Chapter 08-

Foreign Direct Investment (FDI)

Purchase of physical assets or a significant amount of the ownership of a company in another country to gain management control.

Portfolio Investment

Investment that does not involve obtaining a degree of control in a company.

Greenfield Investment

Purchase of land in another country and construction of new facilities or an entire subsidiary from the ground up.

Merger or Acquisition

Strategy to gain foothold in a new market, improve competitiveness, and fill gaps in product lines.

Ex. Rogers and Shaw

International Product Life Cycle

A theory stating that a company starts by exporting its product and later undertakes FDI as the product moves through its life cycle.

Market Imperfections

Theory stating that companies undertake FDI to internalize transactions when market imperfections make transactions less efficient.

Eclectic Theory

Theory stating that firms undertake FDI when location, ownership, and internalization advantages make a location appealing.

Ex. China opening factory in Canada

Market Power Midterm

Theory that asserts firms undertake FDI to establish a dominant market presence in an industry.

Vertical Integration

Extension of company activities into stages of production that provide a firm’s inputs (backward integration) or absorb its output (forward integration).

Rationalized Production

System of production in which each of a product’s components is produced where the cost of producing that component is lowest.

Customer Knowledge

Understanding consumer behavior that may influence the decision to undertake FDI.

Following Clients

FDI strategy where companies invest abroad because their clients have established operations in those countries.

Following Rivals

FDI decision strategy often resembling a follow-the-leader scenario among a limited number of large firms.

Control of the Balance of Payments

One reason for governmental intervention in FDI, focusing on the economic benefits of investment.

Local Content Requirements

Regulations imposed by host countries to ensure that a certain percentage of the product is manufactured locally.

Government Policy Instruments

Tools that governments use to promote or restrict foreign direct investment.

Financial Incentives

Promotional tools used by host countries such as low or waived taxes and low-interest loans to attract FDI.

Ownership Restrictions

Limitations that apply to businesses in cultural industries and companies critical to national security in host countries.

Home Country Intervention

Actions taken by a government's home country to influence FDI, focusing on balance of payments, job protection, and competitiveness.

Tax Breaks

Promotional measure used by home-country governments to encourage outbound FDI.

Sanctions

A restrictive measure that home governments may impose to limit the effects of outbound FDI on the national economy.

Types of Market Imperfections

1. Trade Barriers

2. Specialized Knowledge

How to minimize risk

• Human Resources Policies

• Mandated Benefits

• Labour Costs

• Labour Unions

• Information

Why MNCs engage in cross borde alliances

Increasing costs of research and development

Management Issues and FDI

• Rationalized production

• Knowledge about target customer base

• Following Clients

• Following Rivals

Why do HOST governments Intervene in FDI

• Control the balance of payments

  • boost the initial investment

  • local content requirements may be imposed

  • exports generated by the new operation

• Technology, skills, and employment

  • Can create a formidable future competitors

Why do Home Countries Intervene in FDI

• Influence balance of payments (Lower home investment)

• Protect Jobs (domestic job losses)

• Improve Competitiveness (get companies to invest abroad)

Host Countries FDI Promotions

• Finance Incentives

  • Low or waived taxes

  • Low-interest loans

• Infrastructure Improvements

  • Better seaports, roads, telecom networks

Host Country FDI Restrictions

• Ownership restrictions– Typically apply to businesses in cultural industries and companies vital to national security

• Performance demands– Influence how companies operate in the host nation

Home Country FDI Promotions

• Offer insurance

• Grant loans

• Offer tax breaks

• Apply political pressure

Home Country FDI Restrictions

• Impose differential tax rates

• Impose outright sanction