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BUSI2025 > FDI > Flashcards

FDI Flashcards

1
Q

What is FDI?

A

Occurs when a firm invests directly into facilities to produce or market a product in a foreign county

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2
Q

What is offshore production?

A

FDI undertaken to serve the home market

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3
Q

Why is FDI more favourable to exporting?

A
  • High transport costs

- Trade barriers

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4
Q

Why is FDI more favourable to licensing?

A
  • Internalisation Theory/Market imperfections approach

- Seeks to explain why firms often prefer FDI over licensing: three major drawbacks

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5
Q

What are the drawback in the Internalisation Theory/Market imperfections approach?

A
  1. Protection of tech know-how
  2. Retention of strategic control
    • Firm might want its foreign operation to price and market very aggressively which might be at odds with a licensee
    • Firm might want to take advantage of differences in factor costs and specialise one part of production in a given country and importing the rest from elsewhere, a licensee would probably not accept this lack of autonomy
  3. Capabilities not suiabilte for licensing
    • Loss of efficiency etc.
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6
Q

Why is FDI more favourable to franchising?

A
  • Brand image
  • Quality control
  • Learning
  • Market access
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7
Q

What has been the trend in FDI ?

A

Over the past 30 years has grown more than the growth in world trade and world output

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8
Q

What kinds of FDI are there?

A
  • Acquisition

* Greenfield

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9
Q

What is acquisition?

A
  • Form of FDI
  • Purchase of foreign firm
  • Only 1/3rd of FDI in developing countries takes this form
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10
Q

What are the advantages of acquisition?

A
  • Immediate access to/control over tangible/intangible resources, management, employees, customers
  • Preempt competitors
  • May be less risky than greenfield
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11
Q

What are the disadvantages of acquisition?

A
  • Price
    • Data shows firms tend to pay more than market price
    • Managers are often too oprimisic about the value that can be created
  • Class of cultures
  • Potential host government restrictions
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12
Q

What is greenfield investment?

A
  • Form of FDI?

- Establishment of new firm

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13
Q

What are the advantages of greenfield investment?

A
  • Location selection
  • Own culture and practices
  • Gradual acclimatisation - test the market
  • Often chearper
  • Often encouraged by government
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14
Q

What are the disadvantages of greenfield investment?

A
  • Time to build market share

- Risk

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15
Q

Why has FDI grown?

A
  • Fear of protectionism
  • Political and economic changes
  • New bilateral investment treaties
  • Globalisation
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16
Q

What is Dunning’s Eclectic Paradigm?

A
  • A firm undertakes FDI when location, ownership control and internalisation (efficiency) advantages combine to make a location appealing
  • Location-Specific Advantages
    • The advantages that arise from utilising resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets
    • Silicon Valley
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17
Q

How can FDI be a strategic/imitative behaviour?

A
  • Motivation: Market Power
  • A firm tries to establish a dominant market presence in an industry by undertaking FDI
  • Evident in oligopoly’s
  • Multipoint competition
  • Vertical integration
18
Q

What is multipoint competition?

A
  • Knickerbocker - Strategic Behaviour
  • Arises when two or more enterprises encounter each other in different regional markets, national markets or industries
  • Economic theory suggests that firms will try to match each other’s moves in different markets to try to hold each other in check - ensure that a rival does not gain a commanding position in one market and then sue the profits generated there to subsidise competitive attacks in other markets
19
Q

What is vertical integration and what are the risks and alternatives?

A
  • Extension of a firm’s activities into stages of production that 1. provides a firms inputs (backward or downstream integration) or 2. absorb its output (forward or upstream integration)
  • Risks
    • High costs
    • Changes in technology
    • Unpredictability of demand
  • Alternatives
    • Competitive bidding: issues related to distrust
    • Strategic alliances: long term arrangements or JVs
    • Tapered integration for unpredictability of demand
20
Q

What are the core political ideologies regarding FDI?

A
  • Radical View
  • Free Market View
  • Pragmatic Nationalism
21
Q

What is the radical view of FDI?

A
  • Marxist
  • MNE’s are instruments of imperialist domination - extract profits from host country and take them to their home country, giving nothing of value to host country in exchange
22
Q

What is the free market view of FDI?

