1. Foreign Investment
Foreign Direct Investment (FDI)
Foreign Indirect Investment

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

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

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

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 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

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 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.

9. 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).

10. 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

11. 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

12. 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

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

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

15. Reasons for Home-Country Interventions

16. 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