Chapter 7 Summary Flashcards
Describe the worldwide pattern of foreign direct investment (FDI)
In 2014, developing countries attracted a greater share of global FDI inflows (about 55 percent) than developed countries attracted (41 percent).
The EU, the United States, and Japan account for the majority of FDI inflows.
FDI to developing Asian nations - China, India as the top earners. FDI to Latin America and the Caribbean accounted for about 10 percent of the world total.
Globalization and mergers and acquisitions are the two main drivers of global FDI.
Summarize each theory that attempts to explain why FDI occurs
The international product life cycle theory:
Says that a company begins by exporting its product and then later undertakes FDI as the product moves through its life cycle.
Market imperfections theory:
Says that a company undertakes FDI to internalize a transaction and remove an imperfection in the marketplace that is causing inefficiencies.
The eclectic theory:
Says that firms undertake FDI when the features of a location combine with ownership and internalization advantages to make for an appealing investment.
The market power theory:
States that a firm tries to establish a dominant market presence in an industry by undertaking FDI.
Outline the important management issues in the FDI decision
Control is not guaranteed, even at 100% ownership.
Acquisition of an existing business is preferred when it has updated equipment, good relations with workers, and a suitable location.
Firms often engage in FDI when it gives them valuable knowledge of local buyer behavior, or when it locates them close to client firms and rival firms.
Explain why governments intervene in FDI.
Host nations:
Receive a balance-of-payments boost from initial FDI and from any exports the FDI generates, but they see a decrease in balance of payments when a company sends profits to the home country. FDI in technology brings in people with management skills who can train locals and increase a nation’s productivity and competitiveness.
Home countries:
Can restrict a FDI outflow because it lowers the balance of payments, but profits earned on assets abroad and sent home increase the balance of payments. FDI outflows may replace jobs at home that were based on exports to the host country, and may damage a home nation’s balance of payments if they reduce prior exports.
Describe the policy instruments governments use to promote and restrict FDI.
Host countries promote FDI inflows by offering companies tax incentives, extending low interest loans, and making local infrastructure improvements.
Host countries restrict FDI inflows by imposing ownership restrictions, and by creating performance demands that influence how a company operates.
Home countries promote FDI outflows by offering insurance to cover investment risk, granting loans to firms investing abroad, guaranteeing company loans, offering tax breaks on profits earned abroad, negotiating special tax treaties, and applying political pressure on other nations to accept FDI.
Home countries restrict FDI outflows by imposing differential tax rates that charge income from earnings abroad at a higher rate than domestic earnings and by imposing sanctions that prohibit domestic firms from making investments in certain nations.
