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Bus 346 > Week 8 > Flashcards

Week 8 Flashcards

1
Q

What is Foreign Direct investment?

A

When a company merges with a. firm, creates a subsidiary or an operation in a different country.

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2
Q

What is the result of foreign direct investment?

A

Firm has a significant control of its foreign operation and can affect managerial decisions of the foreign operation

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3
Q

What is flow?

A

Amount of FDI over a period of time

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4
Q

What is stock?

A

Total accumulated value of foreign owned assets at a given point in time

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5
Q

Why has FDI grown rapidly more than world trade?

A

Business fear protectionist pressures, FDI is a way to circumvent trade barriers, dramatic political and economic changes in many parts of the world, firms see entire world as their market

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6
Q

Where are green field operations held?

A

Mostly in developing nations

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7
Q

What are mergers and acquisitions?

A

When foreign firms have valuable strategic assets, believe they can increase efficiency of the acquired firm and its is quicker to execute

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8
Q

What are the two forms of FDI

A

Horizontal Direct Investment and Vertical Direct Investment

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9
Q

What are Horizontal Direct investment?

A

FDI is in the same industry abroad as company operates at home

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10
Q

What are the elements of vertical direct investment?

A

Backward and Forward

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11
Q

What is backward vertical direct investment?

A

Investments into industry that provides inputs into a firms domestic productions (typically extractive industries)

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12
Q

What is forward vertical direct investment?

A

Investment in an industry that uses the outputs from a firms domestic production (typically sales and distribution)

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13
Q

Why is FDI shifting to services?

A

a liberalization of policies governing FDI in services and the rise of internet based global telecommunication networks

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14
Q

What are the reasons for choosing FDI for services?

A

Exporting
Licensing
Internalization theory

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15
Q

What is exporting?

A

Producing goods at home and then shipping them in other countries to sell

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16
Q

What are the limitations of exporting

A

Can be limited to transportation costs and trade barriers, may response to actual or threatened trade barriers

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17
Q

What is licensing?

A

Allowing foreign entities the right to produce and sell their products in return for a royalty fee on every unit that the foreign entity sells

18
Q

What is the limitation of licensing

A

Granting a foreign entity the right to produce and sell the firms product in return for a royalty fee on every unit that the foreign entity sells

19
Q

What is internalization theory?

A

the process of choosing FDI over licensing strategy bc licensing has 3 major drawbacks

20
Q

Why is Internalization theory more preferred than licensing

A

Firms could give away valuable technological know how to a potential foreign competitor, does not give a firm the control over manufacturing, marketing and strategy in a foreign firm and the firms competitive advantage may be based on its management, marketing and manufacturing capabilities

21
Q

Why do firms in the same industry take on FDI at the same time and the same locations?

A

Knickerbocker and multipoint competition and Vernon

22
Q

What is Knickerbocker?

A

FDI flows are a reflection of strategic rivalry between firms in the global marketplace

23
Q

What is multipoint competition?

A

When two or more enterprises encounter each other in different regional markets, national markets or industries

24
Q

Why is it profitable for firms to undertake FDI rather than continuing to export from home base or licensing a foreign firm?

A

Dunning eclectic paradigm states that there are location specific advantages and externalities to consider

25
Q

What are location specific advantages?

A

Arise from using resource endowments or assets that are tied to a particular location and that a firm finds it valuable to combine with its own unique assets

26
Q

What are externalities?

A

Knowledge spillovers that occur when companies in the same industry locate in the same area

27
Q

What are the three types of political ideology?

A

Radical view, Pragmatic Nationalism, Free Market

28
Q

What are the different benefits of FDI to host countries?

A

Resource transfer effects and employment effect

29
Q

What are resource transfer effects and its benefits?

A

Capital, technology, management

30
Q

What are the employment effect and its benefits?

A

Direct and indirect

31
Q

What are the balance of payments effect and its benefits?

A

Current account surplus/deficit, capital account and increases competition and spurs economic growth

32
Q

What are the costs of FDI to host countries?

A
  1. Adverse effects on competition
  2. Adverse effects on the balance of payments
  3. National sovereignty and autonomy
33
Q

Adverse effects on the balance of payments steps

A
  1. After the initial capital inflow there is normally a subsequent outflow of earnings
  2. Foreign subsidiaries could import a substantial number of inputs
34
Q

Why is national sovereignty and autonomy threatened by fdi

A

Some host governments worry that the FDI is accompanied by some loss of economic independence resulting in the host country’s economy being controlled by a foreign corporation

35
Q

What are the benefits of FDI for the home country?

A

The effect on the home country’s balance of payments from inward flow of foreign earnings, employment effects that arise from outward FDI and the gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country

36
Q

How can the home country’s balance of payments suffer

A
  1. The initial capital outflow required to finance the FDI
  2. The purpose of the FDI is to serve the home market from low cost labor location
  3. If the FDI is a substitute for direct exports
  4. Employment may be negatively affected
37
Q

What can governments do to outwardly encourage FDI?

A

Encourage outward FDI by having government backed insurance programs to cover major types of foreign investment risk

38
Q

What can governments do to outwardly restrict FDI?

A

Limit capital outflows, manipulate tax rules or prohibit FD

39
Q

What can governments do to inwardly encourage FDI?

A

Encourage inward FDI through governments offer incentives to foreign firms to invest their countries. These incentives are motivated by a desire to gain from the resource transfer and employment effects of FDI and to capture FDI away from other potential host countries

40
Q

What can governments do to restrict inwardly encourage FDI?

A

By having governments use ownership restraints and performance requirements

41
Q

What are direct effects of employment

A

When a foreign company employs a number of host country citizens to work their operations

42
Q

What is indirect effects of employment

A

When jobs are created in local suppliers as a result of the investment and when jobs are creased because of increased local spendings by the employment of the foreign country

Bus 346 (4 decks)

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