Flashcards in Ch7: Foreign Direct Investment Deck (18)
occurs when a firm invests directly in facilities to produce or market a product in a foreign country.
stock of FDI
the total accumulated value of foreign-owned assets at a given time.
flow of FDI
- the amount of FDI undertaken over a given time period.
growth of FDI (4)
- protectionist pressures
- political and economic changes
- new bilateral investment
- globalization of the world economy
establishing a new operation in a foreign country
M&A more popular (3)
- Mergers and acquisitions are quicker to execute than greenfield investments.
- It is easier and perhaps less risky for a firm to acquire desired assets than build them from the ground up.
- Firms believe that they can increase the efficiency of an acquired firm by transferring capital, technology, or management skills
licensing less attractive
- giving away tech know-how
- no control
- loss competitive advantage
FDI flows are a reflection of strategic rivalry between firms in the global marketplace
- when two or more enterprises encounter each other in different regional markets, national markets, or industries.
- Match moves in order to hold each other in check.
Vernon’s product life cycle theory
Firms undertake FDI at particular stages in the life cycle of a product.
- Production shifts to other advanced countries, then to other developing countries.
location-specific advantages are also of considerable importance in explaining both the rationale for and the direction of foreign direct investment
host-country benefits (4)
1. resource transfer effects
2. employment effects
3. balance of payments effects
4. effects on competition and economic growth
host-country costs (3)
2. debit on the current account
3. perceived loss of national sovereignty and autonomy
home-country benefits (3)
1. balance of payment effects (inward flow of foreign earnings)
2. employment effects
3. reverse resource-transfer effects
home country costs (4)
1. initial capital required to finance FDI
2. - the current account of the balance of payments suffered if the purpose of the foreign investment is to serve the home market from a low-cost production location
3. - current account suffers if the FDI is a substitute for direct exports
4. - Employment effects
offshore production costs related home country costs not valid
- FDI may stimulate economic growth and employment in the home country by freeing resources to specialize in activities where the home country has a comparative advantage
home country policies (+,-)
1. government backed insurance programs (+)
2. limit capital outflows, or prohibit FDI (-)