A
  • MNE’s are an instrument for dispersing the production of goods and services to the most efficient locations around the globe
  • In this way FDI by MNE’s increases the overall efficiency of the world economy
  • Gains from technology, skills and capital and stimulation of economic growth for host country
23
Q

What is the pragmatic nationalism view of FDI?

A
  • FDI can benefit a host country by bringing capital, skills, tech and jobs, but those benefits come at the cost of expatriated profits
  • View says that benefits should outweigh the costs
  • Lends itself to aggressive courting of FDI believed to be in national interest
24
Q

What are the benefits of FDI for the host country?

A
  • Resources transfer effects
  • Employment effects
  • Balance of payments effects
  • Effects on competition and economic growth
25
Q

What are the costs of FDI for the host country?

A
  • Adverse effects of FDI on competition within the host nation
  • Adverse effects on the balance of payments
  • Perceived loss of national sovereignty and autonomy
26
Q

What resource transfer effects of FDI provide benefits to the host country?

A

Capital, tech, management resources, R&D

27
Q

What are the positive employment effects of FDI for the host country?

A
  • Job “transfer”, not necessarily creation - net effect from home country lost jobs
  • Mergers and Acquisitions tend to lead to downsizing in the short term, however research suggest that once the initial restructuring is over, MNEs tend to increase their employment base at a fast rate than domestic rivals
28
Q

What are the positive BoP effects of FDI for the host country?

A

If FDI is a substitute for imports of goods or services, or when the MNE uses a foreign subsidiary to export goods to other countries, the effect can be to strengthen the current account

29
Q

What are the positive effects on competition and growth of FDI for the host country?

A

When FDI is Greenfield, an increased number of firms increases competition

30
Q

What are the negative effects of of FDI on competition in the host nation?

A
  • May have greater economic power than indigenous competitors - may be able to draw on funds generated elsewhere to subsidise its costs in the host market and drive out competition
  • Especially valid in Mergers and Acquisitions
31
Q

What are the negative BoP effects of FDI for the host country?

A

Outflows of earnings show up as capital outflow, and if inputs are imported for production this is a current account debit

32
Q

Why might the host country restrict FDI inflows?

A
  • Impact on BoP: profit outflows

- Fear: FDI reduced economic independence

33
Q

How might the host country restrict FDI inflows?

A
  • Ownership restrictions: strategic industries
  • Performance demands: local content and/or export requirements, tech transfer, local participation in top management
  • Expatriation restrictions
34
Q

Why might the host country promote FDI inflows?

A
  • FDI pays for BoP deficit
  • New exports
  • Import substiution
  • New tech, management know-how, employment
35
Q

How might the host country restrict FDI inflows?

A
  • Financial incentives

- Infrastructure improvements

36
Q

What are the benefits of FDI to the home country?

A
  • Effect of capital account
    • Inward flow of foreign earnings
    • Can stimulate BoP if foreign subsidiary creates demand for home country exports of capital, intermediate or complementary goods
  • Employment effects
    • Indirect through raised economic growth
    • If foreign subsidiary creates demand for him country exports
  • Gains from learning valuable skills
37
Q

What are the costs of FDI to the home country?

A
  • National balance of payments can suffer
    • Initial capital outflow required to finance FDI
    • Current account suffers if the purpose of FDI is to serve the home market from a low-cost production location, or if it is a substitute for direct exports to the host country
  • Employment
38
Q

Why might the home country restrict FDI outflows?

A
  • Damages BoP position
  • Reduces investment, employment, exports of finished goods
  • Bad international relations
39
Q

How might the home country restrict FDI outflows?

A
  • Capital outflow restrictions
  • Differential tax rates
  • Sanctions
40
Q

Why might the home country promote FDI outflows?

A
  • Long-run competiveness
  • Accelerating the decline of sunset industries
  • Increased exports of key product components
  • Good international relations
41
Q

How might the home country promote FDI outflows?

A
  • Risk insurance for FDI
  • Loans to firms engaging in FDI
  • Tax breaks on profits earned abroad
  • Political pressure on other countries
42
Q

When do firms have the most bargaining power in regards to FDI?

A
  • Host government values what the firm has to offer
  • Firm has multiple comparable alternatives
  • Firm has a long time to complete negotiations

BUSI2025 (12 decks)

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