FDI Flashcards
FDI
(UNCTAD) define Foreign Direct Investment as:
an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor
□ UNCTAD uses the cut-off equity stake of 10%
□ Arbitrary number, convention, lower than 10% is a portfolio, greater than is FDI (if from a different country)
Why are FDI’s different from portfolio investments
no direct control
□ No influence over the company, just to get a return in the country
□ Buy stocks in foreign stock exchange
□ Not typically held over a long term
multinational enterprises
“Companies coordinating and controlling operations in more than one country, even if it does not own them” (Dicken)
FDI stock
the level of direct investment at a given point in time, FDI that it already in the country (cumulative amount)
FDI Flow
the value of cross-border transactions related to direct investment in a given period of time (in and out) - new FDI
Inward FDI
(investment in a country come from other countries)
Outward FDI
(a firm expands operations to a foreign country)
Characteristics of FDI
greenfield investments
M&As (mergers and acquisitions)
Greenfield investment
a company decides to invest in another country rom scratch, rather than buying an existing company
M&A
taking over an existing company
brownfield investments
a firm that purchases existing production facilities to launch a new production activity.
OLI framework
Also dubbed the eclectic paradigm as it draws on economics, economic geography and organization theory
§ Ownership advantages:
§ Location advantages:
§ Internalization advantages:
Ownership advantages:
□ firms need to have some advantage of ownership,
e.g.
® patents or substantial R&D knowledge, or
® advantage of nationality: access to strong domestic networks
Location advantages:
□ the location into which a firm wants to expand should be attractive enough for the firm by offering certain advantages
□ (e.g. large market, low taxes etc.)
Internalization advantages:
□ it should be advantageous to the firm to organize the investment itself, rather than through a partnership arrangement or outsourcing
criticism of OLI
- Eclectic- too many theories brought together; self-evident for companies to have successful FDI
- Tautology
- Do firms need ownership advantages to make an FDI?
○ E.g. China
○ Or M&A to achieve patents and rights
e.g. Aldi
CAGE Distance Framework
Cultural
- different values and norms
- different languages
- different religions, network systems
Administrative
- different legal system
- lack of colonial ties
- not in the same trading bloc, currency
Geographic
- physical distance
- no common border
- differences in climate
Economic
- differences in consumer income
- differences in resources
- differences in business systems
What are determinants of FDI?
Economists ○ Size of the economy ○ Distance and transportation costs ○ Taxation ○ Former colony ○ Resource endowments
Business scholars ○ Firm’s motive ○ Match between firm-specific advantages and location advantages ○ Transaction costs ○ Firm’s portfolio
Does FDI by emerging market MNEs differ from that of their developed economy counterparts?
○ Aggressive acquisition strategy (rather than greenfield)?
○ Experience navigating environments with comparatively underdeveloped institutions can be of use in other developing economies and give EMNEs a competitive edge
○ Home-country governments typically play a more important role for the internationalization trajectories of EMNEs
Criticism – FDI statistics
Business scholars would object, and also point at the discussed trends (Beugelsdijk et al., 2010)
- Inward FDI does not necessarily mean inward MNE activity
- A lot of FDI goes towards tax havens
- MNEs also raise funds locally
- Labor productivity varies in an MNE’s foreign affiliate network
- FDI statistics capture intricacies of MNE global strategy?
FDI Policy
Governments have a range of measures at their disposal that potentially influence inward and outward FDI decisions:
- Information provision
- Ministerial support (missions)
- Subsidies, loans
- Investment insurance
- Tax breaks
- Antitrust laws – merger control
- Governments may also work together to create a more secure investment climate
○ International investment agreements, bilateral investment treaties
FDI Summary
Foreign direct investment plays an important role in a world increasingly characterized by globalization
• Yet, FDI flows vary from year to year despite several structural trends
• Different perspectives apply: country-level or firm-level
determinants?
• Scope for governments to influence FDI with policy measures
Are all industrialised economies losing FDI inflows and developing and transition economies increasing it?
Developing countries
○ Face a decrease in investment of roughly 27%
○ US acquisitions were mainly all in the US
○ China acquisition in other countries decreased
- Spain, Australia, Italy growing
○ Improving, incentive to invest outwards more - Why do some country FDI increase
○ UK- Brexit: doesn’t attract foreign investment as economy is unsure
○ USA- protectionist measures to avoid foreign investment
○ Tarde war between USA and China
