Presentation on theme: "Foreign Investment Foreign Direct Investment (FDI)"— Presentation transcript:
1 Foreign InvestmentForeign Direct Investment (FDI)Foreign Indirect Investment
2 Direct Investment Patterns Location of ownershipFor worldwide FDILocation of investmentMost FDI occurs in developed countries (Why ??)Economic sector of investment
3 Reasons for the Growth of FDI GlobalizationMergers and acquisitionsEntrepreneurs and small businesses
4 Theories of Foreign Direct Investment InternationalProduct Life CycleEclectic ParadigmMarket PowerMarketImperfections
5 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.
6 International Product Life Cycle Model High Income CountriesproductionconsumptionQuantity123456789101112131415Medium Income Countries123456789101112131415Low Income Countries1Time23456789101112131415New ProductMaturing ProductStandardized ProductStages of Product Life Cycle
7 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.
8 Eclectic TheoryStating 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.
9 Market Power TheoryA 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).
10 Motivation for FDI as an Alternative or Supplement to TradeSALES EXPANSION OBJECTIVESOvercome high transport costsDomestic capacityGains from scale economiesTrade restrictionsBarriers because of country- of-origin effects (nationalism, product image, delivery risk)Lower productions costs abroad
11 Motivation for FDI as an Alternative or Supplement to Trade (cont.) RESOURCE ACQUISITION OBJECTIVESSavings through vertical integrationSavings through rationalized productionGain access to cheaper or different resources and knowledgeNeed to lower costs as product maturesGain governmental investment incentives
12 Motivation for FDI as an Alternative or Supplement to Trade (cont.) RISK MINIMIZATION OBJECTIVESDiversification of customer base (same motivation as for sales expansion)Diversification of supplier base (same motivation as for resource acquisition objectivesFollowing customersPreventing competitors’ advantage
13 Motivation for FDI as an Alternative or Supplement to Trade (cont.) POLITICAL OBJECTIVESInfluence companies, usually through factors under resource acquisition objectives
14 Reasons for Host- Country Interventions Controllingthe Balanceof PaymentsObtainingResourcesand Benefits