Chapter 8 Foreign Direct Investment

Foreign Direct Investment (FDI) pg.224

Occurs when a firm invests directly in facilitates to produce or market a product in a foreign country. Once a firm undertakes FDI, it becomes a Multinational Enterprise.

Limitations of Exporting pg. 230

Transportation Costs Trade barriers such as import tariffs and quotas

Source of FDI pg. 226

United States has consistently been the largest source country for FDI. The United Kingdom, France, Germany, Netherlands, and Japan along with the US account for 60 percent of all FDI outflows.

Acquisitions pg. 224

acquiring or merging with an existing firm in the foreign country.

Licensing pg. 230

involves granting a foreign entity (the licensee) the right to produce and sell the firm's product in return for a royalty fee on every unit sold.

Exporting pg. 230

involves producing goods at home and then shipping them to the receiving country for sale.

Lean production pg.231

produce higher quality products at lower cost than its global rivals

Flow of FDI pg 224

refers to the amout of FDI undertaken over a given time period (normally a year)

Acquisitions vs. Greenfield Investments pg.228

1. Mergers and acquisitions are quicker to execute than greenfield investments 2. Foreign firms are acquired because those firms have valuable strategic assets, such as brand loyalty, customer relationships, trademarks or patents, distribution systems, production systems, and the like. 3. Firms make acquisitions because they believe they can increase the efficiency of the acquired unit by transferring capital, technology, or management skills

Limitations of Licensing pg. 231

1. licensing may result in a firm's giving away valuable technological know-how to a potential foreign competitor. 2. licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. 3. when the firms competitive advantage is based not as much on its products as on the management, marketing , and manufacturing, capabilities that produce those products. Such capabilities are often not amenable to licensing.

Adverse Effects on Balance of Payments pg 241

1. set against the capital inflow that comes with FDI must be the subsequent outflow of earnings from the foreign subsidiary to its parent company. 2. Concern arises when a foreign subsidiary imports a substantial numberof its inputs from abroad which results in a debit on the current account of the host country's balance of payments

Home Country Benefits pg.242

1.the home country's balance of payments benefits from the inward flow of foreign earnings 2. benefits to the home country from outward FDI arise from employment effects. 3. home country MNE learns valuable skills from its exposure to foreign markets that can subsequently be transferred back to the home country.

Host country Costs of FDI pg. 240-241

Adverse Effects on Competition Adverse Effects on Balance of Payments National Sovereignty and Autonomy

Location Specific Advantages pg. 233-234

Dunn means the advantages that arise from utilizing resource endowments or assets that are tied to a particular foreign location and that firm finds valuable to combine with its own unique assets. Silicon valley has location specific advantages i the generation of knowledge related to the computer and semiconductor industries. It comes from the shee concentration of intellectual talent in this area, and in part it arises from a network of informal contacts that allows firms to benefit from each other's knowledge generation.

Employment Effects pg. 239

FDI brings jobs to a host country that would otherwise not be created there.

Pragmatic Nationalism pg. 236

FDI has both benefits and costs. FDI can benefit a host country by bringing capital, skills, technology and jobs, but those benefits come at a cost of the profits that go abroad, instead of domestic. Shows that FDI is worth it as long as the benefits outweigh the costs.

Trend in FDI pg. 225

FDI has grown more rapidly than world trade and world output. 1. despite the general decline in trade barriers over the past 30 years, firms still fear protectionist pressures. Executives see FDI as a way of circumventing future trade barriers. 2. Much of the increase in FDI has been driven by the political and economic changes that have been occurring in many of the world's developing nations. The general shift toward democratic political institutions and free market economies. 3. the globalization of the world economy is also having a positive effect on the volume of FDI. Many firms see the whole world as their market, and they are undertaking FDI in an attempt to make sure they have a significant presence in many regions of the world.

National Sovereignty and Autonomy pg.241

FDI is accompanied by some loss of economic independence

Resource-Transfer Effects pg. 238

FDI supplies capital, technology, and management resources that would otherwise not be available and thus boost that country's economic growth rate.

offshore Production pg. 243

FDI undertaken to serve the home market.

Host Country Benefits of FDI pg.238-240

Resource-Transfer Effects Employment Effects Balance of Payments Effects Effect on Competition and Economic Growth

Internalization Theory

Seeks to explain why firms often prefer FDI over licensing as a strategy for entering foreign markets or the MARKET IMPERFECTIONS approach.

Adverse Effects on Competition pg. 240

Subsidiaries of MNEs may ave greater economic power than indigenous competitors. The MNE may be able to draw on funds generated elsewhere to subsidize its cost in the hos market, which could drive indigenous companies out of business and allow the firm to monopolize the market.

Greenfield Investment pg.224

The establishment of a new operation in a foreign country.

oligopoly pg. 232

an industry composed of a limited number of large firms (e.g. an industry in which four firms control 80 percent of a domestic market) Interdependence: What one firm does can have an immediate impact on the major competitors, forcing a response in kind.

Radical View on FDI pg. 235

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

The Free Market View pg. 235

argues that international production should be distributed among countries according to the theory of comparative advantage. Countries should specialize in the production of those goods and services that they can produce most efficiently.

Encouraging Outward FDI pg. 243

government-backed insurance programs to cover major types of foreign investment risk. have special funds or banks that make government loans to domestic firms to undertake FDI and elimination of double taxation of foreign income.

Outflows of FDI pg. 224

meaning the flow of FDI out of a country

Home Country Costs pg. 242

most important concerns center on the balance of payments and employment effects of outflow FDI.

Encouraging/ Restricting Inward FDI

pg 245

Restricting Outward FDI

pg. 244

Externalities pg. 234

suggests that firms can benefit from such externalities by locating close to their source.

Inflows of FDI pg. 224

the glow of FDI into a country

Stock of FDI pg 224

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

Balance of payments accounts pg.239

track both its payments to and its receipts from other countries.

Current Account pg. 239-240

tracks the export and import of goods and services. A deficit occurs when a country is importing more goods and services than it is exporting. the opposite is a surplus.

Multipoint Competition pg. 233

when two or more enterprises encounter each other in different regional markets, national markets, or industries. Idea is to ensure that a rival does not gain a commanding position in one market and then use the profits generated there to subsidize competitive attacks in other markets.