Foreign Direct Investment (Joe)

Question 1

What is Foreign Direct Investment?

Answer 1

Purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of management control

Question 2

What is Portfolio Investment?

Answer 2

Investment that does not involve obtaining a degree of control in a company

Question 3

For what reasons would National Governments seek FDI?

Answer 3

• Job Creation
• Creates Export Industries
• Enhance local R&D
• Offset account deficits

Question 4

For what reasons would developing countries seek FDI?

Answer 4

• Long term projects (ie. Infrastructure) that cause high exit cost for investors
• Less conducive to ‘capital flight’ (from Political Instability)
• Job creation
• Skill transfer
• Sustainable growth
• Offset account deficits

Question 5

What are the ways firms can undertake FDI?

Answer 5

GREENFIELD INVESTING
(Starting from scratch)

MERGERS AND ACQUISITIONS

Question 6

What is an example of Greenfield Investing?

Answer 6

A mining company exploiting an undeveloped resource, such as gold.

Question 7

What is an example of Mergers and Acquisitions?

Answer 7

BHP (Aust.) and Billiton (UK-S Africa) merged to form the world’s largest resources company

Lenovo of China: bought IBM’s Thinkpad brand and operation to access its marketing and image

Question 8

What are the 4 theories that explain FDI?

Answer 8

1) International Product Life Cycle
2) Market Imperfections (Internationalisation)
3) Eclectic Power
4) Market Power

Question 9

What is the International Product Life Cycle?

Answer 9

1960’s - Raymond Vernon

A company begins exporting and undertakes FDI as its product moves through its life cycle.

1) New Product
2) Maturing Product
3) Standardized Product

Question 10

What is the Market Imperfections theory?

Answer 10

Imperfection in the market makes a transaction less efficient than it could be.

Companies undertake FDI to remove the imperfection.

Question 11

What are two market imperfections?

Answer 11

TRADE BARRIERS
Tariffs

SPECIALIZED KNOWLEDGE
Companies charging for use of knowledge

Question 12

What is the Eclectic Theory?

Answer 12

Firms undertake FDI when features of a particular location combine with ownership and internationalisation advantages to make a location appealing for investment

Question 13

What are the advantages with Eclectic FDI?

Answer 13

LOCATION (Natural Resources)

OWNERSHIP (Management Ability, Brands and Tech, Knowledge)

INTERNALISATION (Internalising business activities)

Question 14

What is the Market Power theory?

Answer 14

A firm tries to establish a dominant market presence in an industry by undertaking FDI

Benefit is greater profit b/c dictate costs and price

Question 15

What are some of the Management Issues that arise from FDI?

Answer 15

• Control
• Purchase-or-build Decision
• Production Costs
• Customer Knowledge
• Following Clients (Maintain proximity)
• Following Rivals (Follow the Leader)

Question 16

Why might governments intervene with FDI? (To control it)

Answer 16

• It Affects Balance of Payments
  Inflows add to BOP, Outflows reduce BOP
• To obtain resources and benefits (Access to technologies, Management and Employment Skills)

Question 17

Why might home countries intervene with FDI? (To control it)

Answer 17

Investing in other nations sends resources out of home

FDI outflow can damage a nations balance of payments

Question 18

How do host countries restrict FDI?

Answer 18

Ownership Restrictions (EG. Must be less than 50%)

Performance Demands (Portion of product stays local, technology transfer)

Question 19

How do host countries promote FDI?

Answer 19

• Lower rate or offer to waive taxes
• Grant Loans
• Political pressure on other nations
• Offer Insurance