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Flashcards in Ch7: Foreign Direct Investment Deck (18)
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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


greenfield investments

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


internalization theory

licensing less attractive
- giving away tech know-how
- no control
- loss competitive advantage


knickerbocker's theory

FDI flows are a reflection of strategic rivalry between firms in the global marketplace


Multipoint competition

- 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.


Eclectic Paradigm

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)

1. competition
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 (-)


host country policies

1. offer incentives to foreign firms (+)
2. use ownership restraints and performance requirements (-)