budget constraint:
Phenomenon that SOEs tens to receive extra resources from the state when facing financial difficulties
Sovereign wealth fund (SWF):
A state-owned investment fund composed of financial assets
such as stocks, bonds, real estate or other financial instruments
Explain how home and host country institutions affect FDI
- Host countries may restrict FDI by outright bans, case-by-case approval, or limits on foreign
ownership, but such restrictions have become less common in recent years. - Foreign investors are subject to the same regulatory institutions as local firms, plus in some
countries special regulations for foreign investors. - Variations in corporate taxation rules also influence the pattern of FDI.
