FDI & Multinationals Flashcards
FDI
A firm directly controls or owns a subsidiary in another country
How to be classified as MNC or mNE
If a foreign company invests at least 10% of the stock in a subsidiary, deemed sufficient
Controlling firm is parent, controlled are the affiliates
Inward FDI vs outward
Direct investments by non-residents in the reporting economy
Investments of the reporting country abroad
Worldwide flow of FDI trend
Increased significantly since mid 1990s
How can FDI be achieved
Buying a company in the target company
Expand operations of existing business in that country
Greenfield FDI
Company builds a new production facility abroad
Brownfield FDI
Domestic firm buys a controlling stake in a foreign firm
Which is more stable
Greenfield
2 types of FDI
Horizontal - affiliate replicates production process of the parent
Vertical - production chain is broken up and parts of production is transferred to affiliate
What is vertical FDI driven by
Production cost differences (since if one place is cheaper than other, run the affiliate for that particular stage in that place)
What is horizontal FDI dominated by
Flows between developed countries. I.e both parent and affiliate with the same production process are usually in developed countries.
Why?
Since they want production near large customer bases (so do it in developed countries)
As a result, what do firms consider in horizontal FDI decisions
Trade and transport costs (rather than production cost differences, as in vertical FDI0
Which countries engage most in outward FDI
Developed countries
However more recently developing countries have performed more FDI like China and India
