chapter 8 Flashcards
Horizontal Direct Investment
FDI in the same industry abroad as company operates at home
Backward vertical FDI
an investment in an industry abroad that provides inputs for a firm’s domestic production processes (manufacturer, wholesaler, retailer)
Forward vertical FDI
an industry abroad sells the outputs of a firm’s domestic production processes (retailer, wholesaler, manufacturer)
Eclectic Paradigm
The 3 conditions that must be satisfied for a firm to engage in FDI
Company specific advantages
1 condition of eclectic paradigm they have to be superior to local firms
Internalization advantages
one condition of Eclectic Paradigm
incentives to invest money into the market in order to control it
Location specific advantages
it must be more profitable to locate abroad. Ex- tax breaks, providing subsidies along with better technology in japan so companies would locate there
Reasons to buy
A company that is already established saves time, money, the company already has workers, technologies, customers and brand recognition
Reasons to build
there might not be a company available to buy, government restrictions, there could be environmental, labor or legal problems which then would make the new buyers liable, financing may be easier and there could be managerial/cultural problems
radical view
MNE (multi-national enterprise) is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries
East India Company
Union Carbide
chemical company that resulted in the Bhopal disaster
Free Market view
International production should be distributed among countries according to the theory of comparative advantage
Pragmatic nationalism
nations attempt to problem solve. Let them do business as it works
benefits of fdi
inflows of capital, technology, skills and jobs
Costs of fdi
repatriation of profits and a negative balance of payments effect
Host country benefits
- Resource Transfer Effects
capital, technology, and management resources - Employment Effects
FDI can bring jobs that would otherwise not be created there - Balance-of-Payments Effects- good bc the money comes back to te US
- effect on competition
Host country costs
Adverse Effects on Competition- The MNE could draw on funds generated elsewhere to subsidize costs in the local market, Doing so could allow the MNE to drive indigenous competitors out of the market and create a monopoly position, Local entrepreneurship might be deteriorated.
- Adverse Effects on the Balance of Payments- Import components and equipment
- National Sovereignty and Autonomy
Home country benefits
inward flow of foreign earnings
The employment effects arise
The gains skills and technologies from foreign markets
America for American compnaies
Home country costs
The balance of payments suffers from the initial capital outflow required to finance the FDI. The current account is negatively affected if the purpose of the FDI is to serve the home market from a low-cost production location
The current account suffers if the FDI is a substitute for direct exports
