Chapter 7 - Foreign Direct Investment Flashcards
The acquisition or construction of physical capital by a firm from one country in another country.
Foreign Direct Investment
Most authoritative and reliable source of information about global FDI by country and by activity.
United Nations Conference on Trade and Development (UNCTAD)
Business expands its domestic operation to foreign country.
Horizontal FDI
Multinational company acquires or builds an operation to fulfill the role of a supplier.
Backward Vertical FDI
Multinational company fulfills the role of a distributor.
Vertical FDI
Grants the rights for use of intellectual property/business method for royalties.
Licensing and Franchising
Forms of FDI:
1) Acquisition of, or a merger or Joint Venture with, an existing local firm in the destination market
2) Green Field Investment
Amount of FDI undertaken over a given time period.
Flow of FDI
Total accumulated value of foreign-owned assets at a given time.
Stock of FDI
Flow of FDI out of a count.
FDI Outflows
Flow of FDI into a country.
FDI Inflows
Reasons for FDI growth:
1) Fear of protectionism
2) Shift towards democratic political institutions and free market economies
3) Globalization of world economy
Limitations of exporting:
1) Transportation cost
2) Trade barriers
3 major drawbacks of licensing:
1) Giving away valuable technological know-how
2) Loss of tight control over manufacturing, marketing, and strategy to maximize its profitability
3) Firm’s skills and know-how are not amenable to licensing
FDI flows are reflection of strategic rivalry between firms in oligopolistic industries.
Strategic Behaviour Theory
(by Knickerbocker)
Product is first introduced in a developed nation, soon finds market in other developed nations.
The Product Life Cycle Theory
(by Raymond Vernon)
Two or more enterprises encounter each other in different regional markets, national markets, or industries.
Multipoint competition
Explains rationale for and direction of FDI in addition to strategic behavior and product life cycle patterns.
The Eclectic Paradigm Theory
(by John Dunning)
Knowledge spillovers that occur when companies in the same industry locate in the same area.
Externalities
A political ideology that roots to Marxist political and economic theory; multinational companies are a tool for exploiting host countries.
The Radical View
A political ideology that international production should be distributed among countries according to the theory of comparative advantage.
The Free Market View
A political ideology where FDI has both benefits, such as inflows of capital, technology, skills and jobs, as well as costs.
Pragmatic Nationalism
Benefits of FDI:
1) Resource transfer effects
2) Employment effects
3) Balance-of-Payments effects
Positive contribution to economy by supplying capital, technology, and management resources otherwise not available.
Resource transfer effects
Creates jobs that are otherwise not available.
Employment effects
FDIs help a country achieve current account surplus for country’s balance of payment.
Balance-of-Payments effects
Costs of FDI:
1) Adverse effects on competition
2) Adverse effects on the Balance of Payments
3) National sovereignty and autonomy
Multinational companies’ foreign subsidiaries have greater economic power to kill indigenous competition.
Adverse effects on competition
Foreign subsidiary repatriates earnings to its parent country.
Adverse effects on the Balance of Payments
Multinational companies can keep country to economic ransom.
National sovereignty and autonomy
Many investor nations now have government-backed insurance programs to cover foreign investment risk.
Encouraging Outward FDI
All nations exercise this to some degree.
Restricting Outward FDI
Tax concessions, low-interest loans, grants/subsidies.
Encouraging Inward FDI
