Bus 187 Ch 8
A firm will favor FDI over exporting for an entry strategy A firm will favor FDI over licensing
Advantages of FDI
FDI can help a country to achieve a current account surplus
Balance of payments effects
Tracks the exports and imports of goods and services
Current account
By John Dunning discusses location specific advantages. The advantages that arise from utilizing resource endowments or assets that are ties to a particular foreign location and that a firm finds valuable. (silicon valley)
Eclectic Paradigm
FDI can bring jobs would otherwise not be created there
Employment effects
___ is producing goods at home and then shipping them to the receiving country for sale
Exporting
___ is the amount of FDI undertaken over a given time period
Flow of FDI
___ occurs when a firm invests directly in new facilities to produce and/or market in a foreign country
Foreign direct investment (FDI)
When two or more enterprises encounter each other in diff. regional markets, national markets, or industries. To ensure that a rival does not gain a commanding position in one market and then use the profits to subsidize competitive attacks in other markets.
Knickerbocker's Theory (multipoint competition)
___ is granting a foreign entity the right to produce and sell the firms product in return for a royalty fee on every unit that the foreign entity sells
Licensing
transportation costs and trade barriers
Limitations of exporting
1 may result in a firm's giving away valuable tech know-how to a potential foreign competitor 2 does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to max its profits. 3 capabilities such as, management, marketing, and manufacturing are not amendable
Limitations of licensing
What is the direction of FDI
Most FDI has been aimed at the developing nations of the world. UK and France have been the largest recipients of inward FDI.
FDI has both benefits and costs. Pursue polices to max national benefits and minimize the costs. FDI should be allowed so long as benefits outweigh the costs.
Pragmatic nationalism
FDI brings capital, technology, and management resources that would otherwise not be available
Resource transfer effects (free market view)
Benefits of inward FDI for the host country
Resource transfer effects, employment effects, balance of payments effects, effects on competition and economic growth
Market decline in the number of countries that adhere to a radical ideology. People are gravitating toward a free market. Some evidence of switching to a more hostile approach of FDI in some nations.
Shifting Idealogy
___ is the total accumulated value of foreign owned assets at a given time
Stock of FDI
___ international production should be distributed among countries according to the theory of comparative advantage. Specialize in the goods they can produce efficiently. Beneficial to both the source and host country
The free market view
___ the MNE is an instrument of imperialist domination and a tool for employing host countries to the exclusive benefit of their capitalist-imperialist home countries. No country should ever permit foreign corporations to undertake FDI.
The radical view
3 1 why firms will favor FDI 2 why certain firms favor other locations for FDI These two are to observe the pattern of FDI 3 combines these 2 perspectives in a holistic theory (eclectic paradigm)
Theories of FDI
Increase in both flow and stock of FDI. Has grown more rapidly than world trade and world output. 1 Firms still fear protectionist issues. 2 Much of the increase has been driven by the political and economic changes that have been occurring in many of the world's developing nations. 3 General shift towards democratic political and free market economies. 4 Globalization of the world economy.
Trends in FDI
What is the largest source of FDI
United States is the largest source Others include UK, France, Japan, Germany, and the Netherlands. Chinese investors have started to emerge as major foreign investors. (Southeast Asia). They want raw materials.
Cost of inward FDI to the host country
adverse effects on competition, balance of payments, and perceived loss of national autonomy
Many host countries are concerned that a foreign owned manufacturing plant may import many components from its home country, which has negative implications for the host country's ____
balance of payments position
Cost of outward FDI to the home country
decrease in employment, balance of payments
greenfield investments increase the level of competition in a market, driving down prices and improving the welfare of consumers
effects on competition and economic growth
How does government influence FDI by encouraging outward FDI
government backed insurance programs to cover major types of foreign investment risk
___ is the establishment of a whole new operation in a foreign country
greenfield investments
Benefits of outward FDI to the home country
inflows of capital, technology, skills and jobs
How does government influence FDI by restricting outward FDI
limit capital outflows, manipulate tax rules, or prohibit FDI
How does government influence FDI by encouraging inward FDI
offer incentives to foreign firms to invest in their countries
Why do firms choose acquisition versus greenfield investments?
quicker to execute, less risky, belief that they can increase efficiency by transferring capital technology or management skills
How does government influence FDI by restricting inward FDI
use ownership restraints and performance requirements
