Foreign direct investment and Offshoring

Question 1

what is a multinational corporation

Answer 1

If a foreign company invests in at least 10% of the stock in a subsidiary, the two firms are typically classified as a multinational corporation

Question 2

what is brownfield and greenfield FDI?

Answer 2

brown
-when a domestic firm buys a controlling stake in a foreign firm

green
-when a company builds a new production facility abroad

Greenfield FDI has tended to be more stable, while crossborder mergers and acquisitions tend to occur in surges

Question 3

FDI flows?

Answer 3

flows of FDI - usually developed countries but the increasing trend to invest in developing - 50% of FDI in 2009

most FDI outflows from major powers

Question 4

what is offshoring goods and services?

Answer 4

The provision of a service or the production of various parts of a
good in different countries, that are then used or assembled into
a final good in another location.

e.g apple production China, Taiwan, Thailand, Malaysia, Singapore, South Korea,
the Czech Republic, Philippines, and the U.S.

Question 5

Why do some firms shift parts of their production to other
countries?

Answer 5

generally lowers cost significantly due to lower wages/inputs

concentration of specific goods

domestic demand is high and production needed inland to avoid trade costs

Question 6

what is the trade-off of internalisation

Answer 6

choosing between keeping production within one firm or expanding it across multiple firms. Barbie dolls produced by multiple firms and sold via 1

Question 7

why would a firm opt to internalise a process?

Answer 7

transfer of knowledge or another form of technology may be easier within a single organization than through a market transaction between separate organizations.

Consolidating an input within the firm can avoid holdup problems and hassles in writing complete contracts. Interaction and coordination could be easier. (vertical FDI)

Question 8

what is horizontal FDI?

Answer 8

When the affiliate replicates the production process (that the parent firm undertakes in its domestic facilities) elsewhere in the world. The main reason for Horizontal F D I is to locate the firm’s production near its
large customer bases

Hence, trade and transport costs play a much more important role than production cost differences for these F D I decisions.

Question 9

Can you think of real-world examples of horizontal FDI

Answer 9

aitomobile industry - toyota, Volkswagen, and BMW, have set up production facilities in various countries around the world to manufacture cars for local and international markets.

fast food - Companies like McDonald’s and KFC have expanded globally by establishing franchises and subsidiaries in foreign countries. The menu items and operational standards in these foreign outlets often closely resemble those in their home countries

soft drinks- Beverage companies like Coca-Cola and PepsiCo have invested in production facilities in numerous countries to meet local demand for their beverages. The products manufactured abroad are typically the same as those produced domestically.

Question 10

what trade-off is associated with the decision to horizontally FDI

Answer 10

proximity-concentration

Increasing returns to scale in production creates an incentive to
concentrate production in fewer locations.

High trade costs associated with exporting create an incentive to
locate production near customers.

so, if trade costs or tariffs are high it would be optimal to horizontally invest in FDI whereas if Increasing returns to scale can outweigh the trade costs, then it would be optimal to concentrate in one country

Question 11

what is the equation to support the trade off associated with the decision to horizontally FDI?

Answer 11

Q> F/T

t=cot +trade cosyt
F= fixed

Q= units sold abroad

Question 12

what is vertical FDI

Answer 12

It is when the production chain is broken up, and parts of the production
processes are transferred to the affiliate location. mainly driven by differences in production costs

itwill evntually come back to the home country tho - like john lewis vietnam factory

Question 13

where is vertical FDI targetted?

Answer 13

countries with relatively low wages and cheaper inputs for what if trade costs fall (for production. to then transport it back home => trade costs must be low

Question 14

what if trade costs fall for fdi

Answer 14

if trade costs fall vertical FDI becomes more lucrative as more low-skilled work can be foreign

and horizontal FDI becomes less attractive (EoS)

Question 15

is FDI beneficial?

Answer 15

yes. same as international trade everyone should be better off than they were b4

Question 16

what are the assumptions of the offshoring model?

Answer 16

WL* < WL and WH* < WH (Relative wage of low-skilled labour to highly-skilled labour is
lower in Foreign than in Home)

Costs of capital and trade apply uniformly to all parts of the value chain. Again a trade off between the cheaper labour and trade costs associated with producing in foreigngn and sending it home

we also assume that high skilled in foreign country is actually a developed countries low skilled for some dunb fucking reason

Question 17

what happens to the high-low skilled wage market in equilibrium (with trade) in domestic employment markets

Answer 17

Fewer low-skill-intensive activities remain home because of offshoring (value chain slicing) - lower demand for employment as a whole- even less so for low skilled workers. this shifts homes demand for high skilled workers positively even although the supply remains the same equil is higher than it was b4 trade

Both countries experience an increase in the relative wage of skilled labour due to
increased offshoring. As activities in the middle of the value chain are shifted from Home to Foreign, they
raise the relative demand for skilled labour in both countries

These activities are the least skill-intensive of those formerly done at Home but the
most skill-intensive of those done in Foreign.