Foreign Direct Investment And Country Interest Flashcards
What is Foreign direct investment (FDI)
The purchase of physical assets or significant ownership and control of a company in a foreign country
What is flow
Amount of fdi over a period of time
What is a stock
Total accumulated value of foreign owned asset at given point in time
What is horizontal fdi
When the foreign venture is in the same industry abroad as the international company operating at home. It repeats the same value adding activities as those done in home country (ie. McDonalds)
What is vertical fdi
When the foreign venture performs fragmented activities that are part of the international firm’s global value chain
Backward fdi: investment into an industry that provides inputs into a firms domestic production, that is upstream activities.
Forward fdi: investment into an industry that utilizes the outputs from a firm’s production, down stream services
What are the types of fdi by foreign market entry strategy
Green-fields
Acquisition
Joint ventures
What are some motives for fdi
Resource seeking
Market seeking
Efficiency seeking
Tariff jumping
Global strategic positioning
What are fdi theories
International product life cycles
Firm specific (monopolistic/market power) advantage theory market power
Internalization theory
Eclectic paradigm/theory = OLI framework (ownership, location, internalization)
Strategic rivalry in oligopolistic industries
What is the product life cycle
Innovation stage:
- r&d
- innovation and production
- close to main market and HQ feedback
- no competition
- higher prices
- higher purchasing power and buyer sophistication
- exposer to other advanced economies
Growth stage
- high demand for product in advanced economies
- foreign producers copy and produce the product
- us begin production in advanced countries
Maturity
- the product becomes standardized
- prices fall
Decline stage
- price competition
- production takes place in LDCs
- Advanced economies import from LDC
What is Stephen humer theory of firm specific (monopolistic) advantage
Explains why MNE are able to compete in foreign markets even though they are at a disadvantage when compared to host country firms
- based on structural market imperfections
- for fdi to take place a firm must have sufficient firm specific advantages (asset power) to overcome its lack of knowledge of foreign markets
- these specific advantages rely on barriers to entry for protection and sustenance
- if markets were efficient MNE would not be able to sustain monopolistic advantages and fdi would be reduced
What is the internalization theory of fdi?
Explains why MNE prefer fdi and not contractual arrangement
- based on internal market imperfections and transaction cost as first developed by Ronald Coase
- assumes that internal markets are more efficient than external markets for intangible assets
- nature of the asset (does it have alternative use) intangible asset
- inability of individuals and management team to absorb all knowledge
- opportunism of individuals (their ability to cheat)
What is Dunning’s eclectic theory of fdi (OLI theory)
Ownership-specific advantages: to extent to which a firm has or can get tangible assets not available from other firms
Location specific advantages: the firm will profit by locating its facilities to take advantage of the foreign country resources
Internalization: it is the firms best interest to use its ownership-specific advantages (internalize) rather than liscence them to foreign owners
What are national political ideologies and attitude towards fdi
Radical
- Marxist view, MNE exploit less developed host countries
- extract profit
- give nothing of value in exchange
- instrument of domination not development
- keep less-developed countries relatively backwards and dependent on capitalist investment, jobs, and tech
Pragmatic
- FDI has benefits and costs
- allow fdi if benefits outweighs cost
- block fdi that harms indigenous industry
- court fdi that is national interest
*tax incentive, subsidies
- regulate fdi
* protect domestic firms, ensure spillover effects
Free market
- nation specializes in goods and services that they can produce most efficiently
- resource transfer benefit and strengthen the host country
- positive changes in laws and growth of bilateral agreements attest to strength of free market view
- all countries still put restrictions on fdi
What are the benefits of fdi to the host country
Balance of payments effect
- initial fdi boosts economy
- fdi may decrease import demand
- fdi may generate exports
Resource benefits
- access technology
- access management skills
- access to capital
- create employment
- increase competition
What are the cost of fdi to host countries
Crowding out effect: can drive out local competitors or prevent their development
Profits brought home hurts (debit) a host’s capital account
Parts imported for assembly hurt trade balance
Can affect sovereignty and national defense
What are the benefits of fdi to the home country
Improve balance of payment for inward flow of foreign earnings
Creates a demands for exports
Reverse resource transfer
Benefits the consumer through lower prices
Frees up employees resources for higher value activities
Improves national competitiveness through offshore production
Geopolitical/foreign political interests
Cost of fdi to home country
Negative effect on balance of payment
- initial capital outflow
- MNc uses foreign subsidiaries to sell back to home market
- mnc uses foreign subsidiaries as substitute for direct export
Potential loss for jobs
What are methods to promote fdi for host countries
Financial incentives
- subsidies and grants
- low or waived taxes
- low-interest loans
- tax free zone
Infrastructure improvements
- improved seaports, roads, telecommunications networks
- govt efficiency
- investment facilitation
- industrial parks
What are methods for promoting fdi in a home country?
Insurances on assets abroad
Loans and loan guarantees
Special tax and investment treaties
Tax break on profit earned abroad
Persuade other nations to accept fdi
Methods for restricting fdi in host country
Ownership restrictions
- prohibits investment in certain industries or businesses
- JV requirement
Performance measures/ demands
- local content requirement
- technology transfer
- export targets
- number of jobs created
Methods for restricting fdi in home country
Higher tax rates on foreign income
Sanction on specific nations
Limit capital outflows
What are the steps for targeted investment promotion strategy
Country branding
Investment generation
Investment facilitation
What is image building for a country?
Establish a national investment agency dedicated to promote fdi
Identify a country’s locational advantages
What are Canada’s locational advantages
Strong, stable resilient economy
Welcoming business environment
Highly educated, skilled, and diverse labour force
We’ll-developed innovation ecosystem
Extensive access to international markets
High quality of life
What is investment facilitation
Investment promotion agency
Reduces business registration bureaucracy
Assisting investors getting access to startup facilities and resources
Access to permits and business support services
