1. Presentation on Foreign Direct Investment www.AssignmentPoint.com
This is a test

3. Foreign Direct Investment
Why is FDI increasing in the world economy?
Why do firms often prefer FDI to other market entry strategies?
Why do firms imitate competitors with FDI strategies?
Why are certain locations favored for FDI?
How does political ideology affect government FDI policy?
What are key FDI related costs and benefits for receiving and source countries?

4. Foreign Direct Investment
Foreign direct investment (FDI): a firm invests directly in foreign facilities
A firm that engages in FDI becomes a multinational enterprise (MNE)
Multinational = “more than one country”
Factors which influence FDI are related to factors that stimulate trade

5. Foreign Direct Investment
Involves ownership of entity abroad for
production
Marketing/service
R&D
Access of raw materials or other resource
Parent has direct managerial control
Depending on its extent of ownership and
On other contractual terms of the FDI
No managerial involvement = portfolio investment

6. FDI Growth in the World Economy
FDI Outflow: $35 billion in ‘75 to $1.3 trillion in ‘00 to $653 billion in ‘03
FDI Flow (from all countries): from ‘92 to ‘02 up 292%, compared to trade up 69% and world output up 28%
FDI Stock: $3.5 trillion by ‘97 to > $7 trillion in ‘02
In ‘02:
64,000 MNEs had:
850,000 foreign affiliates
53 million employees
$17.7 trillion in sales
$8 trillions global exports
Conclusion: FDI flow growing faster than world trade and world output

8. Direction and Source of FDI
Most FDI flow has been to developed countries from developed countries
Much to the US from EU, Japan
FDI increase to developing countries since ‘85
Much to the emerging Asian and Latin America economies
Africa lagging

10. Forms of FDI FDI forms Purchase of assets: why? why not?
Quick entry, local market know-how, local financing may be possible, eliminate competitor, buying problems
New investment: why? why not?
No local entity is available for sale, local financial incentives, no inherited problems, long lead time to generation of sales
International joint-venture
Shared ownership with local and/or other non-local partner
Shared risk

11. Alternative Modes of Market Entry
FDI
FDI - 100% ownership
FDI < 100% ownership, International Joint Venture
Strategic Alliances (non-equity)
Franchising
Licensing
Exports: Direct vs Indirect

12. Why FDI? FDI over exporting FDI over licensing or franchising
High transportation costs, trade barriers
FDI over licensing or franchising
Need to retain strategic control
Need to protect technological know-how
Capabilities not suitable for licensing/franchising
Follow few main competitors
Immediate strategic responses

14. Pattern of FDI Explanations
International product life-cycle (Ray Vernon)
Trade theory similarity
Eclectic paradigm of FDI (John Dunning)
Combines ownership specific, location specific, and internalization specific advantages
Explains FDI decision over a decision to enter through licensing or exports

15. Eclectic Paradigm of FDI (Dunning)
Ownership advantage: creates a monopolistic advantage to be used in markets abroad
Unique ownership advantage protected through ownership
e.g., Brand, technology, economies of scale, management know-how
Location advantage: the FDI destination market must offer factors (land, capital, know-how, cost/quality of labor, economies of scale) that are advantageous for the firm to locate its investment there (link to trade theory)
Internalization advantage: transaction costs of an arms-length relationship --licensing, exports-- higher than managing the activity within the MNC’s boundaries

16. Government Policy and FDI
The radical view: inbound FDI harmful; MNEs
Are imperialist dominators
Exploit host to the advantage of home country
Extract profits from host country; give nothing back
Keep LDCs backward and dependent for investment, technology and jobs
The free market view: FDI should be encouraged
Adam Smith, Ricardo, et al: international production should be distributed per national comparative advantage
An MNE increases the world economy efficiency
Brings to bear unique ownership advantages
Adds to local economy’s comparative advantages

17. Host Country Effects of FDI
Benefits
Resource -transfer
Employment
Balance-of-payment (BOP)
Import substitution
Source of export increase
Costs
Adverse effects on the BOP
Capital inflow followed by capital outflow + profits
Production input importation
Threat to national sovereignty and autonomy
Loss of economic independence

18. Government Policy and FDI
Home country
Outward FDI encouragement
Risk reduction policies (financing, insurance, tax incentives)
Outward FDI restrictions
National security, BOP
Host country
Inward FDI encouragement
Investment incentives
Job creation incentives
Inward FDI restrictions
Ownership extent restrictions (national security; local nationals can safeguard host country’s interests

19. Decision Framework for FDI
Import Barriers?
Are transportation costs high?
Is know-how easy to license?
Tight control over foreign ops required?
Is know-how valuable and is protection possible? No
Yes No No
Export
Yes No
FDI
Yes
FDI
Yes
FDI No
License