Lecture 1- FDI Flashcards
When a foreign investor begins a greenfield operation (i.e., constructs new production facilities) or acquires control of an existing local firm, that investment is regarded as a ______ investment
direct
An investment is direct if a foreign investor holds at least ______ of a local firm’s equity
10%
at least _____ countries are engaged in FDI
2
describe flows of FDI? (what is it and what are the two kinds)
Flow of FDI- the amount of FDI undertaken overa given time period
Outflows―flows of FDI out of a country
Inflows―flows of FDI into a country
def. - the total accumulated value of foreign-owned assets at a given time
stock of FDI
who has historically (and more recently) been recipients of FDI?
- Historically, mostly directed at developed nations
- U.S. is a target for FDI inflows
- European inflows mainly from the U.S. and other European nations
- China has also been a recipient of FDI recently
Why is the US attractive for FDI?
- Large and wealthy domestic market
- Dynamic and stable economy
- Favorable political environment and openness to FDI
Who are the largest sources of FDI? (Outflows)
- U.S. is the largest source since WWII
- Six countries (U.S., UK, France, Germany, Japan, and the Netherlands) account for 60 percent of all FDI outflows
- China became a major foreign investor around 2005, especially in less developed nations
greenfield operation
Establishing a new operation in a foreign country.
describe some benefits of doing acquisitions and mergers as a form of FDI
- Quicker to execute
- Can acquire valuable strategic assets
- Can increase the efficiency of the acquired unit by transferring capital, technology, or management skills
what are some motivations driving FDI decision (5)
- Cost-of-Capital Theory (have access to lower cost of capital)
- Because certain assets are worth more under foreign than local control.
- Obtain that special (rare, intangible) asset and control it to your advantage, even to the extent of creating a monopoly. Even if that makes the host country upset!
- there are limitations of exporting and licensing
- When a firm wishes to maintain control over its technological know-how, or over its operations and business strategy, or when the firm’s capabilities are simply not amenable to licensing.
cost of capital theory
Foreign firms, because of their size or structure, have access to lower-cost funds not available to local firms.
what are some ways that certain assets are worth more under foreign than local control
- Ownership of an asset > ownership advantage
- Location to produce > locational factors like cheap labor
- To keep an asset internal to the firm > internalization of global transactions
what are some limits of exporting
- Transportation costs and trade barriers
- By limiting imports through quotas and tariffs, governments increase the attractiveness of FDI and licensing
what are some limitations of licensing
- Internalization theory (Market imperfections)
- Licensing may result in a firm’s giving away valuable technological know-how to a potential foreign competitor.
- Licensing does not give a firm the tight control over production, marketing, and strategy in a foreign country that may be required to maximize its profitability.
- The firm’s competitive advantage is based on the management, marketing, and manufacturing capabilities, which is not amenable to licensing.
