Foreign direct investment (FDI) occurs when a firm invests One theory is based on the idea that FDI
hat FDI flows are a
directly in facilities to produce or market a product in a
foreign country. According to the U.S. Department of
Commerce, in the United States FDI occurs whenever a U.S.
citizen, organization or a firm undertakes FDI, it becomes a
multinational enterprise.
FDI takes on two main forms:
The first is a greenfield investment, which involves
establishing a new operation in a foreign country.
The second involves acquiring or merging with an existing
firm in the foreign country.
FDI IN THE WORLD ECONOMY
The flow of FDI refers to the amount of FDI undertaken over
a given period of time (normally a year). The stock of FDI
refers to the total accumulated value of foreign-owned assets
at a given time.
We also take of outflows of FDI meaning the flow of FDI out
of a country, and inflows of FDI, the flow of FDI into a
country.
THE SOURCE OF FDI
Since World War II, the United States has been the largest
source country for FDI, a position it retained during the late
1990s and early 2000s. Other important source countries
include the United Kingdom, France, Germany, the Japan,
and Netherlands. Collectively, these six countries accounted
for 56 percent of all FDI in 2007.
THEORIES OF FDI
Exporting involves producing goods at home and then
shipping them to the receiving country for sale.
Licensing involves granting a foreign entity (the licensee) the
right to produce and sell the firm’s products in return for a
royalty fee on every item sold.
LIMITATIONS OF EXPORTING
The viability of an exporting strategy is often constrained by
transportation costs and trade barriers. When transportation
costs are added to production costs, it becomes unprofitable
to ship some products over a large distance.
Some firms undertake foreign direct investment as response
to actual or threatened trade barriers such as imports tariffs
or quotas.
LIMITATIONS OF LICENSING
Licensing may result in a firms giving away valuable
technological know-how to a potential foreign competitor.
Licensing does not give a firm the tight control over
manufacturing, marketing, ad strategy in a foreign country
that may be required to maximize its profitability.
Licensing arises when the firm’s competitive advantage is
based not as much on its products as on the management,
marketing, and manufacturing capabilities that produce
those products.
THE PATTERN OF FDI
Strategic Behavior
reflection of strategic rivalry between the firm in the global
market place. F. T. Knickerbocker expounded an early variant
of this argument, looking at the relationship between FDI and
rivalry in oligopolistic industries.
In International business, oligopoly is an industry composed
of a limited number of large firms (e.g. an industry in which
four firms control 80 percent of a domestic market).
THE PATTERN OF FOREIGN DIRECT INVESTMENT
As stated in the Multipoint competition extended in
Knickerbockers’s theory arises when two or more enterprises
encounter each other in different regional markets, national
markets, or industries. Economic theory suggests that like
chess players, firms will try to match each other’s moves in
different markets to try to hold each other in check.
The product life cycle theory was also utilized in explaining
FDI. Raymond Vernon’s argument states that often the same
firms that pioneer a product in their home market undertake
FDI to produce a product to be distributed in foreign markets.
THE ECLECTIVE PARADIGM
An eclectic paradigm, also known as the ownership, location,
internalization (OLI) model or OLI framework, is a three-
tiered evaluation framework that companies can follow when
attempting to determine if it is beneficial to pursue foreign
direct investment (FDI).
This paradigm assumes that institutions will avoid
transactions in the open market if the cost of completing the
same actions internally, or in-house, carries a lower price.
-It is based on internalization theory and was first expounded
upon in 1979 by the scholar John H. Dunning.
THREE KEY FACTORS OF THE ECLECTIC PARADIGM
Ownership advantage - The first consideration, ownership
advantages, include proprietary information and various
ownership rights of a company. These may consist of
branding, copyright, trademark or patent rights, plus the use
and management of internally-available skills.
-INTANGIBLE
-COMPETITIVE ADVANTAGE, SUCH AS REPUTATION FOR
RELIABILITY
Location Advantage- Location advantage is the second
necessary good. Companies must assess whether there is a
comparative advantage to performing specific functions
within a particular nation.
-Often fixed in nature. Applies to the availability and costs of
resources
-Natural or created resources
-Generally immobile,
InternalizationAdvantages - signal when it is better for an
organization to produce a particular product in-house, versus
contracting with a third-party.
-Decisions made inside a company
-In-house production or Outsourcing
-The contracting companies must meet the organization’s
needs and quality standards at a lower cost.
POLITICAL IDEOLOGY AND FDI
According to history, the political ideology on FDI in a
particular country has ranged from a dogmatic radical
position that is hostile to all inward FDI at one extreme to an
obedience to the non interfering principle of free market
economics at the other. This approach is called pragmatic
nationalism.
