FDI Flashcards
What is a Multinational Firm?
Business incorporated in one country that has production and sales operations in several other countries.
What is FDI?
Purchase of physical assets – typically the investment in production facilities in a foreign country.
How may a firm engage in FDI?
Greenfield and Cross Border M&A
OLI Framework (Eclectic Paradigm)
Dunning 1977
Ownership-specific
Location
Internalisation
Ownership Advantages
Links to resource based view of the firm
Advantage that one company has over another company in a different country, in supplying a market
This is from the ownership of hard to imitate, valuable and rare resources
Comparative advantage > liability of foreigness
If yes, consider FDI. If no, remain domestic
Location Advantages
The advantages the foreign country has over the domestic country. This can be geographic factors or tax regulations
Porters Diamond of National Competitive Advantage Starbucks in Amsterdam
Netherlands
Internalisation Advantages
Refers to the process of foreign engagement
Is it more value creating to keep assets in house or externally? Make or buy
Coase nature of the firm
Internalisation theory
e.g. Coca Cola
Motivations of FDI
What is FDI primary objective of the firm Financial perspective, value enhancing Kindle burger (1969) motives Get around trade barriers Intangible Assets Imperfect labour market Product Life cycle vertical integration shareholder diversification
Why firms engage in Cross Border M&As
What is cross border M&A
What is the ultimate goal of the firm
Therefore would expect the motivation to be to enhance value
Cross border have added elelemts that domestic M&A
Kindleberger 1969 motivations of FDI that relate
Erel et al. (2012) further expands conversation to determinants that increase likelihood of M&A
Geography, Economic development, currency/stock performance
Alexandridis et al (2010) evidence for fundamental aim being generation of synergistic gains
Increased market power, shareholder wealth, corporate growth, boosted profits
Geography Matters
Closer you are > more likely
NZ 2/3 Australia
Home bias puzzle
Economic development
Acquirers tend to be high development
increases chances of merger being accepted by target
increase shareholder protection
Currency
3 years prior
acquirers currency appreciates,
Stock performance
3 years prior
Acquirers improve better than target
Shareholders benefit?
Doukas and Travlos (1988) supported by Harris and Ravenscroft (1991)
Morck and Yeung (1992) information intangible assets
Alexandridis et al (2010) US/UK/Canada, normal or negative. ROW positive
Overpaying - managerial confidence/empire building
Payment method also affects
Political risk
potential of uncertain political events may occur that impacts the success of a firm’s FDI.
Macro/Micro
Transfer/operational/control
