Chapter 6a: Terms

Question 1

Foreign portfolio investment (FPI)

Answer 1

Investment in a portfolio of foreign securities such as stocks and bonds.

Question 2

Joint venture

Answer 2

An operation with shared ownership by several domestic or foreign companies.

Question 3

Horizontal FDI

Answer 3

FDI that creates operations abroad at the same position in the value chain as the operation in the home country.

Question 4

Vertical FDI

Answer 4

A type of FDI in which a firm moves upstream or downstream in different value chain stages in a host country.

Question 5

Upstream vertical FDI

Answer 5

A type of vertical FDI in which a firm engages in an upstream stage of the value chain.

Question 6

Downstream vertical FDI

Answer 6

A type of vertical FDI in which a firm engages in a downstream stage of the value chain in two different countries.

Question 7

FDI flow

Answer 7

The amount of FDI moving in a given period (usually a year) in a certain direction.

Question 8

Foreign direct investment (FDI)

Answer 8

Investment in, controlling and managing value-added activities in other countries.

Question 9

FDI stock

Answer 9

The total accumulation of inbound FDI in a country or outbound FDI from a country across a given period of time (usually several years).

Question 10

OLI paradigm

Answer 10

A theoretical framework positing that ownership (O), location (L) and internalization (I) advantages combine to induce firms to engage in FDI.

Question 11

Ownership advantages

Answer 11

Resources of the firm that are transferable across borders and enable the firm to attain competitive advantages abroad.

Question 12

Locational advantages

Answer 12

Advantages enjoyed by firms operating in certain locations.

Question 13

Internalisation advantages

Answer 13

Advantages of organizing activities within an MNE rather than using market transactions.

Question 14

Location-bound resources

Answer 14

Resources that cannot be transferred abroad.

Question 15

Five reasons to encourage firms to set up operations close to their markets

Answer 15

1. Protectionism
2. Transportation costs
3. Direct interaction with the customer
4. The production and sale of some services
5. Marketing assets

Question 16

Agglomeration

Answer 16

The location advantages that arise from the clustering of economic activities in certain locations.

Question 17

Knowledge spillover

Answer 17

Knowledge diffused from one firm to others among closely located firms.

Question 18

Transaction costs

Answer 18

The costs of organising a transaction

Question 19

Market failure

Answer 19

Imperfections of the market mechanism that make some transactions prohibitively costly.

Question 20

Asset specificity

Answer 20

An investment that is specific to a business relationship.

Question 21

Intra-firm trade

Answer 21

International trade between two subsidiaries in two countries controlled by the same MNE.

Question 22

Licensing

Answer 22

Firm A’s agreement to give Firm B the rights to use A’s proprietary technology (such as a patent) or trademark (such as a corporate logo) for a royalty fee paid to A by B.

Question 23

Dissemination risk

Answer 23

The risk associated with unauthorized diffusion of firm-specific know-how.

Question 24

Tacit knowledge

Answer 24

Knowledge that is noncodifiable and whose acquisition and transfer require hands-on practice.

Question 25

Local content requirements

Answer 25

Requirement that a certain proportion of the value of the goods made in a country originates from that country.

Question 26

Tax avoidance

Answer 26

Reducing tax liability by legally moving profits to jurisdictions where tax rates are lower.

Question 27

Three regulations of FDI

Answer 27

1. General regulatory institutions of business
2. Trade regulation impacting FDI
3. Corporate taxation

Question 28

Bargaining power

Answer 28

The ability to extract a favourable outcome from negotiations due to one party’s strengths.

Question 29

Obsolescing bargain

Answer 29

Refers to the deal struck by MNEs and host governments which change their requirements after the initial FDI entry.

Question 30

Sunk costs

Answer 30

Up-front investments that are non-recoverable if the project is abandoned.

Question 31

Expropriation

Answer 31

Government’s confiscation of private (foreign-owned) assets.

Question 32

Emerging economy MNEs

Answer 32

MNEs that originate from an emerging economy and are headquartered there.

Question 33

Sovereign wealth fund (SWF)

Answer 33

A state-owned investment fund composed of financial assets such as stocks, bonds, real estate or other financial instruments.

Question 34

Implications for action for FDI

Answer 34

1. Carefully assess whether FDI is justified in light of other foreign entry modes, such as outsourcing and licensing.
2. Pay careful attention to the location advantages in combination with the firm’s strategic goals.
3. Be aware of the institutional constraints and enablers governing FDI and enhance legitimacy in host countries.

Question 35

Explain how home and host country institutions affect FDI

Answer 35

• 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.

Question 36

Three debates on FDI

Answer 36

1. The relationship between MNEs and host governments is subject to an ‘obsolescing bargain’.
2. Emerging economy MNEs are important new players in the global economy.
3. Sovereign wealth funds (SWFs) from resource-rich countries are becoming important international investors.