FDI (L1) Flashcards
(51 cards)
1
Q
Foreign Direct investment
A
- when residents of one country acquire assets in another to control production, distribution, and operations.
2
Q
Methods of Establishing presence in foreign markets
A
- International trade
- International licensing
- International distribution and production (FDI)
3
Q
International trade
A
- produce goods in the home country and export finished goods
to host country
4
Q
International licensing
A
- Licensing a foreign company to use the technology or
know-how or a trademark for a fee
5
Q
International distribution and production
A
- firm establishes distribution and
production facility abroad and exercises control (FDI)
6
Q
Types of FDI
A
- Horizonal FDI
- Vertical FDI
- Conglomerate FDI
- Greenfield investment
- Joint Ventures
- Cross-border Mergers and Acquisitions
7
Q
Horizonal FDI
A
Horizontal FDI is expanding overseas to produce the same or similar goods/ services abroad
8
Q
Vertical FDI
A
- adding a stage in the production process that comes earlier (backward vertical FDI) or later than the firm’s principal processing
activity (forward vertical FDI)
9
Q
Conglomerate FDI
A
involves both horizontal and vertical FDI
10
Q
Greenfield investment
A
- Establishes new production, distribution or other facilities in the host country
- Beneficial for host as it creates jobs and increases production capacity
11
Q
Cross-border Mergers and Acquisitions
A
- Acquire or merge with an established firm in the host
country - Can be politically sensitive due to ownership and control of domestic assets being transferred to foreigners.
- Less welcomed by host country as they might not increase production capacity
12
Q
Joint Ventures
A
- Establish a joint venture with an established firm in the host country
- Each party contributes its assets, either tangible or intangible, such as technology, ability to raise finance, existing customer base, knowledge of local market, law and
regulations
13
Q
Theories of FDI
A
- Hymer’s (1976) Industrial Organization Hypothesis
- Location Hypothesis
- Internalization Hypothesis
- Eclectic or OLI Theory (John Dunning)
14
Q
Industrial Organization Hypothesis
A
- Hymer’s (1976)
- Firms engage in FDI when they possess some firm-specific advantages over and
above that possessed by Indigenous competitors in the host country
15
Q
Examples of firm-specific advantage
A
- Better access to cheap finance than domestic competitors
- Superior managerial and organizational capabilities
- Superior technology and information
- Privileged access to raw materials or final goods markets.
16
Q
Location hypothesis of FDI
A
- firms engage in FDI to access some immobile factors of production abroad at a lower
cost - Due to the immobility of these factors of production some countries have locational advantages,
hence attract more FDIs than others
17
Q
Examples of immobile factors of production are
A
- Human capital.
- Natural resources.
- Infrastructure, e.g. transportation, communication
- Political, legal and institutional environment
- The size and development of the financial system
18
Q
Location advantages and disadvantages in developing countries
A
- High potential for economic growth
- Low wages, low average productivity
- High country/political risk
- Underdeveloped financial system
- Weak/little support for the protection of property rights and contract enforcement
19
Q
Location advantages and disadvantages in Developed countries
A
- Strong support for the protection of property rights and contract enforcement
- Sophisticated financial systems
- More mature/competitive markets
- High wages, high productivity
20
Q
The internalisation hypothesis
A
- Developed by Peter Buckley and Mark Casson in the 1970s
- explains FDI as firms internalising operations to avoid market inefficiencies, protect proprietary assets, ensure quality control, and reduce transaction costs.
21
Q
Internalising parts of the production facility enables firms to
A
- exert full control over final product’s quality
- avoid unexpected interruption to supplies due to time lag and cost of buying/selling
market transactions for production input/output.
22
Q
The Eclectic or OLI theory
A
- Developed by John Dunning
- integrates multiple theories
- suggests For a firm to indulge in FDI, three conditions must be met:
- The firm of one nationality possesses some ownership advantages (O) over those of
other nationalities - It’s more beneficial for the firm to use these advantages than license them to domestic
firms in the host country (internalisation advantages (I)) - It’s in the firm’s best interest to combine the O and I advantages with the factors of
production located in the host country (location advantages (L))
23
Q
Motives of FDI
A
- Natural resource seeking
- Market seeking
- Efficiency seeking
- Strategic asset seeking
24
Q
Natural resource seeking
A
- Companies invest abroad to access cheaper, higher-quality, or unavailable resources
- reducing costs and ensuring supply stability.
- Also called vertical FDI.
25
Resources sought after by MNE
- Physical resources such as fossil fuels, and agricultural products (developed to developing)
- Low-cost unskilled or semi-skilled labour (developed to developing)
- Technological capabilities, specialised management skills, and marketing expertise. (developing to developed countries)
26
Market seeking motive
- Access foreign markets by supplying goods/services locally or exporting nearby (horizontal FDI)
- Helps bypass trade barriers, reduce transportation costs, and tailor products to local needs.
- Undertaken to protect market share, expand into new markets, and establish a presence in key regions
27
Efficiency-seeking motive
- Aims to optimise production by leveraging common ownership and governance across regions.
- Typically pursued by large MNEs, it enhances scale, scope, and risk diversification by integrating production in different locations to maximize cost advantages and global synergy.
28
Strategic asset-seeking motive
- Aims to enhance long-term competitiveness.
- Often involves cross-border mergers and acquisitions (M&As).
- Acquiring knowledge-based resources strengthens global or regional market position.
- Can help firms control supply chains by acquiring key foreign suppliers.
- May also be used to weaken competitors through mergers or acquisitions.
29
Example of Strategic asset seeking motive
- China’s Lenovo Group acquired IBM’s PC business in a deal worth approximately £1 billion in 2005.
