Scribd Logo
Upload

Welcome to Scribd!

  • 317 views

    FDI Ch.7

    Uploaded by

    Rekhavikas
    Foreign direct investment (FDI) has increased significantly in recent decades due to factors like globalization and trade liberalization. Firms often prefer FDI over alternatives like exporting or licensing to maintain strategic control over valuable assets like technology or brands. Governments' FDI policies are influenced by debates around the potential costs and benefits of inbound investment for host countries, and policies aim to either encourage or restrict FDI. The eclectic paradigm developed by John Dunning provides a framework for understanding why firms choose FDI based on their ownership, location, and internalization advantages.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd

    FDI Ch.7

    Uploaded by

    Rekhavikas
    317 views20 pages
    Foreign direct investment (FDI) has increased significantly in recent decades due to factors like globalization and trade liberalization. Firms often prefer FDI over alternatives like exporting or licensing to maintain strategic control over valuable assets like technology or brands. Governments' FDI policies are influenced by debates around the potential costs and benefits of inbound investment for host countries, and policies aim to either encourage or restrict FDI. The eclectic paradigm developed by John Dunning provides a framework for understanding why firms choose FDI based on their ownership, location, and internalization advantages.

    Original Description:

    fdi

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Foreign direct investment (FDI) has increased significantly in recent decades due to factors like globalization and trade liberalization. Firms often prefer FDI over alternatives like exporting or licensing to maintain strategic control over valuable assets like technology or brands. Governments' FDI policies are influenced by debates around the potential costs and benefits of inbound investment for host countries, and policies aim to either encourage or restrict FDI. The eclectic paradigm developed by John Dunning provides a framework for understanding why firms choose FDI based on their ownership, location, and internalization advantages.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    317 views20 pages

    FDI Ch.7

    Uploaded by

    Rekhavikas
    Foreign direct investment (FDI) has increased significantly in recent decades due to factors like globalization and trade liberalization. Firms often prefer FDI over alternatives like exporting or licensing to maintain strategic control over valuable assets like technology or brands. Governments' FDI policies are influenced by debates around the potential costs and benefits of inbound investment for host countries, and policies aim to either encourage or restrict FDI. The eclectic paradigm developed by John Dunning provides a framework for understanding why firms choose FDI based on their ownership, location, and internalization advantages.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    You are on page 1of 20

    Foreign Direct Investment

    Foreign Direct Investment


     Why is FDI increasing in the world economy?
     Why do firms often prefer FDI to other market
    entry strategies?
     Why do firms imitate competitors with FDI
    strategies?
     Why are certain locations favored for FDI?
     How does political ideology affect government
    FDI policy?
     What are key FDI related costs and benefits for
    receiving and source countries?
    Foreign Direct Investment

     Foreign direct investment (FDI): a firm


    invests directly in foreign facilities
    Afirm that engages in FDI becomes a
    multinational enterprise (MNE)
    – Multinational = “more than one country”

     Factors which influence FDI are related to


    factors that stimulate trade
    Foreign Direct Investment

     Involves ownership of entity abroad for


    – production
    – Marketing/service
    – R&D
    – Access of raw materials or other resource
     Parent has direct managerial control
    – Depending on its extent of ownership and
    – On other contractual terms of the FDI
     No managerial involvement = portfolio investment
    FDI Growth in the World
    Economy
     FDI Outflow: $35 billion in ‘75 to $1.3 trillion in ‘00 to
    $653 billion in ‘03
     FDI Flow (from all countries): from ‘92 to ‘02 up 292%,
    compared to trade up 69% and world output up 28%
     FDI Stock: $3.5 trillion by ‘97 to > $7 trillion in ‘02
     In ‘02:
    – 64,000 MNEs had:
     850,000 foreign affiliates

