Week 1 Flashcards
Negative FDI effects on the host country
- Capital outflow through repatriated earnings
- Local firms competing with the MNE lose
- Thread to power of the host country government
Positive FDI effects on the host country
+ Job creation
+ Increase in government tax revenue
+ Positive externalities
Negative FDI effects on the home country
- Lower returns on labour
- domestic labour is replaced with foreign labour
- Loss of external benefits associated with domestic production
- Profits are shifted abroad; reduction in government tax revenue
Positive FDI effects on the home country
+ Capital outflow; capital becomes more scarce which leads to higher returns to capital
+ Profit repatriation
+ Learning from operations abroad
Other benefits of FDI
enhances market power
Benefit from differential tax regulations in home and foreign country by making use of transfer pricing
What are internalization advantages?
The benefits of organizing cross-border activities in-house instead of through the market
E.g. incomplete contracting
asset specificity (market parties cannot use your technology)
internal market for transferring tacit knowledge
What are Location advantages
Attractive, country-specific resources that are location-bound
E.g. natural resources, knowledge/skills, wages
What are ownership-advantages
Firm-level sources of competitive advantage that help to overcome the liability of foreignness.
E.g. scarce, tacit firm specific assets (brand), ability of managers to identify and exploit resources and coordinate, monopoly power due to size
Advantages and disadvantages of FDI over licensing
+ Avoid transaction costs related to licensing
+ Control how firm’s assets are used
+ Reduce dissemination risk
- Local firms are more familiar with the foreign business environment
- High costs of establishing and managing foreign operations
Advantages and disadvantages of FDI over exporting
+ Utilize local resources
+ circumvent import restrictions in foreign country and avoid transportation costs
+ get access to trade blocs
+ proximity to foreign customers
- production takes place in multiple locations
- loss of size advantage (economies of scale)
liability of foreignness
the inherent disadvantages of being foreign.
Such as: overcoming institutional, cultural, and language bariers. Travel and communications costs. Other costs that native firms don’t have
resources and capabilities generate a firm-specific advantage if they are:
valuable
rare
inimitable
non-substitutable
additional advantages of owning/controlling foreign operations
Firms have valuable assets and capabilities (firm-specific advantages) they want to exploit in foreign markets
Horizontal (market-seeking) FDI
serving foreign markets directly; replication of home activities in host country
substitute for trade
risk of expropriation is?
possibility to default on foreign liabilities if foreign government expropriates firm assets
