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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
- 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.
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
- many companies now view the world
- as their market
- need to be closer to their
- 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
- 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
- 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
- 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