International Business - Chapter 8

Foreign Direct Investment (FDI)

When a firm invests directly in new facilities to produce and/or market in a foreign country.

Flow of FDI

How much foreign investment happens during a specific period.

Stock of FDI

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

Outfows

Flows of FDI out of a country.

Inflows

Flows of FDI into a country.

Greenfield Investment

Greenfield investment establishes a new operation in a foreign country.

Acquisition or merger

Acquire or merge with an existing company.

Acquisition or merger: advantages

Quicker to execute. Can acquire valuable strategic assets. Can increase the efficiency of the acquired unit by transferring capital, technology, or management skills.

Exporting

Producing goods at home and shipping to receiving country for sale.

Licensing

Is when a company allows another company, often in a foreign country, to use its products, technology, brand, or intellectual property in exchange for payment.

Why FDI? Exporting is unattractive

When transportation costs or trade barriers make exporting unattractive.

Why FDI? Control is needed

When firms want to maintain control over technological know-how, operations, or business strategy.

Why FDI? Not Amenable to licensing

When the firm’s capabilities are not easy to license.

Licensing: risk of know-how

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

Knickerbocker

Competitors follow competitors into foreign markets.

Oligopoly

A few large companies dominate and compete in an industry.

Multipoint competition

Is when the same companies go head-to-head in multiple countries or markets at once. Think Coca-Cola and Pepsi.

The Eclectic Paradigm: economist

Championed by British economist John Dunning.

The Eclectic Paradigm: location-specific advantages

Why a company chooses a particular country for FDI.

The Eclectic Paradigm: location and unique capabilities

Combining location-specific assets or resource endowments with the firm’s own unique capabilities often requires foreign direct investment.

The Radical View: MNEs

MNEs exploit and control foreign countries for their own benefit.

The Free Market View: production

International production should be distributed among countries according to the theory of comparative advantage.

The Free Market View: country benefits

FDI benefits both the source country and host country.

Pragmatic Nationalism: benefits and costs

FDI has both benefits and costs.

Pragmatic Nationalism: policies

Pursue policies designed to maximize the national benefits and minimize the national costs.

Host-Country Benefits: Resource-transfer effects

Supplies capital, technology, and management resources.

Host-Country Benefits: Employment Effects

Brings jobs to host country that would otherwise not be created there.

Host-Country Benefits: competition

Greenfield investment creates new enterprises.

Host-Country Costs: greenfield versus acquisition

Greenfield investments should increase competition but not as clear with an acquisition.

Host-Country Costs: earnings outflow

Means that a foreign company sends profits earned in the host country back to its parent company in its home country.

Host-Country Costs: sovereignty

A loss of economic independence.

Home-Country Benefits: balance of payments

Foreign Direct Investment (FDI) can benefit the home country's economy by bringing income back from abroad and increasing exports.

Home-Country Benefits: reverse resource-transfer effect

A company invests abroad, learns new skills, technology, or business practices, and brings that knowledge back to its home country.

Home-Country Costs: initial capital outflow

From the initial capital outflow needed to finance FDI.

Home-Country Costs: employment

A company moves production from its home country to another country, workers in the home country may lose their jobs.

Offshore production

Manufacturing abroad to supply your home market.

Home-Country Policies Encouraging outward FDI

Government-backed insurance programs. Government loans. Elimination of double taxation of foreign income. Host countries relaxing restrictions on FDI.

Home-Country Policies Restricting outward FDI

Limit capital outflows. Manipulate tax rules. Prohibit investment for political reasons.

Host-Country Policies Encouraging inward FDI

Incentives such as tax concessions, low-interest loans, grants, or subsidies.

Host-Country Policies Restricting inward FDI

Ownership restraints. Performance requirements.