Foreign Investment Foreign Direct Investment (FDI) Foreign Indirect Investment

Direct Investment Patterns Location of ownership For worldwide FDI Location of investment Most FDI occurs in developed countries (Why ??) Economic sector of investment

Reasons for the Growth of FDI Globalization Mergers and acquisitions Entrepreneurs and small businesses

Theories of Foreign Direct Investment International Product Life Cycle Eclectic Paradigm Market Power Market Imperfections

International Product Life Cycle Stating that a company will begin by exporting its product and later undertake foreign direct investment as a product moves through its life cycle.

International Product Life Cycle Model High Income Countries production consumption Quantity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Medium Income Countries 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Low Income Countries 1 Time 2 3 4 5 6 7 8 9 10 11 12 13 14 15 New Product Maturing Product Standardized Product Stages of Product Life Cycle

Market Imperfections (Internalization) When an imperfection in the market makers a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection.

Eclectic Theory Stating that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment.

Market Power Theory A firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. Vertical integration – extension of company activities into stages of production that provide a firm’s inputs (backward integration) or absorb its output (forward integration).

Motivation for FDI as an Alternative or Supplement to Trade SALES EXPANSION OBJECTIVES Overcome high transport costs Domestic capacity Gains from scale economies Trade restrictions Barriers because of country- of-origin effects (nationalism, product image, delivery risk) Lower productions costs abroad

Motivation for FDI as an Alternative or Supplement to Trade (cont.) RESOURCE ACQUISITION OBJECTIVES Savings through vertical integration Savings through rationalized production Gain access to cheaper or different resources and knowledge Need to lower costs as product matures Gain governmental investment incentives

Motivation for FDI as an Alternative or Supplement to Trade (cont.) RISK MINIMIZATION OBJECTIVES Diversification of customer base (same motivation as for sales expansion) Diversification of supplier base (same motivation as for resource acquisition objectives Following customers Preventing competitors’ advantage

Motivation for FDI as an Alternative or Supplement to Trade (cont.) POLITICAL OBJECTIVES Influence companies, usually through factors under resource acquisition objectives

Reasons for Host- Country Interventions Controlling the Balance of Payments Obtaining Resources and Benefits

Reasons for Home-Country Interventions

Government Policy and FDI Methods of Restricting FDI Methods of Promoting FDI Ownership Restrictions Performance Demands Tax Incentives Low-Interest Loans Improve Infrastructure Host Countries Differential Tax Rates Sanctions Insurance Loans Tax Breaks Political Pressure Home Countries