Foreign Direct Investment. Flashcards
What is FDI?
This is when foreigners have facilities I’m another country of which it has control over.
Why FDI?
To have significant influence of the facility it is investing into.
What percentage is required to consider it an FDI investment?
They need at least 10% or more shares to consider it foreign Direct investment
What are the 2 types of FDI?
- Outward foreign direct investment
- Inward foreign direct investment
What is outward foreign direct investment?
Outward foreign direct investment is the one offered to another to another country.
E.g USA to China, the USA will be offering an outward investment to China.
What is inward foreign direct investment?
This is when a country is receiving foreign direct investments.
E.g China getting investments from USA
What are some of the controversies relating to FDI?
Host developing countries worry foreign investors will control them.
Host developed countries worry about offshoring.
How does FDI happen?
Mergers
Acquiring an existing company
Greenfield investment
What is a merger type of FDI?
When a host country merges their business with a foreign investor (country)
What does acquiring an existing company mean in FDI?
When an investor buys a company or shares in a company simply to make profits and benefits the country in which the investment is being made.
What is greenfield investment?
This is when an investing company or country makes a completely new company in another country.
What are some of the motivations of FDI?
1.Proximity to a country
2. Access to raw materials
3. Access to lower labour costs
4. Tariff jumping
5. Host country specific advantages
Explain proximity to a foreign market?
In FDI the contracting parties may be in close proximity and so they investing country cause this as an opportunity to transport goods. Either by exporting or importing.
How does access to raw materials influence FDI?
If the foreign investors need some raw materials in a host country they may invest in the company and provide services either expertise or machinery.
Explain the concept behind access to lower labour costs.
It can happen that in a host country less labour is required to make certain materials so that can motivate investors to invest in a business. It can also reduce the cost of wages as less people are employed to complete the task.
What are some of the advantages of lower labour costs on foreign investors?
They have lesser wages
So they get to pay to pay their employees well but use less money.
Eg. Investing in already developed countries that have technology They pay less money on labour because machinery will do most of the work
What is tariff jumping?
This is when a country transports unfinished goods to be assembled in another country because tariffs there are lesser than in there’s.
Why is tariff hoping or circumvention a motivation for Investment?
Investing countries often look for countries with lower tariffs so that they can pay lesser and that’s usually a motivation for them to invest.
Give an example of tariff circumvention
A country can make an agreement to have their goods assembled in another country that has lower tariffs. That means they move production to the another country.
What we’re some of the challenges facing FDI?
Host countries weren’t open to fdi so investments were low and they discouraged investments
How can a country increase investment flows?
By creating policies that are more open to FDI.
What are some of the disadvantages of FDI?
- Expropriation
- Exchange rate risk
- Regulatory risk
Why is expropriation a disadvantage to FDI?
It is a disadvantage because it discourages investors from investing because of fear of their property rights being taken away and not making a profit of benefits.
Eg. If country A invests in country B using the greenfield method. Like making a factory. It is not a movable thing and if country B nationalises the property it cannot be taken away and they are at risk of losing their property rights over the factory and not get compensation.
Why is expropriation a disadvantage to FDI?
It is a disadvantage because it discourages investors from investing because of fear of their property rights being taken away and not making a profit of benefits.
Eg. If country A invests in country B using the greenfield method. Like making a factory. It is not a movable thing and if country B nationalises the property it cannot be taken away and they are at risk of losing their property rights over the factory and not get compensation.
