Unit 2: FDI

Question 1

What is Foreign Direct Investment?

Answer 1

The establishment of a plant or distribution network abroad. Investors can acquire part or all of the equity of an existing foreign corporation either to control or share control over sales, production, and research and development

Question 2

The basic questions of FDI

Answer 2

(1) Who is the investor?
(2) What kind of FDI?
(3) Why are we investing?
(4) Where is the FDI going?
(5) When do we invest?
(6) How the mode of entry?

Question 3

What is horizontal FDI?

Answer 3

Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI

Question 4

What is Platform FDI?

Answer 4

Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country

Question 5

What is vertical FDI?

Answer 5

Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains

Question 6

What is OLI theory?

Answer 6

O - who is an FD Investor?
L - Where to invest?
I - Why to invest?

Question 7

What is O - Ownership advantages?

Answer 7

Some firms have a firm specific capital known as knowledge capital: Capital, Human capital, patents, technologies, brand, reputation…

This capital can be replicated in different countries without losing its value, and easily transferred within the firm without high transaction costs.

Question 8

What is L - Localization advantages?

Answer 8

• Producing close to final customers or downstream customers
• Saving transport costs
• Obtaining cheap inputs
• Jumping trade barriers
• Provide services (for most services production and delivery have to be contemporaneous)

Question 9

What is I - internalization advantages?

Answer 9

Why doesn’t a firm just sign a contract with a subcontractor (external agent) in a foreign country?
Because contracting out is risky: it implies transferring the specific capital outside the firm and revealing the proprietary information

Question 10

What are the problems whenn a firm signs a contract with a subcontractor in a foreign country?

Answer 10

(1) If the agent interrupts the contract it can use the technology to compete with the mother company

(2) In the case of brands/reputation: if the agent damages the brand reputation

Question 10

What are conclusions of OLI approach?

Answer 10

(1) The eclectic, or OLI paradigm, suggests that the greater the O and I advantages possessed by firms and the more the L advantages of creating, acquiring (or augmenting) and exploiting these advantages from a location outside its home country, the more FDI will be undertaken

(2) Where firms possess substantial O and I advantages but the L advantages favor the home country, then domestic investment will be preferred to FDI and foreign markets will be supplied by exports

Question 10

What are 4 types of FDI derived from OLI theory?

Answer 10

The typology of FDI was developed by Jere Behrman to explain the different objectives of FDI
* resource seeking FDI
* marketing seeking FDI
* efficiency seeking (global sourcing FDI)
* strategic asset/capabilities seeking FDI

Question 11

Why resource seeking FDI?

Answer 11

To seek and secure natural resources such as minerals, raw materials, lower labor costs for the investing company

Question 12

Why market seeking FDI?

Answer 12

• To identify and exploit new markets for the firms’ finished products
• Unique possibility for some types of services for which production and distribution have to be contemporaneous
• Automotive TNCs have invested heavily in China

Question 13

Why efficiency seeking FDI?

Answer 13

To restructure its existing investments so as to achieve an efficient allocation of international economic activity of the firms

(*) international specialization whereby firms seek to benefit from differences in product and factor prices and to diversify risk

(*) global sourcing - resource saving and improved efficiency by rationalizing the structure of their global activities. Undertaken primarily by network based MNCs with global sourcing operations

Question 14

Why strategic asset/capabilities seeking FDI?

Answer 14

MNCs pursue strategic operations through the purchase of existing firms and/or assets in order to protect O specific advantages in order to sustain or advance its global competitive position

(*) acquisition of key establish local firms

(*) acquisition of local capabilities including R&D, knowledge and human capital

(*) acquisition of market knowledge

(*) Pre-empting market entrance by competitors

(*) Pre-empting the acquisition by local firms by competitors

Question 15

FDI theories on macro level

Answer 15

(1) Capital market theory
* one of the oldest theories of FDI
* FDI is determined by interest rates

(2) Dynamic macroeconomic FDI theory
* FDI are a long term function of TNC strategies
* The timing of the investment depends on the changes in the macroeconomic environment (PESTEL)
* hysteresis effect

(3) FDI theory based on exchanged rates
* Analyse the relationship of FDI flows and exchange rate changes
* FDI as a tool of exchange rate risk reduction

(4) FDI theory based on economic geography
* Explores the factors influencing the creation of international production clusters
* Innovation as a determinant of FDI - Greta Garbo effect

(5) Gravity approach to FDI
* The closer two countries are, the higher will be the FDI flows between these countries

(6) FDI theories based on institutional analysis
* Explore the importance of the institutional framework on the FDI flows
* Political stability - key factor

Question 16

What is FPI?

