1. Global Business 3e Chapter 6 Investing Abroad Directly
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2. LEARNING OBJECTIVES
After studying this chapter, you should be able to:
6-1 use the resource-based and institution-based views to answer why foreign direct investment (FDI) takes place.
6-2 understand how FDI results in ownership, location, and internalization (OLI) advantages.
6-3 identify different political views on FDI based on an understanding of its benefits and costs to host and home countries.
6-4 participate in two leading debates concerning FDI.
6-5 draw implications for action.
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3. FDI VOCABULARY Foreign direct investment (FDI)
Putting money in activities that control and manage value-added activities in other countries
Multinational enterprise (MNE)
Firms that engage in FDI
Foreign portfolio investment (FPI)
Holding securities, such as stocks and bonds, of companies in countries outside one’s own but does not entail the active management of foreign assets
Management control rights
Authority to appoint key managers and establish control mechanisms
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4. HORIZONTAL AND VERTICAL FDI
Horizontal FDI Producing the same products or offering the same services in a host country as firms do at home Vertical FDI Firm moves upstream or downstream in different value chain stages in a host country through FDI
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7. UPSTREAM AND DOWNSTREAM VERTICAL FDI
Upstream vertical FDI Using FDI in an earlier activity in the value chain Downstream vertical FDI Using FDI in an later activity in the value chain
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8. FDI FLOW AND STOCK
FDI flow Amount of FDI moving in a given period (usually a year) in a certain direction FDI inflow FDI moving into a country in a year FDI outflow FDI moving out of a country in a year FDI stock Total accumulation of inbound FDI in a country or outbound FDI from a country
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11. WHY FIRMS BECOME MNEs BY ENGAGING IN FDI
OLI advantages
Quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages
Ownership
MNEs’ possession and leveraging of certain valuable, rare, hard- to-imitate, and organizationally embedded (VRIO) assets overseas
? Can you name some OLI advantages for a familiar firm?
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13. OLI ADVANTAGES
Location Features unique to a place, such as its natural or labor resources or its location near particular markets, that provide certain advantages to firms doing business there Internalization Replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries
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14. OLI ADVANTAGES
Licensing Selling technology or intellectual property for a fee Market imperfection (market failure) Imperfect rules governing international transactions
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16. FDI VS LICENSING
Dissemination risk Possibility of unauthorized diffusion of firm-specific know-how
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17. LOCATION
Agglomeration Clustering of economic activities in certain locations Knowledge spillover Diffusion of knowledge from one firm to others among closely located firms that attempt to hire individuals from competitors
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18. LOCATION
Location advantages refer to the advantages one firm obtains when operating in a location due to its firm-specific capabilities
Oligopoly
An industry dominated by a small
number of players
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21. OVERCOMING MARKET FAILURE THROUGH FDI
Intrafirm trade Transactions occur between two subsidiaries in two countries controlled by the same MNE
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22. POLITICAL VIEWS ON FDI
Radical view Treats FDI as an instrument of imperialism and a vehicle for exploiting domestic resources, industries, and people by foreign capitalists and firms Free market view Unrestricted by government Intervention FDI will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services
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23. POLITICAL VIEWS ON FDI ? What is your opinion of FDI?
Pragmatic nationalism Considering both the pros and cons of FDI and approving FDI only when its benefits outweigh its costs
? What is your opinion of FDI?
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25. BENEFITS AND COSTS OF FDI TO HOST COUNTRIES
Technology spillover Domestic diffusion of foreign technical knowledge and processes Demonstration effect Local rivals, after observing foreign technology, may recognize its feasibility and strive to imitate Contagion (imitation) effect
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26. HOW MNEs AND HOST GOVERNMENTS BARGAIN
Bargaining power Ability to extract favorable outcome from negotiations due to one party’s strengths
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28. HOW MNEs AND HOST GOVERNMENTS BARGAIN
Obsolescing bargain Requirements of a deal previously struck between an MNE and a host government is changed after the initial FDI entry Expropriation Confiscating foreign assets Sunk cost Already invested sums
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29. SOVEREIGN WEALTH FUNDS
Sovereign wealth fund (SWF) State-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets
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