FDI theory Flashcards
FDI theory
firm invests directly in facilitates to produce and/or market a product in a foreign country
involves substantial financial or resource commitment in foreign markets
an investor putting significant equity into a business in a foreign country
Is free trade fair?
some countries have more resources/more advantages
by taking out the barriers there is opportunity for equality
example - Toyota new venture with Nummi to get into the US market.
Is there a diff between an international firm and a multinational firm?
International firm is a firm that exports and imports - trade
multinational that has FDI - productive assets in various countries.
Generic directions of FDI
horizontal - duplication of home country activities at the same value chain
vertical - operating at a diff stage of the value chain in a host country.
firms in value chains - firms operate at diff stages of the value chain: distributors, marketing firms, suppliers of inputs, manufacturers.
Horizontal FDI
operating at the same stage of the value chain in home and foreign markets.
Vertical FDI
both upstream and downstream.
Upstream- components, downstream - marketing.
Why do firms do vertical FDI?
Lowering costs - able to manage costs better when you do it yourself.
more control over business/supply chain - no reliance on producer.
Ownership advantages theory of FDI
- Some firms have unique assets that give them a competitive advantage over firms in a different country (Hymer-Kindleberger thesis)
- The possession of strategic competences can be a leverage for multinational enterprises to go to foreign countries.
- MNEs must protect their competences from getting into the wrong hands
- keep them in-house.
- Appropriability theory: deny competitors access to competitive resources, else lose competitive advantage (Magee, 1981).
- To avoid divulging business secrets or giving away competitive resources and capabilities, firms do foreign direct investment - they own and control their foreign operations.
Why were certain countries most attractive destinations for FDI in 2022?
US, China, Singapore. Hong Kong + China
big manufacturing countries - labour cheap
large populations - more labour
US investments cheaper as dollar depreciates
less health and safety regulation - China
Location adv of FDI
natural resources, specialised cheap labour, presence of clusters or supply chain
addresses where do multinational enterprises go to - do FDI in places that offer them location adv.
Motives for FDI
- market seeking: limited domestic capacity, following customers
- resource seeking: access to natural resources
- innovation seeking: knowledge and tech, learning
- efficienty seeking: economics of scale, cheaper cost
further motives for FDI
- own land in another country
- be more known - expand
- avoid trade restrictions - important substitution
- trade deals and economic integration can make certain locations attractive for FDI
- trade restrictions can make certain locations unattractive for FDI.
Knickerbockers imitative theory
- FDI is a reflection of strategic rivalry between firms.
- Firms imitate one another’s FDI - roots in game theory, common in oligopolistic industries.
- Similar to multipoint competition - forms matching each others moves in different markets
- Match cross-subsidization of strategic assets
Disrupt first-mover advantage
FDI theory: internalization
- FDI is costly, risky and time consuming
- firms internalize and transform international trade between 2 independent firms in 2 countries into intra-firm trade.
Why the market fails?
- Market failure - imperfections of market mechanisms that make transactions costly and sometimes impossible
- Causes - lack of/or inefficient intermediaires. Agency problems. Uncertainties - quality,price,future
