Presentation on theme: "FDI (Foreign direct Investment) Chapter 8. What is DFI? Flow of capital from a country to another to establish production or service facilities used."— Presentation transcript:
What is DFI? Flow of capital from a country to another to establish production or service facilities used to conduct business activities Ownership share of at least 10 or 25% Different from (1) portfolio investment and (2) investment of earnings from FDI Recently more rapidly growing than trade
Why FDI? (What advantages of control?) Easiness of transfer of technology and other competitive assets (Appropriability theory tells that companies deny rivals access to vital resources.) Cost reduction through internationalization
Trade and DFI Substitution –Factor mobility (FDI) can be a substitute for trade (exporting), especially when there are some trade restrictions. Complementarity –In the long run FDI can stimulate trade (exporting) of the home country because of need for components and capital equipments for subsidiaries and sales of home-made complementary products. –Actually 1/3 of the world trade is among controlled entities.
Motives for FDI Market expansion (market seeking) –Most FDI for this reason Resource acquisition (resource- seeking) –Increasing trend in recent years Risk reduction Political motives
Market Expansion (Why FDI instead of trade?) High transportation cost horizontal expansion When no or low gains from scale economies To overcome trade (tariffs, quotas) and nontrade (Nationalism) barriers When lack of domestic capacity
Resource acquisition (Why FDI instead of trade?) Vertical integration cost reduction To achieve rationalized (optimal) production To access to essential resources To take advantage of lower costs of resources (at the maturity or decline stages of the product life cycle) To take advantages of incentives given by the host government.
Risk reduction Diversification to minimize cyclical swings in sales and profits To prevent competitors’ advantage To follow customer firms
Two types of FDI Acqusition (or merge) of existing frims –No startup problems –Easier financing –Readily available resources Establishing a new firm –No carry-over problems (e.g. debts) –New facilities (more efficient capital)
FDI patterns Who invest, where and why? Who? –Firms of developed countries (mostly MNEs) Where? –To developed countries –Noticeable increase in China (almost 10% of world total FDI) Why? –Market seeking –Resource seeking