BUSMHR (Ch.8 Foreign Direct Investment)

Host-country benefits of FDI

- main benefits of inward FDI for a host country arise from: 1. resource-transfer effects 2. employment effects 3. balance-of-payments effects 4. effects on competition and economic growth

Pragmatic nationalism

A view between the two extremes (Radical View and Free Market View) that FDI has both benefits and cost. FDI can benefit a host country by brining capital, skills, technology and jobs but come at a cost.

Location-specific advantages

Advantages that arise from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets.

Electric paradigm

Argument that combining location specific assets or resource endowments and the firm's own unique assets often requires FDI; it requires the firm to establish production facilities where those foreign assets or resources endowments are located

Multipoint competition

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

Greenfield Investment

Establishing a new operation in a foreign country

Firm entry strategies alternative to FDI

Exporting and Licensing

FDI inflows

Flow of foreign direct investment into a country

FDI outflows

Flow of foreign direct investment out of a country

FDI

Foreign Direct Investment occurs when a firm invests directly in facilities to produce or market a product in a foreign country

Political ideology

Has ranged from a dogmatic radical stance that is hostile to all inward FDI at one extreme to an adherence to the noninterventionist principle of free market economics at the other. the views include: 1. The Radical View 2. The Free Market View 3. Pragmatic Nationalism

Market imperfection

Imperfections in the operation of the market mechanism

Recent patterns of FDI

In the past few years the FDI outflows has been increasing every year (since 2009)

Licensing

Occurs when a firm licenses the right to produce its product, its protection processes, or its brand name or trademark to another firm; in return for giving the license these rights, the licensor collects a royalty fee on every unit the licensee sells

Exporting

Sale of products produced in one country to residents of another country

FDI flow

The amount of direct investment into a country in a defined time period undertaken by foreign entities

Internalization theory

The argument that firms prefer FDI over licensing in order to retain control over know-how, manufacturing, marketing and strategy or because some firm's capabilities are not amenable to licensing.

Home-country benefits of FDI

The benefits of FDI arise from 3 sources: 1. the home country's balance of payments benefits from the inward flow of foreign earnings 2. employment effects arise when the foreign subsidy creates demand for home-country exports 3. when MNE learns valuable skills from its exposure to foreign markets that can subsequently be transferred back to the home country

International Product Life Cycle Theory

explain the observed pattern of international trade. The theory suggests that early in a product's life-cycle all the parts and labor associated with that product come from the area in which it was invented. After the product becomes adopted and used in the world markets, production gradually moves away from the point of origin. In some situations, the product becomes an item that is imported by its original country of invention.

Oligopolistic reaction theory (OR)

explains why firms follow rivals into foreign markets

Limitations of licensing

firms often prefer FDI over Licensing (see Internalization Theory) the major drawbacks include: 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. Firms competitive advantage is based not as much on its products as on the management, marketing and manufacturing capabilities that produce those products

Limitations of exporting

often constrained by transportation costs and trade barriers such as import tariffs or quotas

Home-country costs of FDI

the most important concerns center on the balance-of-payments and employment effects of outward FDI. the home country's balance of payments may suffer in 3 ways: 1. the balance of payments suffers from the initial capital outflow required to finance the FDI 2. the current account of the balance of payments suffers if the purpose of the foreign investment is to serve the home market from a low-cost production location 3. the current account of the balance of payments suffers if the FDI is a substitute for direct exports

Theories of FDI

the theories approach the various phenomena of FDI form 3 different perspectives: 1. seeks to explain why a firm will favor FDI as a means of entering a foreign market when two other alternatives exist (SEE INTERNALIZATION THEORY) 2. Seeks to explain why firms in the same industry often undertake FDI at the same time and why they favor certain locations over others as targets for FDI (SEE OR THEORY) 3. SEE ECLECTIC PARADIGM

Host-country costs of FDI

three costs of FDI arise from: 1. possible adverse effects on competition within the host nation 2. adverse effects on the balance of payments 3. the perceived loss of national sovereignty and autonomy

Historic patterns of FDI

- In the past 30 years, the flow of the FDI has accelerated faster than the growth on world trade and world output - from 1992 to 2000 the FDI outflows increased more and more each year - the FDI outflows took a hit in 2001 and decreased but rebounded and hit a record high in 2007

Radical view

- Traces roots to Marxist political and economic theory - MNE is an instrument of imperialist domination - MNE is a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries - beleive the MNE take money form host countries and bring it back to their country giving nothing back to the host

Free market view

- Traces roots to classical economics and the international trade theories of Adam Smith and David Ricardo - argues that international production should be distributed among countries according to the theory of comparative advantage - Countries should focus on the products they can produce most efficiently