     53 million employees

     $17.7 trillion in sales

    – $8 trillions global exports


     Conclusion:
    FDI flow growing faster than world trade and world output
    Direction and Source of FDI
     MostFDI flow has been to developed
    countries from developed countries
    – Much to the US from EU, Japan
     FDI increase to developing countries since
    ‘85
    – Much to the emerging Asian and Latin
    America economies
    – Africa lagging
    Forms of FDI
     FDI forms
    – Purchase of assets: why? why not?
     Quick entry, local market know-how, local financing may be
    possible, eliminate competitor, buying problems
    – New investment: why? why not?
     No local entity is available for sale, local financial incentives, no
    inherited problems, long lead time to generation of sales
    – International joint-venture
     Shared ownership with local and/or other non-local partner
     Shared risk
    Alternative Modes of Market Entry
     FDI
    – FDI - 100% ownership
    – FDI < 100% ownership, International Joint
    Venture
     Strategic Alliances (non-equity)
     Franchising
     Licensing
     Exports: Direct vs Indirect
    Why FDI?

     FDI over exporting


    – High transportation costs, trade barriers
     FDI over licensing or franchising
    – Need to retain strategic control
    – Need to protect technological know-how
    – Capabilities not suitable for licensing/franchising
     Follow few main competitors
    – Immediate strategic responses
    Pattern of FDI Explanations

     International product life-cycle (Ray Vernon)


    – Trade theory similarity
     Eclectic paradigm of FDI (John Dunning)
    – Combines ownership specific, location specific,
    and internalization specific advantages
    – Explains FDI decision over a decision to enter
    through licensing or exports
    Eclectic Paradigm of FDI (Dunning)
     Ownership advantage: creates a monopolistic advantage to be
    used in markets abroad
    – Unique ownership advantage protected through ownership
    – e.g., Brand, technology, economies of scale, management know-how
     Location advantage: the FDI destination market must offer
    factors (land, capital, know-how, cost/quality of labor,
    economies of scale) that are advantageous for the firm to
    locate its investment there (link to trade theory)
     Internalization advantage: transaction costs of an arms-length
    relationship --licensing, exports-- higher than managing the
    activity within the MNC’s boundaries
    Government Policy and FDI
     The radical view: inbound FDI harmful; MNEs
    – Are imperialist dominators
    – Exploit host to the advantage of home country
    – Extract profits from host country; give nothing back
    – Keep LDCs backward and dependent for investment,
    technology and jobs
     The free market view: FDI should be encouraged
    – Adam Smith, Ricardo, et al: international production
    should be distributed per national comparative
    advantage
    – An MNE increases the world economy efficiency
     Brings to bear unique ownership advantages
     Adds to local economy’s comparative advantages
    Host Country Effects of FDI
    Benefits
    – Resource -transfer
    – Employment
    – Balance-of-payment (BOP)
     Import substitution
     Source of export increase
    Costs
    – Adverse effects on the BOP
     Capital inflow followed by capital outflow + profits
     Production input importation
    – Threat to national sovereignty and autonomy
     Loss of economic independence
    Government Policy and FDI
    Home country
    – Outward FDI encouragement
     Risk reduction policies (financing, insurance, tax incentives)
    – Outward FDI restrictions
     National security, BOP
    Host country
    – Inward FDI encouragement
     Investment incentives
     Job creation incentives
    – Inward FDI restrictions
     Ownership extent restrictions (national security; local nationals
    can safeguard host country’s interests
    Decision Framework for FDI
    Are transportation costs Import
    No No Export
    high? Barriers?
    Ye
    Ye s
    s
    Is know-how easy to No FDI
    license?
    Ye
    s
    Tight control over FDI
    Yes
    foreign ops required?
    No

    Yes FDI
    Is know-how valuable and
    is protection possible?
    No License

    You might also like

    pFad - Phonifier reborn

    Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

    Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


    Alternative Proxies:

    Alternative Proxy

    pFad Proxy

    pFad v3 Proxy

    pFad v4 Proxy