THE RADICAL VIEW
The radical view is a political view that sees FDI as an
instrument of imperialism and a vehicle for foreign
exploitation.
Radical Writers: The multinational enterprise or MNE is the
key to imperialist domination.
FDI serves as a tool to the exclusive benefit of their capitalist-
imperialist home countries. according to the radical view, FDI
by the MNEs of advanced capitalist nations keeps the less
developed countries of the world relatively backward and
dependent on advanced capitalist nations.
THE FREE MARKET VIEW
This view argues that international production should be
distributed among counties according to the theory of
comparative advantage.
Roots came from the classical economics and the
international trade theories of Adam Smith and David Ricardo
It has been strengthened by the internationalization
explanation of FDI.
Countries should specialize in the production of goods and
services that they can produce most efficiently.
MNE is an instrument for dispersing the production of goods
and services to the most efficient locations around the globe.
FDI by the MNE increases the overall efficiency of the world
economy.
PRAGMATIC NATIONALISM
The pragmatic nationalism view is that FDI has both benefits
and costs. FDI can benefit a host country by bringing capital,
skills, technology, and jobs, but those benefits come at a cost.
When a foreign company rather than a domestic company
produces products, the profits from that investment go
abroad.
Many countries are also concerned that a foreign-owned
manufacturing plant may import many components form its
home country, which has negative implications for the host
country’s balance of payments position.
-countries adopting a pragmatic stance pursue policies
designed to maximize the national benefits and minimize the
national costs.
PRAGMATIC NATIONALISM: FDI TO HOST-COUNTRY BENEFITS
& COST
HOST-COUNTRY BENEFITS
Resource-transfer effects
Employment effects
Balance-of-payment effects
Effect on Competition and
Economic Growth
HOST COST
Adverse effects on competition.
Adverse effects on the balance of payments
National sovereignty and Autonomy
MODULE MODULE 8:Regional Economic Integration
Economic integration is an arrangement among nations that
typically includes the reduction or elimination of trade
barriers and the coordination of monetary and fiscal policies.
Economic integration aims to reduce costs for both
consumers and producers and to increase trade between the
countries involved in the agreement.
The advantages of economic integration fall into three
categories:
Trade Benefits
Employment
Political Cooperation
Economic integration can be classified into five additive
levels, each present in the global landscape:
Free Trade -Tariffs between member countries are
significantly reduced, some abolished altogether.
Custom Union - Sets common external tariffs among member
countries.
Common Market - Services and capital are free to move
within member countries.
Economic Union -No barriers for internal trade, free
movement of labor, harmonized tax rates, common
monetary and fiscal policy
Political Union - form of integration with a common
government.
The Economic casE for regional integration
Is straightforward. As shown in the economic theories of
international trade, it predict that unrestricted free trade will
allow countries to specialize in the production of goods and
services that they can produce most efficiently.
The Political case for regional economic integration also has
loomed large in several attempts to establish free trade
areas,
custom unions, and the like. Linking neighbouring economies
and making them increasingly dependent on each other
create incentives for political cooperation between the
neighbouring states and reduce the potential for violent
conflict.
Impediments to Integration -
First, although economic integration aids the majority, it has
its costs. While a nation as a whole may benefit significantly
from a regional free trade agreement, certain groups may
lose. Moving to a free trade regime involves painful
adjustments. Second, impediment to integration arises from
concerns over national sovereignty.
The Case AgainstRegional Integration
Regional integration allows countries to overcome these
costly divisions integrating goods, services and factors'
markets.
Trade creation occurs when high cost domestic producers are
replaced by low-cost producers within the free trade area.
Trade diversion occurs when lower-cost external suppliers
are replaced by the higher- cost suppliers within the free
trade area.
The European Union(EU)has long been the most developed
model of regional ntegration, it was severely shaken by the
recent economic crisis, causing increasing doubts about the
integration process. The lack of a timely and coherent
response to the euro crisis called into question the integrity
of the eurozone, whose structural and institutional fault lines
have been revealed by the financial crisis.

There have been several attempts to achieve regional

integration outside of Europe:

Association of SouthEast AsianNations (ASEAN)

African Union (AU)

Gulf Cooperation Council
(GCC), Mercosur in South
America

ASEAN is the most advanced of these efforts

and regularly sends delegations to Brussels to
seek ideas from the EU experience; however,
ASEAN remains a strictly inter-governmental
body and there is no indication of interest in
sovereignty sharing.