Final: FDI Flashcards
What is Foreign Direct Investment (FDI)?
Occurs when a firm invests directly in new facilities to
produce or market a good or service in a foreign country.
Once a firm undertakes FDI, it becomes a ________ ________.
Multinational Enterprise
Define Flow of FDI?
The amount of FDI undertaken over a given time period.
Define Stock of FDI
Total accumulated value of foreign-owned assets at a given time.
Define FDI Outflows
Flows of FDI out of a country.
Define FDI Inflows
Flows of FDI into a country.
What is a Greenfield Investment?
Establishes a new operation in a foreign country.
What is the Radical View of FDI?
Roots in Marxist political and economic theory and believed that multinational enterprises (MNE) are an instrument of imperialist domination.
What is the Free Market View of FDI?
Roots in classical economic theory and trade theories of Adam Smith and David Ricardo. Believed that international production should be distributed among countries according to the theory of comparative advantage. FDI is a benefit to both the source country and the host country.
What is Pragmatic Nationalism View of FDI?
FDI has both benefits and costs. Countries pursue policies designed to maximize the national benefits and minimize the national costs. While having a tendency to aggressively court FDI believed to be in the national interest. This is done through tax breaks or grants.
What are Host-Country Benefits of FDI?
- Resource-Transfer Effects
- Employment Effects
- Balance-of-Payments Effects
• Countries prefer to run a current account surplus. - Effect on Competition and Economic Growth
What is a Current Account Deficit, or Trade Deficit?
When a country is importing more goods and services than it is exporting.
What are Host-Country Costs of FDI?
- Adverse Effects on Competition
- Adverse Effects on the Balance of Payments
- Possible Effects on National Sovereignty and Autonomy
What are Home-Country Benefits of FDI?
- The home country’s balance of payments benefits from the inward flow of foreign earnings.
- Employment effects.
- Reverse resource-transfer effect
What are Home-Country Costs of FDI?
- Balance-of-payments effects suffer in three ways:
• Initial capital outflow needed to finance FDI.
• The current account of the balance of payments suffers if the purpose of the foreign investment is to serve the home market from a low-cost production location.
• The current account of the balance of payments suffers if the FDI is a substitute for direct exports. - Employment effects when FDI is a substitute for domestic production.
What are Home-Country Policies of FDI?
- Encouraging Outward FDI:
• Government-backed insurance programs.
• Government loans.
• Elimination of double taxation of foreign income.
• Relaxation of restrictions on FDI by host countries. - Restricting Outward FDI:
• Limit capital outflows.
• Manipulate tax rules.
• Prohibit investment for political reasons.
What are Host-Country Policies of FDI?
1. Encouraging Inward FDI: • Incentives such as tax concessions, low-interest loans, grants, or subsidies. 2. Restricting Inward FDI: • Ownership restraints. • Performance requirements.
What International Institution was created that help the Liberalization of FDI?
World Trade Organization
What is a firm?
An entity that draws various types of factors of production in different amounts from the economy, and converts them into desirable outputs, through a process with the help of suitable technology. It is a business unit that owns, controls, and manages a plant.
What is a Perfect Market?
Where buyers and sellers have complete information about a particular product and it is easy to compare prices of products. Both buyers and sellers are numerous and market prices cannot be manipulated.
What is the Market Mechanism?
Resources are allocated by means of the price mechanism:
• Cost of using the price mechanism
• Cost of discovering prices
• Cost of negotiating and writing prices
What is the Firm Mechanism?
This allocation is dependent on an entrepreneur-coordinator (or a manager-coordinator).
What is Information?
A message, one dimensional and bounded by its form: a document, an image, a speech, a genome, a recipe, a symphony score. You can package it and instantly distribute it to anyone, anywhere.
What is Knowledge?
Results from the assimilation and connecting of information through experience, most often through apprenticeship or mentoring. As a result, it becomes embedded in organizations in ways that, so far, have largely evaded codification.
