FDI

Question 1

What is FDI

Answer 1

FDI is an internationalisation strategy in which the firm establishes a physical presence abroad through ownership of productive assets such as capital, technology, labour, land and equipment

FDI by received

1. US
2. Hong Kong
3. China
4. UK

Question 2

Why engage in FDI?

Answer 2

• Strategic behaviour: can raise entry barriers or shut out new competitors, or circumvent barriers established by companies already doing business in the foreign country
• Market implications - need to overcome lack of know how or the firm must invest in specialised assets whose value depends on inputs provided by a foreign supplier

1. Ownership advantages
2. Location advantages
3. Internationalisation advantages

Question 3

Types of FDI

Answer 3

• Horizontal FDI
• Vertical FDI

Hence FDI occurs when a firm invests directly in facilities to produce and/or market product in a foreign country

• Green field investment - establishing a wholly new operation in a foreign country
• A or M with an existing firm in a foreign country
• Investment portfolio is not fdi

Question 4

The case for and against FDI

Answer 4

FOR;

• Protects technology
• Local product identity
• Adaptation to local customer requirement
• Shorter likes of delivery
• Easier after sales
• Access to skilled staff
• Bypass high tariffs
• Gain access to local procurement
• Combat adverse exchange rate

AGAINST

• High capital outlay
• Duplication of effort and inefficiency
• Coordination and management may be difficult
• Complexities dealing with foreign currencies
• Transfer price decisions

Question 5

Objectives of National FDI policies

Answer 5

Development concerns;

• Maximising benefits of FDI
• Attracting FDI
• Minimising negative effects of FDI

Question 6

National Policies

Answer 6

Some major concerns;

• JV arrangement
• Controlling entries and takeovers
• Excluding foreigners
• Controlling local content
• Export requirements
• Controlling capital market

Examples of policies towards FDI;

• Investment process
• Investment protection
• Fiscal and non fiscal incentives
• Soft incentives

Question 7

Benefits and costs of FDI to host country

Answer 7

BENEFITS;

• Resource-transfer effect
• Employment effect
• Balance of payments effect
• Effect on competition and economic growth

COSTS;

• Drive out local competitor
• Profits brought home debit a hosts credit account
• Parts imported for assembly may hurt trade balance