FDI Flashcards
What is FDI?
Occurs when a firm invests directly into facilities to produce or market a product in a foreign county
What is offshore production?
FDI undertaken to serve the home market
Why is FDI more favourable to exporting?
- High transport costs
- Trade barriers
Why is FDI more favourable to licensing?
- Internalisation Theory/Market imperfections approach
- Seeks to explain why firms often prefer FDI over licensing: three major drawbacks
What are the drawback in the Internalisation Theory/Market imperfections approach?
- Protection of tech know-how
- 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
- Capabilities not suiabilte for licensing
- Loss of efficiency etc.
Why is FDI more favourable to franchising?
- Brand image
- Quality control
- Learning
- Market access
What has been the trend in FDI ?
Over the past 30 years has grown more than the growth in world trade and world output
What kinds of FDI are there?
- Acquisition
* Greenfield
What is acquisition?
- Form of FDI
- Purchase of foreign firm
- Only 1/3rd of FDI in developing countries takes this form
What are the advantages of acquisition?
- Immediate access to/control over tangible/intangible resources, management, employees, customers
- Preempt competitors
- May be less risky than greenfield
What are the disadvantages of acquisition?
- 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
What is greenfield investment?
- Form of FDI?
- Establishment of new firm
What are the advantages of greenfield investment?
- Location selection
- Own culture and practices
- Gradual acclimatisation - test the market
- Often chearper
- Often encouraged by government
What are the disadvantages of greenfield investment?
- Time to build market share
- Risk
Why has FDI grown?
- Fear of protectionism
- Political and economic changes
- New bilateral investment treaties
- Globalisation
What is Dunning’s Eclectic Paradigm?
- 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
How can FDI be a strategic/imitative behaviour?
- 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
What is multipoint competition?
- 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
What is vertical integration and what are the risks and alternatives?
- 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
What are the core political ideologies regarding FDI?
- Radical View
- Free Market View
- Pragmatic Nationalism
What is the radical view of FDI?
- 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
What is the free market view of FDI?
- 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
What is the pragmatic nationalism view of FDI?
- 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
What are the benefits of FDI for the host country?
- Resources transfer effects
- Employment effects
- Balance of payments effects
- Effects on competition and economic growth
What are the costs of FDI for the host country?
- Adverse effects of FDI on competition within the host nation
- Adverse effects on the balance of payments
- Perceived loss of national sovereignty and autonomy
What resource transfer effects of FDI provide benefits to the host country?
Capital, tech, management resources, R&D
What are the positive employment effects of FDI for the host country?
- 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
What are the positive BoP effects of FDI for the host country?
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
What are the positive effects on competition and growth of FDI for the host country?
When FDI is Greenfield, an increased number of firms increases competition
What are the negative effects of of FDI on competition in the host nation?
- 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
What are the negative BoP effects of FDI for the host country?
Outflows of earnings show up as capital outflow, and if inputs are imported for production this is a current account debit
Why might the host country restrict FDI inflows?
- Impact on BoP: profit outflows
- Fear: FDI reduced economic independence
How might the host country restrict FDI inflows?
- Ownership restrictions: strategic industries
- Performance demands: local content and/or export requirements, tech transfer, local participation in top management
- Expatriation restrictions
Why might the host country promote FDI inflows?
- FDI pays for BoP deficit
- New exports
- Import substiution
- New tech, management know-how, employment
How might the host country restrict FDI inflows?
- Financial incentives
- Infrastructure improvements
What are the benefits of FDI to the home country?
- 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
What are the costs of FDI to the home country?
- 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
Why might the home country restrict FDI outflows?
- Damages BoP position
- Reduces investment, employment, exports of finished goods
- Bad international relations
How might the home country restrict FDI outflows?
- Capital outflow restrictions
- Differential tax rates
- Sanctions
Why might the home country promote FDI outflows?
- Long-run competiveness
- Accelerating the decline of sunset industries
- Increased exports of key product components
- Good international relations
How might the home country promote FDI outflows?
- Risk insurance for FDI
- Loans to firms engaging in FDI
- Tax breaks on profits earned abroad
- Political pressure on other countries
When do firms have the most bargaining power in regards to FDI?
- Host government values what the firm has to offer
- Firm has multiple comparable alternatives
- Firm has a long time to complete negotiations
