UNIT 5:- MULTINATIONAL CORPORATE DECISIONS IN GLOBAL MARKET

FOREIGN INVESTMENT DECISION

Foreign investment refers to the investment in domestic companies and assets of another country by a
foreign investor. Large multinational corporations will seek new opportunities for economic growth by
opening branches and expanding their investments in other countries. It involves cash flows moving
from one country to another to execute the transaction.

FOREIGN DIRECT INVESTMENT (FDI)

Foreign direct investment (FDI) is an ownership stake in a foreign company or project made by an
investor, company, or government from another country. The term is used to describe a business
decision to acquire a substantial stake in a foreign business or to buy it outright to expand operations to
a new region. FDI is a key element in international economic integration because it creates stable and
long-lasting links between economies.

MOTIVE
FDI THEORIES

A) THEORY OF COMPARATIVE ADVANTAGE

David Ricardo was a classical economist who developed several key theories that remain influential in
economics.

Ricardo was a successful investor and Member of Parliament who took up writing about economics
after retiring young from his fortunes.

Ricardo is best known for his theories of comparative advantage, economic rents, and the labor theory
of value.

Ricardo's widely acclaimed comparative advantage theory suggests that nations can gain an
international trade advantage when they focus on producing goods that produce the lowest opportunity
costs as compared to other nations.

Ricardo suggested that a good's value is determined by the labor hours invested in its production.

THEORY OF COMPARATIVE ADVANTAGE

Among the notable ideas that Ricardo introduced was the theory of comparative advantage, which
argued that countries can benefit from international trade by specializing in the production of goods for
which they have a relatively lower opportunity cost in production even if they do not have an absolute
advantage in the production of any particular good.

Example: a mutual trade benefit would be realized between China and the United Kingdom from
China specializing in the production of porcelain and tea and the United Kingdom concentrating on
machine parts. Ricardo is prominently associated with the net benefits of free trade and the detriment
of protectionist policies. Ricardo's theory of comparative advantage produced offshoots and critiques
that are discussed to this day.

B) OLI PARADIGM OF FDI IN INDIA

Based on the internalization theory of British economist J.H Dunning, the eclectic paradigm is an
economic and business method for analyzing the attractiveness of making a foreign direct investment
(FDI). The eclectic paradigm model follows the OLI framework. The framework follows three tiers –
ownership, location, and internalization.

The eclectic paradigm assumes that companies are not likely to follow through with a foreign direct
investment if they can get the service or product provided internally and at lower costs.

The eclectic paradigm model follows the OLI framework. The framework follows three tiers –
ownership, location, and internalization.

 Ownership Advantage

The ownership advantage can also be seen as the competitive advantage that comes with the FDI.
Ownership, in this instance, can be defined as the proprietorship of a unique and valuable resource that
cannot easily be imitated, thereby creating a competitive advantage against potential foreign
competitors.

 Location Advantage

The potential business host countries being considered for FDIs must present numerous competitive
advantages; location is one of them. The location advantage focuses more on the geographic advantages
of the host country or countries. An example of a geographic advantage can be access to the ocean (for
sea freight or other purposes) versus a land-locked country.

Other location advantages can include low-cost labor and raw materials, lower taxes and other tariffs, a
well-trained labor force, etc. Normally, the Porter’s diamond model can be used to evaluate location
advantages.

 Internalization Advantage

In order for companies to choose which investment pathway or method is best suited for their needs,
their management team must analyze the internalization advantage. They normally need to consider
whether it would be more sensible to get the value chain activity performed locally with their own team
or outsource it to a foreign country.

The advantages of outsourcing from different countries can include (but are not limited to) lower costs
and better skills to perform the value chain activities and/or better knowledge of the local markets.
FII’S

DEFINITION

A foreign institutional investor (FII) is an investor or investment fund investing in a country outside of
the one in which it is registered or headquartered. The term foreign institutional investor is probably
most commonly used in India, where it refers to outside entities investing in the nation's financial
markets. The term is also used officially in China.

Example: If a mutual fund in the United States sees a high-growth investment opportunity in an India-
listed company, it can take a long position by purchasing shares in an Indian stock market. This type of
arrangement also benefits private U.S. investors who may not be able to buy Indian stocks directly.
Instead, they can invest in the mutual fund and take part in the high-growth potential.

ROLE OF FII’S

DIFFERENCE BETWEEN FDI & FII

FDI: Foreign Direct Investment shortly known as FDI refers to the investment in which foreign funds
are brought into a company based in a different country from the investor company’s country.

FII: FII is an abbreviation used for Foreign Institutional Investor, are the investors that pool their
money to invest in the assets of the country situated abroad. It is a tool for making quick money for the
investors. Institutional investors are companies that invest money in the financial markets in the country
based outside the investor country.

BASIS FOR FDI FII

COMPARISON

Meaning When a company situated in one country FII is when foreign companies
makes an investment in a company situated make investments in the stock
abroad, it is known as FDI. market of a country.

Entry and Exit Difficult Easy

What it brings? Long term capital Long/Short term capital

Transfer of Funds, resources, technology, strategies, Funds only.

know-how etc.
Economic Growth Yes No

Consequences Increase in country's Gross Domestic Increase in capital of the country.

Product (GDP).

Target Specific Company No such target, investment flows

into the financial market.

Control over a Yes No

company

Key Differences Between FDI and FII

The significant differences between FDI and FII are explained below:

1. Foreign Direct Investment or FDI is defined as the investment made by a company in the company
situated outside the country. Foreign Institutional Investor or FII is when investors, most commonly
in the form of institutions that invest in the country’s financial market.
2. FII is a way to to make quick money, the entry and exit to the stock market are very easy. On the
other hand, the entry and exit are not easy in FDI.
3. FDI brings long-term capital in the investee company whereas FII may bring long or short term
capital in the country.
4. In the case of FDI, there is the transfer of funds, resources, technology, strategies, know-how.
Conversely, FII involves the transfer of funds only.
5. FDI increases job opportunities, infrastructural development in the investee country and thus leads
to economic growth, which is not in the case of FII.
6. FDI results in the increase in the country’s productivity. As opposed to FII that results in the
increase in the country’s capital.
7. FDI targets a particular company, but FII does not target a particular company.
8. FDI obtains management control in the company. However, FII does not enable such control.

Conclusion: Both have its positive and negative aspects. However, foreign investment in the form of
FDI is considered better than FII because it does not just bring capital but also amounts to better
management, governance, transfer of technology and creates employment opportunities.