SGMT 2200 Chapter 4: Foreign Direct Investment

Foreign Portfolio Investment (FPI)

investment in a portfolio of foreign securities such as stocks and bonds

Sovereign Wealth Funds (SWF)

a state-owned investment fund composed of financial assets such as stocks, bonds, real estate, and other financial instruments

Management Control Right

the right to appoint key managers and establish control mechanisms

Dissemination Risk

risk associated with unauthorized diffusion of firm-specific know-how

Horizontal FDI

a type of FDI in which a firm duplicates its home-country based activities at the same value-chain stage in a host country

Vertical FDI

a type of FDI in which a firm moves upstream at different value-chain stages in a host country

Upstream Vertical FDI

a type of vertical FDI in which a firm engages in an upstream stage of the value chain in a host country

Downstream Vertical FDI

a type of vertical FDI in which a firm engages in a downstream stage of the value chain in a host country

FDI Inflow

inward FDI moving into a country in a year

FDI Outflow

outward FDI moving out of a country in a year

FDI Stock

total accumulation of inward FDI in a country or outward FDI from a country across a given period

OLI Advantage

a firm’s quest for ownership (O), location (L), and internalization (I) advantages via FDI

Licensing

firm A’s agreement to give firm B the rights to use A’s proprietary technology (e.g. a patent) or trademark (e.g. corporate logo) for a royalty fee paid to A by B; typically done in manufacturing industries

Market Imperfection (Market Failure)

the imperfect rules governing international transactions

Natural Resource Seeking

possession of natural resources and related transport and communication infrastructure

Bargaining Power

ability to extract favourable outcomes from negotiations due to one party’s strengths

Expropriation

government’s confiscation of foreign assets

Sunk Cost

cost that a firm has to endure after making the initial investment

Market Seeking

abundance of strong market demand and customers willing to pay

Efficiency Seeking

economies of scale and abundance of low-cost factors

Innovation Seeking

abundance of innovative individuals, firms, and universities

Agglomeration

clustering of economic activities in certain locations

Knowledge Spillovers

knowledge diffused from one firm to others among closely located firms

Oligopoly

an industry dominated by a small number of players

Internalization Advantage

the replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries

Intrafirm Trade

international transactions between two subsidiaries in two countries controlled by the same MNE

Radical View

a political view that’s hostile to FDI

Free Market View

a political view that suggest that FDI unrestricted by government intervention is the best

Pragmatic Nationalism

a political view that only approves FDI when its benefits outweigh its costs

Benefits and Costs of FDI to Host Countries

• capital inflow can help improve a host country’s balance of payments

• technology can create technology spillover, i.e. technology diffused from foreign firms to domestic firms

Demonstration Effect

the reaction of local firms to rise to the challenge demonstrated by MNEs through learning and imitation