Chapter 8: Foreign Direct Investment

International Business

What is Foreign Direct Investment (FDI)?

When a firm invests directly in facilities to produce or market a good or service in a foreign country.

What ownership percentage is generally required for FDI?

A 10% or greater interest in a foreign business.

What does a firm become once it undertakes FDI?

A multinational enterprise (MNE).

Give an example of a multinational enterprise.

McDonald's

What is the flow of FDI?

The amount of FDI undertaken over a given time period.

What is the stock of FDI?

The total accumulated value of foreign-owned assets at a given time.

What are FDI outflows?

Flows of FDI out of a country.

What are FDI inflows?

Flows of FDI into a country.

What has been the trend in FDI over the last 30 years?

Both the flow and stock of FDI have increased significantly.

Why do companies use FDI to avoid trade barriers?

FDI can circumvent tariffs, quotas, and other trade restrictions.

What political and economic changes helped increase FDI?

The shift toward democratic political institutions and free-market economies.

Historically, where has most FDI been directed?

Developed nations.

Why has the United States attracted large FDI inflows?

Large and wealthy markets, a dynamic and stable economy, and a favorable political environment.

Which developing country has become an important recipient of FDI?

China

Which country has been the largest source of FDI since World War II?

The United States.

What is a Greenfield investment?

Establishing a new operation in a foreign country from scratch.

What is a major advantage of mergers and acquisitions (M&A)?

They are quicker to execute

How can M&A benefit a company?

By acquiring valuable strategic assets.

How can M&A improve an acquired unit?

Through transferring capital, technology, or management skills.

What are the two main alternatives to FDI?

Exporting and licensing.

What is exporting?

Producing goods at home and shipping them to another country for sale.

What is licensing?

Granting a foreign company the right to produce and sell a product in return for a royalty fee

What limits exporting?

Transportation costs and trade barriers.

What is the value-to-weight ratio?

A measure of a product's monetary value per unit of weight.

What products have a high value-to-weight ratio?

Jewelry, electronics, and high-end technology products.

What products have a low value-to-weight ratio?

Sand, ore, and paint.

According to internalization theory, what is a major risk of licensing?

Giving away valuable technological know-how to a potential competitor.

Why might licensing reduce profitability?

It does not provide tight control over production, marketing, and strategy.

When is FDI preferred over exporting?

When transportation costs or trade barriers make exporting unattractive.

When is FDI preferred over licensing?

When firms want to maintain control over technology, operations, or business strategy.

What does the radical view say about multinational enterprises?

They are instruments of imperialist domination.

Why did the radical view lose influence?

Poor economic performance in countries that adopted it and better performance in capitalist countries.

According to the free market view, international production should be distributed according to what theory?

Comparative advantage.

According to the free market view, who benefits from FDI?

Both the source country and the host country.

What is pragmatic nationalism?

The belief that FDI has both benefits and costs.

What is the goal of pragmatic nationalist policies?

To maximize national benefits and minimize national costs.

What ideological shift has increased FDI worldwide?

The rise of free-market ideology and more liberal foreign investment policies.

Which countries have experienced major FDI growth due to liberalization?

China, India, and Vietnam.

What employment benefit does FDI provide to host countries?

It creates jobs that otherwise would not exist.

What employment cost can result from FDI?

Jobs may be lost in the home country.

How does Greenfield investment affect competition?

It creates new enterprises and increases competition.

How does Greenfield investment affect consumers?

It increases consumer choice

What is a potential host-country cost of FDI?

Foreign subsidiaries may have greater economic power than local competitors.

How can acquisitions negatively affect competition?

They may reduce competition and potentially create a monopoly.