chapter 8 int

free market view

international production should be distributed among countries according to the theory of comparative advantage embraced by advanced and developing nations including the United States and Britain, but no country has adopted it in its purest form shift towards this stance

Firms prefer to acquire

mergers and acquisitions are quicker to execute than greenfield investments it is easier and perhaps less risky for a firm to acquire desired assets than build them from the ground up firms believe that they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills

FDI

occurs when a firm invests directly in new facilities to produce and/or market in a foreign country the firm becomes a multinational enterprise FDI can be in the form of greenfield investments - the establishment of a wholly new operation in a foreign country acquisitions or mergers with existing firms in the foreign country

theoretical view of FDI

radical view free market view pragmatic nationalism

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

the stock of FDI

the total accumulated value of foreign-owned assets at a given time

Why choose FDI

why choose FDI over licensing or exporting exports can be limited by transportation costs and trade barriers FDI may be a response to actual or threatened trade barriers such as import tariffs or quotas 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

Costs of FDI on a home country

Adverse effects of FDI on competition within the host nation Adverse effects on the balance of payments Perceived loss of national sovereignty and autonomy

source of FDI

Since World War II, the U.S. has been the largest source country for FDI the United Kingdom, the Netherlands, France, Germany, and Japan are other important source countries together, these countries account for 60% of all FDI outflows from 1998-2011

trends in FDI

Both the flow and stock of FDI have increased over the last 35 years Most FDI is still targeted towards developed nations United States, Japan, and the EU but, other destinations are emerging South, East, and South East Asia especially China Latin America

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

acquisition vs greenfield

Most cross-border investment is in the form of mergers and acquisitions rather than greenfield investments between 40-80% of all FDI inflows per annum from 1998 to 2011 were in the form of mergers and acquisitions but in developing countries two-thirds of FDI is greenfield investment fewer target companies

FDI Benefits for host country

Resource transfer effects - FDI brings capital, technology, and management resources Employment effects - FDI can bring jobs Balance of payments effects - FDI can help a country to achieve a current account surplus 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

the flow of FDI

The flow of FDI - the amount of FDI undertaken over a given time period Outflows of FDI are the flows of FDI out of a country Inflows of FDI are the flows of FDI into a country

growth of FDI a result of

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