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FDI Ch.7
FDI Ch.7
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?
direct investment (FDI): a firm invests directly in foreign facilities firm that engages in FDI becomes a multinational enterprise (MNE)
Multinational = more than one country
Factors
Marketing/service
R&D Access of raw materials or other resource
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
FDI
85
Much to the emerging Asian and Latin
America economies
Africa lagging
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 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
Venture
Strategic
Alliances (non-equity)
Franchising
Licensing Exports:
Direct vs Indirect
Why FDI?
FDI
FDI
over exporting
over licensing or franchising
Need to retain strategic control Need to protect technological know-how Capabilities not suitable for licensing/franchising
Follow
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 MNCs boundaries
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 economys comparative advantages
Costs
Capital inflow followed by capital outflow + profits Production input importation Loss of economic independence
country
Risk reduction policies (financing, insurance, tax incentives) National security, BOP
Host
country
Investment incentives Job creation incentives Ownership extent restrictions (national security; local nationals can safeguard host countrys interests
No
Import Barriers?
Ye s
No
Export
No
FDI
Yes
FDI
Yes No
FDI
License