Chapter 6: Investing Abroad Quiz

A. Define what is FDI and its importance

Foreign direct investment (FDI) is a type of cross-border investment in

which a resident of one country establishes a long-term interest in and
considerable influence over a resident of another economy. The
possession of 10% or more of the voting power in a business in one
economy by an investor in another is proof of such a connection. Foreign
direct investment (FDI) is an important component of international
economic integration because it establishes solid and long-term linkages
between economies. FDI is an essential avenue for the transfer of
technology between nations, it encourages international trade by
providing access to foreign markets, and it may be a significant vehicle
for economic development. This group includes metrics like inbound and
outward stock, flow, and income values by partner nation and sector, as
well as FDI restrictions.

FDI may help a target country's economic development by creating a

more favorable environment for businesses, investors, and the local
population and economy. Countries often have their own import duties,
making trade difficult. Many economic sectors require a presence in
overseas markets to guarantee sales and goals are reached. All of these
facets of international trade are made much easier by FDI. As investors
establish new businesses in foreign nations, FDI provides new employment
and possibilities. This can lead to a rise in income and spending power for
locals, resulting in an overall boost for targeted economies. Taxes, of
course. Foreign investors benefit from tax incentives that are particularly
helpful regardless of the industry they choose. Everyone enjoys a tax
reduction. Human capital development is a significant benefit of FDI. The
skills developed by the workforce via training contribute to a country's
 total education and human capital. Countries that receive FDI benefit by
improving their human resources while retaining ownership.

B. In your own words please explain:

1. Why ownership advantages are necessary for firms to engage in FDI

To counter the liability of foreignness, a corporation needs an

ownership advantage. Foreignness liability refers to the inherent
disadvantage that foreign enterprises face in host nations as a result
of their non-native status. These disadvantages range from just not
speaking the local language to having a limited understanding of
local client expectations. These advantages should be important,
uncommon, difficult to replicate, and organizationally anchored. In
other words, the resource should be valuable enough for a firm to
gain a competitive edge over international competitors. As a result,
businesses should assess if they have a specific competitive
advantage that they may transfer outside to offset their foreignness
risk.

2. What location advantages attract foreign investors

The availability of natural resources, the size and potential

expansion of the market, the availability of inexpensive labor, and
the distance between possible host countries are all factors to
consider. These advantages may be purely geographical or derive
from low-cost raw materials, low salaries, a trained labor force,
distinctive taxes, a lack of tariffs, and so on. Companies should
consider if there is a competitive advantage in doing specific
services in a specific country. These concerns are frequently
influenced by the prices and availability of resources. Furthermore,
the characteristics differ depending on the area. Natural or artificial
 resources are typically referred to as a geographical advantage. In
any case, these resources are often immobile and require a
collaboration with a foreign investor in the target site to be fully
utilized.

3. How home and host country institutions affect FDI.

Foreign-owned enterprises usually always pay greater wages than

domestically-owned firms inside host nations. They may not always
induce salary increases in locally held enterprises, but their
presence often raises wage levels in host nations. Foreign
enterprises are usually more productive than domestic firms,
although evidence for spillovers to domestic company productivity
is equivocal. It appears to be determined by host-country policies
and environments, as well as the technology levels of industries and
host-country enterprises. The same combination of variables affects
host-country growth in general. The influence of FDI on the growth
of host nation exports and links to the rest of the globe is becoming
clearer. In certain circumstances, FDI plays a significant role in
transforming host economies from exporters of raw materials and
commodities to exporters of manufactured goods, even particularly
high-tech manufactured goods. Much of the impact is due to the
transfer of knowledge about global markets and methods of
integrating into global production networks, which is not obvious in
traditional productivity assessments.