Foreign Direct Investment - Section B

Horizontal FDI

FDI in the same industry in which the firm operates at home.

h) Benefits and cost to home-country

a. Benefits i. Effect on capital account of home country from inflow of foreign earnings ii. Employment effects from outward FDI. iii. The gains from learning skills from foreign markets to bring back. b. Costs i. Suffer from the initial capital outflow required to finance the FDI. ii. Suffer if the purpose to extract the low-cost labour. iii. Suffer if the FDI is substitute for direct exports.

Why do firms chose FDI instead of

a. Exporting: producing goods at home and then shipping them to the receiving country for sale. i. Due to transportation costs, trade barriers. b. 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. i. Compared to FDI, licensing is less attractive as the firm could give away technological know-how, does not give firm control over it, and the firms competitive advantage may be based on their processes.

b) Explain the difference between foreign direct investment (FDI) and foreign portfolio investment (FPI).

a. FDI - Firm invest directly in facilities to produce and/or market a product in a foreign country. b. FPI - Investment by individuals, firm's or public bodies in foreign financial instruments, e.g. stocks, bonds.

j) Case study

a. FDI in Japan been low due to government regulations.

f) Identity some major modes or 'forms' of foreign direct investment (FSI). Assess their advantages and disadvantages.

a. Greenfield Investments: establishment of a new operation in a foreign country i. Advantages: able to setup how it wants ii. Disadvantages: longer time, costly, risky. b. Brownfield Investments: mergers or acquisitions with existing firms in a foreign country. i. Advantages: Speed to market ii. Disadvantages: existing processes and structure not aligned to businesses own.

a. Host-Country Policies

a. Host-Country Policies: governments can encourage or restrict inward FDI. i. To encourage inwards FDI: governments offer incentives to foreign firms to invest in their countries. ii. Incentives are motivated by a design to gain from the resource-transfer and employment effects of FDI, and to capture FDI away from other potential host countries iii. To restrict inward FDI: government use ownership restraints and performance requirements

i) Example of foreign firms that have invested in the UK. Why did they? What does this mean for the UK?

a. Nissan in Sunderland as it's the leading location for next-gen manufacturing.

a) Basic definitions: flow, stock, outflow, inflow:

a. The flow of FDI refers to the amount of FDI undertaken over a given time period. b. The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time. c. Outflows of FDI are the flows of FDI out of a country. d. Inflows of FDI are the flows of FDI into a country.

b. Host-Country Benefits

b. Host-Country Benefits: Four main benefits to inward FDI - i. BEER ii. Resource Transfer Effect - FDI makes positive contribution to host economy by supplying capital, technology, and management resources that would otherwise not be available. iii. Employment Effects - FDI can bring jobs to host country that would otherwise not be created there. iv. Balance of Payments Effects: a country's balance of payments account is a record of a country's payments to and receipts from other countries. Better to see a surplus than a deficit in the current account. v. Effects on competition and economic growth: FDI increases the level of competition in a market, driving down prices and improving welfare of consumers.

Vertical FDI

b. Vertical (where firms locate multiple stages of production in different countries) - Two type of vertical FDI: i. Backward vertical FDI: investment in an industry abroad that provides inputs for a firm's domestic production processes. ii. Forward vertical FDI: occurs when an industry abroad sells the outputs of a firm's domestic production processes, this is less common than backward vertical FDI.

c. Host-Country Costs

c. Host-Country Costs: Inward FDI has three main costs - i. BEER PAT - amy grandad ii. Possible adverse effect of FDI on competition within the host nation. iii. Adverse effects on the balance of payments. The initial capital inflow must be outflow of capital as it ships earnings to its parent country. iv. The perceived loss of national sovereignty and autonomy - Foreign parent country makes decisions over host as the host cannot control that.

e) Who do firms undertake FDI Employ and reference theories of FDI in order to answer this question.

Market Imperfections Theory - Hymer, 1976 Strategic Behaviour Location Advantages