FDI

Question 1

FDI

Answer 1

(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)

Question 2

Why are FDI’s different from portfolio investments

Answer 2

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

Question 3

multinational enterprises

Answer 3

“Companies coordinating and controlling operations in more than one country, even if it does not own them” (Dicken)

Question 4

FDI stock

Answer 4

the level of direct investment at a given point in time, FDI that it already in the country (cumulative amount)

Question 5

FDI Flow

Answer 5

the value of cross-border transactions related to direct investment in a given period of time (in and out) - new FDI

Question 6

Inward FDI

Answer 6

(investment in a country come from other countries)

Question 7

Outward FDI

Answer 7

(a firm expands operations to a foreign country)

Question 8

Characteristics of FDI

Answer 8

greenfield investments

M&As (mergers and acquisitions)

Question 9

Greenfield investment

Answer 9

a company decides to invest in another country rom scratch, rather than buying an existing company

Question 10

M&A

Answer 10

taking over an existing company

Question 11

brownfield investments

Answer 11

a firm that purchases existing production facilities to launch a new production activity.

Question 12

OLI framework

Answer 12

Also dubbed the eclectic paradigm as it draws on economics, economic geography and organization theory

§ Ownership advantages:

§ Location advantages:

§ Internalization advantages:

Question 13

Ownership advantages:

Answer 13

□ 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

Question 14

Location advantages:

Answer 14

□ 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.)

Question 15

Internalization advantages:

Answer 15

□ it should be advantageous to the firm to organize the investment itself, rather than through a partnership arrangement or outsourcing

Question 16

criticism of OLI

Answer 16

• 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

Question 17

CAGE Distance Framework

Answer 17

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

Question 18

What are determinants of FDI?

Answer 18

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

Question 19

Does FDI by emerging market MNEs differ from that of their developed economy counterparts?

Answer 19

○ 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

Question 20

Criticism – FDI statistics

Answer 20

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?

Question 21

FDI Policy

Answer 21

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

Question 22

FDI Summary

Answer 22

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

Question 23

Are all industrialised economies losing FDI inflows and developing and transition economies increasing it?

Answer 23

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