Why do firms engage in trade and FDI? Flashcards
What is FDI?
Acquiring Ownership of Assets in a foreign country
What is Horizontal FDI?
FDI in the same area of operations as your home operations (Honda’ s plant in Swindon for example).
What is Vertical FDI?
FDI into different areas of operation (acquiring supply or distribution operations).
An example of this is Russian Nordgold, a company operating 3 massive extraction and processing plants in Burkina Faso (90% of the operations are owned by the company and the other 10% by the government of Burkina Faso).
How can Classical and New Modern Theory explain why firms engage in trade and FDI?
They can’t fully, or explain why firms choose FDI over simply using markets in these foreign countries.
How can Value Chains explain FDI?
GVC maximises the value of operations.
Firms may obtain inputs by importing from firms in other countries if the firms in other countries have lower prices (either because of comparative advantage or agglomeration benefits), explaining inter-industry trade.
Vertical FDI will be used to obtain inputs if it is cheaper to import from foreigners that use home firms, and Horizontal FDI will be used to reduce costs like transport costs, transaction costs of assembling products.
Boeing supply chain is spread across world; Flight deck controls made in USA while fuselage is made in Italy.
What are the implications of GVCs?
- Low tariffs and NTBs
- Low transport and distribution costs
- Ability to protect assets
- Low communication costs and barriers
- Effective locating of activities
- Adjustment to technological changes
What is the importance of Geography?
Economies close together under the gravity trade model have large markets due to high demand and low transport costs due to proximity.
Proximity is often accompanied by similar culture, language, institutions, reducing trade costs.
