Lecture International business - Chapter 7: Foreign direct investment

In this chapter, you will explore foreign direct investment. You will also: Learn about worldwide patterns of foreign direct investment flows and the theories that attempt to explain them; understand important management issues in the foreign direct investment decision; and examine why governments intervene in the flow of foreign direct investment and the methods they use.

Investment

7

• Explain why governments intervene in the free flow of FDI

• Discuss the policy instruments that governments use to promote and restrict FDI

• Produces 8 million cars a year

• Modular production strategy

• Special protection in Germany

 Purchase of physical assets or

significant amount of ownership

of a company in another country

in order to gain some measure of

management control

 By contrast, portfolio investment

does not involve obtaining a

degree of control in a company

Yearly FDI Inflows

Increasing globalization

International mergers and acquisitions

Source: Based on World Investment Report (Geneva, Switzerland: UNCTAD), various years.

 China and India attract most FDI

 All of Africa: 2.8% of world FDI

82,000 multinationals

with 810,000 affiliates

Foreign direct investment is the

purchase of physical assets or a

significant amount of the

ownership of a company in

another country to gain a

measure of management

control.

Portfolio investment does not

involve obtaining a degree of

control in a company.

(special asset)

Internalization advantage

(efficiency)

FDI used to establish a dominant presence in an industry

Vertical integration

Extends company’s activities into stages of production that  provide its inputs (backward  integration) or absorb its out­

puts (forward integration)

Market power

= Greater profits

The eclectic theory says

that firms undertake FDI

when location, ownership,

The eclectic theory says

that firms undertake FDI

when location, ownership,

Management Issues I

Production

costs

Customer knowledge

Following rivals Following clients

Capital account Current account

National accounting system that records all payments to entities

in other countries and all receipts coming into the nation

The import and export of

goods and services,

in a company)

U.S. Balance of Payments

A country’s balance of payments is

a national accounting system that

records all payments to entities in

other countries and all receipts

coming into the nation.

The system helps monitor a

country’s flows of goods, services,

income, and asset transfers

between itself and other nations

The balance of payments position

sends warning signals about trade

deficits with other nations.

+ Improve competitiveness

+ Eliminate low-wage jobs

– Remove national resources

– Eliminate export markets

– Eliminate domestic jobs

Ownership restrictions

■ Prohibit investment in industries or businesses

Performance demands

■ Local content requirements

■ Export targets

■ Technology transfers

 Persuade other nations

to accept FDI

Higher taxes on

foreign income

Sanctions that prohibit investing

A host government may

encourage an initial FDI

because the inflow can

A host government may

encourage an initial FDI

because the inflow can

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