Answer 16

Foreign Portfolio Investment: the purchase of shares and long-term debt obligations from a foreign entity. Portfolio investors do not aim to take control of a corporation. They can liquidate their investment at market value any time.

Question 17

What is strategic approach?

Answer 17

Foreign direct investment decisions based on business strategies. Investors seek access to raw materials, markets, product efficiency, and “know-how”

Question 18

What are different factors between FDI and FPI?

Answer 18

(1) Form

(2) Management Control

(3) Liquidity

Question 19

What is cash flow?

Answer 19

The total amount of cash that remains in a company after it has paid taxed and other cash expenses

Question 20

What are investment incentives?

Answer 20

Benefits such as cash grants, tax credits, accelerated depreciation, and low interest-bearing loans, which are sponsored by national or local authorities to attract foreign investment

Question 21

What is exclusive distributor?

Answer 21

An independent sales agent who is given the soles right, under contract, to sell a foreign manufacturer’s products

Question 22

What is multiple distributor?

Answer 22

A sales agent who represents more than one manufacturers

Question 23

What are royalty payments?

Answer 23

The payments made by a foreign manufacturer to a company that has licensed the manufacturer to product its products

Question 24

What is joint venture?

Answer 24

A subsidiary formed by two or more coporations

Question 25

What is a joint venture expertise?

Answer 25

A JVE is an expertise established in Vietnam on the basis of a joint venture contract signed by two or more parties for the purpose of conducting investment and business in Vietnam.

A JVE may be entered into between:
(1) a Vietnamese party and a foreign party
(2) a Vietnamese party and a wholly foreign owned enterprise
(3) a JVE and a foreign party
(4) a JVE and a wholly foreign owned enterprise
(5) two JVEs

Question 26

What is wholly foreign owned enterprise?

Answer 26

A WFOE is an enterprise owned and established by one or more foreign investors under which the investors will manage the enterprise and assume full responsibility for its debts and liabilities.

An existing WFOE in Vietnam may cooperate with another WFOE and/or with foreign investors to establish a WFOE

A WFOE may be established as a joint-stock company, a limited liability company or a partnership

Question 27

What is business cooperation contract?

Answer 27

A business cooperation contract is a form of FDI established via a contractual arrangement between two or more parties without creating a legal entity. The contract should stipulate the responsibilities and distribution of profits and liabilities between the parties.

Question 28

What is a foreign company branch and representative office?

Answer 28

A foreign company branch established under Vietnamese laws is regarded as the dependent unit of a foreign investor.

It is permitted to engage in commercial activities which include investment.

A representative office, also a dependent unit of a foreign investor, but only for conducting market surveys and commercial promotion activities permitted under Vietnames laws

Question 29

What is a multinational company?

Answer 29

Global corporation

Question 30

What is a multinational strategy?

Answer 30

(1) A strategy of adapting products and their marketing strategies in each national market to suit local preferences

(2) Multinational strategy allows companies to closely monitor buyer preferences in each local market and respond quickly and effectively as new buyer preferences emerge.

(3) It does not allow companies to exploit scale economies in product development, manufacturing, or marketing

Question 31

What is a global strategy?

Answer 31

(1) A strategy of offering the same products using the same marketing strategy in all national markets

(2) The main benefit of a global strategy is its cost savings due to product and marketing standardization

(3) It allows managers to share lessons learned in one market with managers at other locations

(4) It may cause a company to overlook important differences in buyer preferences from one market to another.

Question 32

What is licensing?

Answer 32

Licensing – Practice by which one company owning intangible property (the licensor) grants another firm (the licensee) the right to use that property for a specified period of time.

Question 33

What is franchising?

Answer 33

Franchising – A practice by which one company ( the franchiser) supplies another (the franchisee) with intangible property and other assistance over an extended period.

Question 34

What are differences between licensing and franchising?

Answer 34

Licensing
* Practice by which one company owning intangible property (the licensor) grants another firm (the licensee) the right to use that property for a specified period of time.

Franchising
* A practice by which one company ( the franchiser) supplies another (the franchisee) with intangible property and other assistance over an extended period.