ch 8 FDI

Internalization theory

(aka market imperfections theory) -compared to FDI licensing is less attractive firm could give away valuable technological know-how to a potential foreign competitor does not give a firm the control over manufacturing, marketing, and strategy in the foreign country the firm's competitive advantage may be based on its management, marketing, and manufacturing capabilities

FDI radical view

-the MNE is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries

three main costs of Inward FDI for a host country

1.Adverse effects of FDI on competition within the host nation subsidiaries of foreign MNEs may have greater economic power than indigenous competitors because they may be part of a larger international organization 2.Adverse effects on the balance of payments when a foreign subsidiary imports a substantial number of its inputs from abroad, there is a debit on the current account of the host country's balance of payments 3.Perceived loss of national sovereignty and autonomy decisions that affect the host country will be made by a foreign parent that has no real commitment to the host country, and over which the host country's government has no real control

four main benefits of inward FDI for a host country

1.Resource transfer effects-FDI brings capital, technology, and management resources 2.Employment effects-FDI can bring jobs 3.Balance of payments effects-FDI can help a country to achieve a current account surplus 4.Effects on competition and economic growth-greenfield investments increase the level of competition in a market, driving down prices and improving the welfare of consumers can lead to increased productivity growth, product and process innovation, and greater economic growth

The benefits of FDI for the home country

1.The effect on the capital account of the home country's balance of payments from the inward flow of foreign earnings 2.The employment effects that arise from outward FDI 3.The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country

The costs of FDI for the home country

1.The home-country's balance of payments can suffer from the initial capital outflow required to finance the FDI if the purpose of the FDI is to serve the home market from a low cost labor location if the FDI is a substitute for direct exports 2.Employment may also be negatively affected if the FDI is a substitute for domestic production But, international trade theory suggests that home-country concerns about the negative economic effects of offshore production(FDI undertaken to serve the home market) may not be valid

growth of FDI is a result of

1.a fear of protectionism want to circumvent trade barriers 2.political and economic changes deregulation, privatization, fewer restrictions on FDI 3.new bilateral investment treaties designed to facilitate investment 4.the globalization of the world economy many companies now view the world as their market need to be closer to their customers

Pragmatic nationalism

FDI has both benefits (inflows of capital, technology, skills and jobs) and costs (repatriation of profits to the home country and a negative balance of payments effect) FDI should be allowed only if the benefits outweigh the costs

Licensing

granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit that the foreign entity sells

2 types of fdi

greenfield investments acquisitions or mergers with existing firms in the foreign country

FDI free market view

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

Foreign direct investment (FDI)

occurs when a firm invests directly in new facilities to produce and/or market in a foreign country

Dunning's eclectic paradigm

paradigm that it is important to consider -location-specific advantages-that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets -externalities-knowledge spillovers that occur when companies in the same industry locate in the same area

greenfield investments

the establishment of a wholly new operation in a foreign country

Gross fixed capital formation

the total amount of capital invested in factories, stores, office buildings, and the like the greater the capital investment in an economy, the more favorable its future prospects are likely to be

Knickerbocker

theorized that FDI flows are a reflection of strategic rivalry between firms in the global marketplace

multipoint competition

when two or more enterprises encounter each other in different regional markets, national markets, or industries