FDI (L1)

Question 1

Foreign Direct investment

Answer 1

• when residents of one country acquire assets in another to control production, distribution, and operations.

Question 2

Methods of Establishing presence in foreign markets

Answer 2

• International trade
• International licensing
• International distribution and production (FDI)

Question 3

International trade

Answer 3

• produce goods in the home country and export finished goods
  to host country

Question 4

International licensing

Answer 4

• Licensing a foreign company to use the technology or
  know-how or a trademark for a fee

Question 5

International distribution and production

Answer 5

• firm establishes distribution and
  production facility abroad and exercises control (FDI)

Question 6

Types of FDI

Answer 6

• Horizonal FDI
• Vertical FDI
• Conglomerate FDI
• Greenfield investment
• Joint Ventures
• Cross-border Mergers and Acquisitions

Question 7

Horizonal FDI

Answer 7

Horizontal FDI is expanding overseas to produce the same or similar goods/ services abroad

Question 8

Vertical FDI

Answer 8

• adding a stage in the production process that comes earlier (backward vertical FDI) or later than the firm’s principal processing
  activity (forward vertical FDI)

Question 9

Conglomerate FDI

Answer 9

involves both horizontal and vertical FDI

Question 10

Greenfield investment

Answer 10

• Establishes new production, distribution or other facilities in the host country
• Beneficial for host as it creates jobs and increases production capacity

Question 11

Cross-border Mergers and Acquisitions

Answer 11

• Acquire or merge with an established firm in the host
  country
• Can be politically sensitive due to ownership and control of domestic assets being transferred to foreigners.
• Less welcomed by host country as they might not increase production capacity

Question 12

Joint Ventures

Answer 12

• Establish a joint venture with an established firm in the host country
• Each party contributes its assets, either tangible or intangible, such as technology, ability to raise finance, existing customer base, knowledge of local market, law and
  regulations

Question 13

Theories of FDI

Answer 13

• Hymer’s (1976) Industrial Organization Hypothesis
• Location Hypothesis
• Internalization Hypothesis
• Eclectic or OLI Theory (John Dunning)

Question 14

Industrial Organization Hypothesis

Answer 14

• Hymer’s (1976)
• Firms engage in FDI when they possess some firm-specific advantages over and
  above that possessed by Indigenous competitors in the host country

Question 15

Examples of firm-specific advantage

Answer 15

• Better access to cheap finance than domestic competitors
• Superior managerial and organizational capabilities
• Superior technology and information
• Privileged access to raw materials or final goods markets.

Question 16

Location hypothesis of FDI

Answer 16

• firms engage in FDI to access some immobile factors of production abroad at a lower
  cost
• Due to the immobility of these factors of production some countries have locational advantages,
  hence attract more FDIs than others

Question 17

Examples of immobile factors of production are

Answer 17

• Human capital.
• Natural resources.
• Infrastructure, e.g. transportation, communication
• Political, legal and institutional environment
• The size and development of the financial system

Question 18

Location advantages and disadvantages in developing countries

Answer 18

• High potential for economic growth
• Low wages, low average productivity
• High country/political risk
• Underdeveloped financial system
• Weak/little support for the protection of property rights and contract enforcement

Question 19

Location advantages and disadvantages in Developed countries

Answer 19

• Strong support for the protection of property rights and contract enforcement
• Sophisticated financial systems
• More mature/competitive markets
• High wages, high productivity

Question 20

The internalisation hypothesis

Answer 20

• Developed by Peter Buckley and Mark Casson in the 1970s
• explains FDI as firms internalising operations to avoid market inefficiencies, protect proprietary assets, ensure quality control, and reduce transaction costs.

Question 21

Internalising parts of the production facility enables firms to

Answer 21

• exert full control over final product’s quality
• avoid unexpected interruption to supplies due to time lag and cost of buying/selling
  market transactions for production input/output.

Question 22

The Eclectic or OLI theory

Answer 22

• Developed by John Dunning
• integrates multiple theories
• suggests For a firm to indulge in FDI, three conditions must be met:
• The firm of one nationality possesses some ownership advantages (O) over those of
  other nationalities
• It’s more beneficial for the firm to use these advantages than license them to domestic
  firms in the host country (internalisation advantages (I))
• It’s in the firm’s best interest to combine the O and I advantages with the factors of
  production located in the host country (location advantages (L))