-
What is the flow of foreign direct investment?
refers to the amount of FDI undertaken over a given time period (normally a year)
-
What is the stock of FDI?
refers to the total accumulated value of foreign direct-owned assets at a given time.
-
Outflows of FDI
refers to the flow of FDI out of a country
-
Inflows of FDI
the flow of FDI into a country
-
Trends of FDI
- - FDI has increased in last 30 years
- - has increased from $25 billion in 1975 to $1.8 trillion in 2009.
- - has accelerated faster than the growth of world trade and world output
- - shift towards democracy and free market has encouraged FDI
- - removal of restrictions in Asia, Eastern Europe, and Latin America have made FDI more attractive
- - BUT since 2000, regulations have tightened again
- - Latin America: 2/3 of the changes made it less favorable
- - sharp increase of bilateral investment treaties.
- - 2009: 2,676 treaties to facilitate FDI
-
FDI in China
- - 1978: move away from socially driven to more market driven economy
- - result: huge economic growth of about 10% each year compounded
- - second biggest recipient of FDI after the US
- - late 2000s: $80-100 billion in FDI per year
- - China represents the world's largest market
- - population of 1.3 billion
- - Before 2001, import tariffs made it hard for to serve through exports so FDI was required
- - doing business there is important because of guanxi (relationship network)
- - BUT China has a lack of purchasing power
- - lack of well-established transportation infrastructure
- - different goals between joint-venture partners
- - Government has committed to investing $800billion in infrastructure over 10 years
-
Who is the largest source of FDI?
The United States
-
What are other important countries to FDI?
UK, France, Germany, the Netherlands, and Japan
-
What are the majority forms of FDI?
Acquisitions and mergers; not greenfield investments
-
What is the percentage of FDI inflows in the form of mergers and acquisitions in developing nations?
- - 1/3
- - may reflect the fact that there are fewer target firms to acquire
-
Why mergers and acquisitions?
- quicker to execute
- have valuable strategic assets, such as brand loyalty, customer relationships, trademarks or patents
- they believe they can increase the efficiency of the acquired unit by transferring capital, technology or management skills
-
What is licensing?
involves granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit sold
-
Limitations of exporting
- cost of transportation especially with low value to weight products e.g. cement
- Import tariffs and trade barriers e.g. Japan engaged in FDI in the states when there were threats of quotas and imports
-
Internalization theory
- Major drawbacks of licensing:
- 1. licensing may result in giving away valuable technological know-how to a potential foreign competitor
- 2. licensing does not give a firm the tight controls over manufacturing, marketing, and strategy in a foreign country that may be necessary
- 3. when the firm's competitive advantage is not rooted in its products, but in its management, marketing, manufacturing capabilities, these are often not transferrable.
-
Location-specific advantages
the advantages that arise from utilizing resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own assets (technology, management, etc)
-
The eclectic paradigm
- Dunning argues that combining location-specific assets with the firm's own unique capabilities requires FDI
- could get advantage from being close to a spillover or "externalities" of knowledge in a particular location.
-
The growth of FDI is a result of..
- 1.A fear of protectionism
- Øwant to circumvent trade barriers
- 2.Political and economic changes
- Øderegulation, privatization, fewer
- restrictions on FDI
- 3.New bilateral investment treaties
- Ødesigned to facilitate investment
- 4.The globalization of the world
- economy
- many companies now view the world
- as their market
- need to be closer to their
- customers
-
Host-Country Benefits
- 1.Resource transfer effects: supplies capital, technology, and management resources
- 2.Employment effects: brings jobs that otherwise wouldn't have been created.
- 3.Balance of payments effects
- 4. Effects on competition and economic growth: can increase the level of competition in a market, driving down prices and increasing the economic welfare of consumers.
- increased competition also increased productivity
-
Host-Country Costs
- 1.Adverse effects on competition
- within the host nation: could drive indigenous companies out of business and monopolize markets
- 2.Adverse effects on the balance of
- payments: taking earnings made in the host country out of the host country.
- importing a substantial amount of their materials
- 3.Perceived loss of national
- sovereignty and autonomy: concerns that key economic decisions will be made by foreign parents that have no commitment to the country and that the government has no real control over
-
Home-Country Benefits
- 1.The positive effect on the capital
- account from the inward flow of foreign earnings
- 2.The employment effects that arise
- from outward FDI
- 3.The gains from learning valuable
- skills from foreign markets that can subsequently be transferred back to the
- home country
-
Home-Country Costs
- 1.The negative effect on the balance
- of payments
- 2.Employment may also be negatively
- affected if the FDI is a substitute for domestic production
-
How does Government encourage outward FDI?
- government-backed insurance
- programs to cover major types of foreign investment risk
-
How can governments restrict outward FDI?
- limit capital outflows, manipulate tax
- rules, or outright prohibit FDI
-
How can Governments can encourage inward FDI by...
- offer incentives to foreign firms
- to invest in their countries
-
How can Governments can restrict inward FDI
- use ownership restraints and
- performance requirements
|
|