Ch. 7 - Foreign Direct Investment

Ownership Advantage

a company advantage that arises from ownership of some special asset, such as a powerful brand, technical knowledge, or management ability.

Balance of Payments

a national accounting system that records all payments to entities in other countries and all receipts coming into the nation

Standardized Product Stage (3)

competition from companies selling similar products pressures companies to lower prices to maintain sales levels. A search for low-cost production bases abroad begins and the home market may begin importing the product.

Portfolio Investment

does not involve obtaining a degree of control in a company

Purchase-Or-Build Decision

entails deciding whether to purchase an existing business or to build a subsidiary fresh from the ground up

Eclectic Theory

firms undertake foreign direct investment when the features of a location combine with ownership and internalization advantages to make a location appealing for investment.

New Product Stage (1)

high purchasing power and buyer demand encourage a company to design and introduce a new product concept. Although there is virtually no export market initially, exports increase late in this stage.

Home Country Restriction Methods

higher taxes on foreign income, sanctions that prohibit investing

Home Country Promotion Methods

insurance on abroad assets, loans+guarantees, special tax treaties, tax breaks on profits abroad, persuade other nations to accept the FDI

Location Advantage

is the advantage of locating a particular economic activity in a specific location because of its natural or acquired characteristics.

Internalization Advantage

is the advantage that arises from internalizing a business activity rather than leaving it to a relatively inefficient market

Following Clients

occurs when suppliers of component parts have close working relationships with their customers. FDI puts the supplier nearer their customers where they can better understand and anticipate their needs

Current Accounts

records the import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country.

Capital Accounts

records transactions involving the purchase or sale of assets. These assets include physical assets such as foreign direct investments in factories and equipment, and financial assets such as shares of stock in a company abroad.

International Product Life Cycle Theory

states that a company will begin exporting its product and later undertake foreign direct investment as the product moves through its life cycle.

Market Power Theory

states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment.

Market imperfections (or internalization) theory

states that when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake FDI to internalize the transaction and thereby eliminate the imperfection; ex: trade barrier

Maturing Product Stage (2)

the domestic market and markets abroad become fully aware of the existence of the product and its benefits. Demand rises and is sustained over a fairly lengthy period of time. Near the end of this stage, sales begin in developing nations and manufacturing is established there.

Vertical Integration

Extends company's activities into stages of production that provide its inputs (backward _____) or absorb its out-puts (forward _____) can gain market power

Host Country Promotion Methods

Financial incentives: Low or waived taxes, Low-interest loans Infrastructure benefits: Better seaports, roads, and telecom networks

Host Country Restriction Methods

Ownership restrictions: Prohibit investment in, industries or businesses Performance demands: Local content requirements, Export targets, Technology transfers

Foreign Direct Investment (FDI)

Purchase of physical assets or significant amount of ownership of a company in another country in order to gain some measure of management control

Internalization

The eclectic theory says that firms undertake FDI when location, ownership, and __________ advantages combine to make a location appealing for investment.

Following Rivals

"follow the leader" scenario and is common in industries with a limited number of large firms. FDI is driven by a belief that not matching rivals' moves can mean losing a "first mover" advantage or being shut out of a lucrative market altogether.

The U.S. Commerce Department says that stock ownership above _____ percent constitutes FDI.

10%

Boost

A host government may encourage an initial FDI because the inflow can __________ its balance-of-payments position.

What is the difference between foreign direct investment and portfolio investment?

Foreign direct investment is the purchase of physical assets or a significant amount of the ownership of a company in another country to gain a measure of management control. Portfolio investment does not involve obtaining a degree of control in a company.