Chapter 8 Global Business

In recent years, there has been a strong shift toward the free market stance creating:

-A surge in the volume of FDI worldwide -An increase in the volume of FDI directed at countries that have recently liberalized their regimes -But, some countries are becoming more hostile to FDI

FDI has grown more rapidly than world trade and world output because:

-Firms still fear protectionist policies -The shift toward democratic political institutions and free market economies encourages FDI -Globalization is prompting firms to ensure they have a significant presence in many regions of the world

Acquisitions are attractive because:

-They are quicker to execute than greenfield investments -It is easier and less risky for a firm to acquire desired assets than build them from the ground up -Firms believe they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills

Two forms of FDI:

1. A greenfield investment - the establishment of a wholly new operation in a foreign country 2. Acquisition or merging with an existing firm in the foreign country

Limitations of Licensing: internalization theory

1. Licensing could 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. Licensing may be difficult if the firm's competitive advantage is not amendable to it

Host Country Benefits

1. Resource Transfer Effects 2. Employment Effects 3. Balance-of-Payments Effects

Resource Transfer Effects

FDI can bring capital, technology, and management resources that would otherwise not be available

Employment Effects

FDI can bring jobs that would otherwise not be created there

pragmatic nationalism

Ideology toward FDI has ranged from a radical stance that is hostile to all FDI to the non-interventionist principle of free market economies Between these two extremes is an approach that might be called

FDI will be favored over licensing when:

The firm wants control over its technological know-how The firm wants control over its operations and business strategy The firm's capabilities are not amenable to licensing

FDI will be favored over exporting when:

Transportation costs are high Trade barriers are high

Foreign direct investment (FDI):

a firm invests directly in new facilities to produce or market in a foreign country

Limitations of Exporting

an exporting strategy can be limited by transportation costs and trade barriers -When transportation costs are high, exporting can be unprofitable -Foreign direct investment may be a response to actual or threatened trade barriers such as import tariffs or quotas

Inflows of FDI

are the flows of FDI into a country

Outflows of FDI

are the flows of FDI out of a country

Location-specific advantages

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

Knickerbocker

explored the relationship between FDI and rivalry in oligopolistic industries

Dunning's eclectic paradigm

in addition to the various factors discussed earlier, two additional factors must be considered when explaining both the rationale for and the direction of foreign direct investment

Externalities

knowledge spillovers that occur when companies in the same industry locate in the same area

A firm engaged in FDI is a

multinational enterprise

flow of FDI

the amount of FDI undertaken over a given time period

stock of FDI

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

multipoint competition

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