Chapter 8: Foreign Direct Investment

What are 3 main FDI costs for the host country?

1) Adverse effects on competition 2) Adverse effects on balance of payments 3) National sovereignty and autonomy

What are the 3 limitations of licensing?

1) Giving away technological know-how to a potential foreign competitor 2) Lack of tight control over manufacturing, marketing, and strategy in a foreign country for maximum profitability 3) Competitive advantages not amenable to licensing

What are the 2 pros of a greenfield investment?

1) Greater flexibility to build the kind of subsidiary company (organizational culture, operating routines) 2) Can yield greater long-term returns

What are the adverse effects on competition?

1) In a larger international organization: Foreign MNE may be able to draw on funds generated elsewhere to subsidize its costs in the host market, which will drive indigenous companies out of business and allow firm to monopolize market 2) Foreign MNE could raise prices above those that would prevail in other markets

What are the 2 cons of a M&A?

1) Less flexibility to build subsidiary company 2) Does not yield greater long-term returns

What are the 3 pros of a M&A?

1) Quicker to execute 2) Easier and less risky for a firm to process valuable strategic assets through acquisitions 3) Firms believe they can increase efficiency of the acquired unit (difficult to achieve)

What are the 3 main FDI benefits for the host country?

1) Resource transfer effects 2) Balance of payment effects 3) Competition effects

What are the adverse effects on balance of payments?

1) Set against the initial capital inflow that comes with FDI must be the subsequent outflow of earnings from the foreign subsidiary to its parent company 2) Foreign subsidiary imports a substantial number of its inputs from abroad- debit on current account of host country's BofP

What are the 3 cons of a greenfield investment?

1) Slower to establish a new subsidiary 2) Riskier due to uncertain future revenues and profits 3) Faster and more aggressive global competitors via acquisitions

What are the 2 situations in which FDI should be preferred, as opposed to licensing?

1) When the firm wishes to maintain control over its technological know-how, or over its operations and business strategy 2) When the firm's capabilities are simply not amenable to licensing

What is multipoint competition?

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

What are competition effects?

Increased: lowered prices and increase in economic welfare of consumers, stimulate capital investments by firms in plant, equipment, and R&D Long-term: Increased productivity growth, product and process innovations, and greater economic growth

What is licensing?

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

What is the purpose of multipoint competition?

It ensures that the rival doesn't gain a commanding position in one market and then use profits generated there to subsidize competitive attacks in other markets

What is national sovereignty and autonomy?

Key decisions that can affect the host country's economy will be made by foreign parent that has no real commitment to the host country, and over which the host country's government has no real control

What is the definition of a greenfield investment?

One of the main forms of FDI which involves the establishment of a new operation in a foreign country.

What is the definition of M&A [Mergers & Acquisitions]?

Other main form of FDI (most popular) which involves acquiring and merging with an existent firm in the foreign country.

What are the host country policies in terms of restricting inward FDI?

Ownership restraints: 1) Foreign firms are often excluded from certain sectors on the grounds of national security/competition 2) Based on belief that local owners can help maximize the resource transfer and employment benefits

What are resource transfer effects?

Supplying capital, technology, and management resources that would otherwise not be available and thus boosting that country's economic growth rate

What are balance of payment effects?

Track payments both to and its receipts from other countries 1) If FDI is substitute for imports, effect can be to improve current account of host country's BofP 2) MNE uses a foreign subsidiary to export goods and services to other countries