- The deal added to Lenovo's existing global portfolio of assets, making them the world’s third-largest PC manufacturer.
30
The Effects of FDI
- Output growth
- Employment, wages and income inequality
- Technology advances
- Market structure
- Environment and the quality of life
31
Output growth (The Effects of FDI)
- Increases the total capital accumulation.
- increases tax revenues
- improves the trade balance
- improves efficiency and technological progress
- Stimulate investment by local firms (crowding-in effects)
- Spill-over knowledge to local firms
32
Increases the total capital accumulation. (Output growth)
- New investments in physical infrastructure (factories, machinery, and equipment).
- Development of new industries and - expansion of existing ones.
Increased production capacity, resulting in higher GDP growth.
33
Increases tax revenues (output growth)
- Corporate taxes on profits.
- Payroll taxes from newly created jobs.
- Value-added tax (VAT) and sales
- Taxes on goods and services.
- Property taxes on acquired land and buildings
34
Improves the trade balance (output growth)
- FDI often results in greater exports from the host country, improving the trade balance in two ways:
- Export-oriented FDI boosts exports by establishing production facilities for foreign markets.
- Import substitution FDI reduces reliance on imports by enabling domestic production.
35
Improves efficiency and technological progress (output growth)
- Technology transfer: MNEs introduce advanced technology, machinery, and production techniques.
- Efficiency gains: Best practices in management, production, and supply chains improve local firms.
- Workforce development: Training by foreign investors enhances labor skills and productivity.
36
Stimulate investment by local firms (crowding-in effects) (output growth)
- Creates demand for local suppliers, which incentivises domestic companies to expand operations.
37
Spill-over knowledge to local firms (output growth)
- Employees formerly trained by MNEs hired to local firms, either by observing and or by reverse engineering.
38
Employment (The Effects of FDI)
- FDI impacts employment positively, neutrally, or negatively depending on the type of investment.
- Direct effects: Depend on whether FDI is a greenfield venture (creates new jobs) or an acquisition (may not increase jobs).
- Indirect effects: Depend on whether foreign affiliates source inputs from local firms, boosting employment in supply chains.
- Empirical evidence is mixed, varying across industries, countries, and investment motives.
39
Wages (The Effects of FDI)
- MNEs generally pay higher wages than local firms, but this varies by context.
- Example: Chinese firms in Sub-Saharan Africa tend to pay lower wages than both domestic and foreign firms (Coniglio et al., 2015).
- Foreign affiliates' ability to pay higher wages is an ownership advantage.
- FDI may increase wage inequality by benefiting skilled workers more than unskilled workers
40
Inequality (The Effects of FDI)
- Feenstra and Hanson (1997) analyzed Mexico’s rising wage inequality due to FDI.
- Home country (USA): Uses high-skilled labor.
- Host country (Mexico): Uses lower-skilled labor (but relatively high-skilled by local standards).
- FDI increases demand for skilled labor, raising wage inequality.
- In FDI-concentrated Mexican regions, over 50% of the wage share increase was among skilled labor in the late 1980s
41
Employment, Wages, equality KEy takeaways (The Effects of FDI)
- FDI creates jobs but its impact varies by investment type and local sourcing.
- MNEs generally offer higher wages, but exceptions exist.
- FDI can widen income inequality by favoring skilled over unskilled labor.
42
Technology (The Effects of FDI)
- FDI enhances the host country's technological capabilities through a three-stage process:
- Transfer: Foreign affiliates import or develop technology.
- Diffusion: Local firms learn and adopt the technology.
- Absorption: Local firms utilize and adapt technology for their advantage
43
Knowledge Spillovers (Technology)
- Branstetter (2006): FDI enables knowledge transfer between investing and local firms.
- Example: Japanese firms investing in US manufacturing.
- Two mechanisms: R&D transfer and greenfield investment.
- Result: Higher productivity and better management in host firms.
44
High-Tech Industries (Technology)
- Tech capacity is concentrated in OECD countries.
- Benefiting industries: Aircraft, pharmaceuticals, computing, motor vehicles, and chemicals.
- FDI enhances innovation and technology adoption.
- Developing countries benefit through diffusion and absorption
45
Economic Impact (Technology)
- Technological externalities benefit domestic firms.
- FDI contributed 14% to US manufacturing productivity (1987-1996).
- Strongest diffusion in firms within vertical production chains.
- Boosts efficiency, competitiveness, and knowledge sharing.
46
Market Structure
- The extent of the rivalry that exists between firms engaging in the same lines of value-added activity
- and which pursue similar product and marketing
strategies
47
Attributes of market structure
- Industrial concentration: the number of firms supplying a particular market
- Product differentiation
- Entry barriers and exit costs: the extent to which markets are contestable
48
The effects of FDI: Market structure
- Foreign affiliates can reduce industrial concentration by entering existing markets.
- Market share shifts: Foreign affiliates may take market share from domestic firms, forcing them to scale down and increasing concentration.
- Greenfield investments (without new products) lower concentration ratios.
- Takeovers of local firms do not have the same impact on concentration as new market entries.
49
(FDI Effects) Market structure paper
- Driffield and Hughes (2003)
- The effects of inward FDI in the UK are vastly positive in
several sectors like motor vehicles and chemicals
- Crowding out effect are more severe in some regions such as Wales and Scotland
- possibly due to differences in economic structures and firm competitiveness.
50
The pollution-haven hypothesis
- MNCs tend to move production from countries with stringent
environmental regulations to those with less stringent environmental
regulations
51
The pollution-halo hypothesis
- Foreign-owned firms may utilise newer, environment-friendly technologies. Through the transferring and diffusion of technology, FDI im
proves environmental quality.
