chapter Foreign Direct Investment McGraw-Hill/Irwin Global Business Today, 5e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 7

7 - 3 Chapter 7: Foreign Direct Investment INTRODUCTION Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country. Once a firm undertakes FDI it becomes a multinational enterprise.

7 - 4 Chapter 7: Foreign Direct Investment FDI takes on two main forms: A greenfield investment (the establishment of a wholly new operation in a foreign country) Acquisition or merging with an existing firm in the foreign country FDI is not foreign portfolio investment (investment by individuals, firms, or public bodies in foreign financial instruments).

7 - 5 Chapter 7: Foreign Direct Investment FOREIGN DIRECT INVESTMENT IN THE WORLD ECONOMY The flow of FDI refers to the amount of FDI undertaken over a given time period The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time Outflows of FDI are the flows of FDI out of a country Inflows of FDI are the flows of FDI into a country

7 - 6 Chapter 7: Foreign Direct Investment Trends in FDI The Direction of FDI The Source of FDI The Form of FDI: Acquisitions versus Greenfield Investments The Shift to Services

7 - 7 Chapter 7: Foreign Direct Investment THEORIES OF FOREIGN DIRECT INVESTMENT Why do firms choose foreign direct investment over other forms of market entry? There are several theories that attempt to explain the observed pattern of foreign direct investment flows.

7 - 8 Chapter 7: Foreign Direct Investment Why Foreign Direct Investment The Pattern of Foreign Direct Investment The Eclectic Paradigm

7 - 9 Chapter 7: Foreign Direct Investment POLITICAL IDEOLOGY AND FOREIGN DIRECT INVESTMENT Ideology toward FDI ranges 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 pragmatic nationalism

Chapter 7: Foreign Direct Investment The Radical View The Free Market View Pragmatic Nationalism Shifting Ideology

Chapter 7: Foreign Direct Investment BENEFITS AND COSTS OF FDI FDI affects countries in different ways. Host Country Benefits Host Country Costs Home Country Benefits Home Country Costs International Trade Theory and Foreign Direct Investment

Chapter 7: Foreign Direct Investment GOVERNMENT POLICY INSTRUMENTS AND FDI What are the policy instruments that home countries and host countries use to regulate FDI? Home Country Policies Host Country Policies International Institutions and the Liberalization of FDI

Chapter 7: Foreign Direct Investment IMPLICATIONS FOR MANAGERS How are managers affected by FDI? The Theory of FDI Government Policy