Chapter 7: Foreign Direct Investment Notes

Learning Objectives

• Understand trends in Foreign Direct Investment (FDI)
• Examine various theories related to FDI
• Analyze how political ideologies influence government attitudes towards FDI
• Explore benefits and costs of FDI for home and host countries
• Identify government policy tools affecting FDI
• Recognize implications of FDI theory and policy for managers

FDI Overview

• Definition: Foreign Direct Investment (FDI) involves a firm (MNE) investing directly in foreign production or marketing facilities.
• Flow of FDI: Refers to volume of FDI over time (e.g., annually).
• Stock of FDI: Total accumulated value of foreign-owned assets at a particular time.
• Outflows and Inflows:
  • Outflows: FDI capital going out of a country.
  • Inflows: FDI capital coming into a country.

Opening Case: JCB in India

• JCB partnered with Escort to manufacture backhoe loaders.
• Emphasis on deregulation and know-how transfer.
• Transitioned from a joint venture to a wholly owned subsidiary in a high-growth market.

Trends in FDI

• FDI inflows and outflows have varied significantly over the years (1990-2022 data).
• FDI landscape shows developing nations gaining on developed nations.
• Canada had $53 billion in FDI inflow in 2022 versus $79.2 billion outflow.

Theoretical Perspectives on FDI

1. Why Choose FDI?: Firms opt for direct investment to enter foreign markets over other strategies like licensing.
2. Simultaneous FDI Trends: Examination of why firms in the same sector often invest abroad simultaneously.
3. Eclectic Paradigm: A comprehensive model combining key theories of FDI.

Limitations of Strategies

• Exporting: Transportation can be costly, especially for low value-to-weight ratio products. Examples include cement and soft drinks vs. electronics.
• Licensing: Can risk technology loss; firms prefer internalization via FDI for tighter control.

Strategic Behavior in FDI

• Oligopoly & Competition: The dynamics between a limited number of large firms and their strategic interactions in various markets.

The Eclectic Paradigm

• Introduced by John Dunning; includes location-specific advantages essential for FDI rationale and preferences.

Ideological Views on FDI

1. Radical View: MNEs viewed as exploiting host nations for home country benefits (Marxist perspective).
2. Free Market View: FDI fosters global efficiency through specialization based on comparative advantage.
3. Pragmatic Nationalism: States balance the benefits of FDI against associated costs, recognizing both potential advantages and disadvantages.

Benefits and Costs of FDI

Host Country

• Benefits:
  • Resource transfer, employment growth, improved balance of payments.
• Costs:
  • Can negatively affect local competition and sovereignty.

Home Country

• Benefits:
  • Skills and technology retrieved from subsidiaries, job creation.
• Costs:
  • Negative balance of payments from outward FDI, potential job losses.

Government Policies on FDI

• Home Country: Policies may encourage or restrict outward FDI.
• Host Country: Policies also vary in promoting or limiting inward FDI.
• International Institutions: The WTO formed in 1995 began influencing FDI policies globally.

Implications for Business

• Understanding trade barriers and policies can impact firm strategies.
• Impacts on decision-making for entry strategies and international operations.

Closing Case: Starbucks’ FDI Strategy

• Analyze Starbucks' investment history in China and identify the political/economic factors of success.
• Discussion on optimal entry strategies for foreign retailers in emerging markets.