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GBE > Foreign Direct Investments > Flashcards

Foreign Direct Investments Flashcards

1
Q

Definition of FDI

A

Purchase of physical asset or significant amount of ownership of a company in another country to gain some measure of management control
In contrast, portfolio investment does not involve obtaining a degree of control in an company.

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2
Q

Why companies undertake FDI - Market Imperfection

A

To internalize a transaction that is being made inefficient by market imperfection

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3
Q

Why companies undertake FDI - Eclectic Theory

A
  • Ownership advantage
  • Location advantage
  • Internationalization advantage - overcome market imperfections
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4
Q

Why companies undertake FDI - Market Power

A

Establish a dominant presence in an industry > Better dictate loss of outputs and price of outputs > Greater profits

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5
Q

FDI Management Issues - Control

A
  • Activities in the local market
  • Common marketing activities in both markets
  • Common selling price in both markets
  • Complete ownership not equals control
  • Local laws may require company to hire local managers
  • Goods produced in the local facility be exported for non-compete reasons
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6
Q

FDI Management Issues - Control (Partnership requirements)

A
  • Governments require shared ownership
  • -To shield workers from exploitation
  • -Prevent industries from domination by international firms
  • MNCS adjust and adapt to shared ownership for market access
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7
Q

FDI Management Issues - Control (Benefits of co-operation)

A
  • Governments may relax restrictive policies

- Lower unemployment, increased tax revenues

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8
Q

FDI Management Issues - Purchase or Build Decision

A

Purchase:
-existing plant, equipment, brand, personnel, goodwill
-risks is obsolete equipment, poor labour relation, bad debts, unsuitable location
Build:
Greenfield investment
-Need to obtain permits, financing, hire local personnel

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9
Q

FDI Management Issues - Production Costs

A
  • May be favourable today but never a constant
  • Rationalized production
  • -A system of production in which each of a product’s components is produced where the cost of purchasing the component is lowest
  • -All components are then brought together at one central location for assembly
  • -Work stoppage in one country can bring production to a standstill
  • Cross-border alliances and acquisitions in R&D for more competitive costs and access to high quality scientific and technical human capital
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10
Q

FDI Management Issues - Customer Knowledge

A

-Local market presence helps companies gain knowledge about customer preferences and facilitates product customization

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11
Q

FDI Management Issues - Following Clients

A
  • Component suppliers follow strategic customers to overseas location
  • Supply chain clustering within close geographic proximity
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12
Q

FDI Management Issues - Following Rivals

A
  • Follow the leader, usually industries with limited number of players
  • -Opportunity to make financial gains
  • -Minimize risk (do as the leader does)
  • Each market can only sustain certain number of rivals
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13
Q

Why governments intervene in FDI? - Balance of payments

A

National accounting system that records all payments to entities in other countries and all receipts coming into the nation

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14
Q

Why governments intervene in FDI? - Hosts

A

Basically to Control Balance of Payments and Obtain Resources/Benefits

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15
Q

Control Balance of Payments

A

-Initial FDI by MNC increase BOP in host country
-DECREASE IMPORT DEMAND
Local content requirements on MNC
–Give local companies opportunity to become suppliers to the production operation
–Help reduce imports
–Increase BOP
-GENERATE EXPORTS
Exports by MNC production operation increases BOP

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16
Q

Control Balance of Payments

A
  • Repatriation of profits by MNC
  • -Capital outflows deplete foreign exchange reserves of host countries
  • -Reduce balance of payments of host country
  • -Host nation may prohibit the MNC from removing profits to its home country
  • Host country may conserve their foreign exchange reserves while MNC reinvest their earnings
  • -Improves the competitiveness of local producers
  • +BOP of host country
17
Q

Obtain Resources and Benefits

A
  • Access to technology
  • -Increase productivity and competitiveness of a nation
  • Management skills and employment
  • -Former communist nations and developing economies lack management skills to succeed in the global economy
  • -FDI attracts foreign talent to come into host country and train locals
  • -Improve the international competiveness of domestic companies
18
Q

Why Home Country intervenes in FDI?

A

Bad:
-It removes resources from the nation, eliminate an export market, and might eliminate domestic job
Good:
-Improves nation competitiveness, can offshore sunset Industry

19
Q

Bad points of home country intervening in FDI

A

-Removes resources from home nation, eliminate export markets, but
Everything just +BOP from repatriated profits -_-
-Eliminate domestic jobs
-Jobs resulting from outgoing investments may replace jobs at home but can be offset if additional exports are needed to the support activity overseas

20
Q

Good points of home country intervening in FDI

A
  • Improve national competitiveness
  • -Conduct business in the most favorable location anywhere in the world
  • -Continuously improve their performance relative to competitors
  • -Derive technological advantage from alliances formed with other companies
  • Offshore sunset industries
  • -Those that use outdated and obsolete technologies or employ low-skilled workers
  • -Opportunity to retrain workers
21
Q

Host Promotion Methods

A
  • Financial incentives

- Infrastructure Improvements

22
Q

Host Promotion Methods - Financial Incentives

A
  • Insurance of assets abroad
  • Loans and guarantees
  • Special tax treaties
  • Tax breaks on profits earned abroad
23
Q

Host Restriction Methods

A

-Prohibit investment in certain industries or increase local content requirements, technology transfers or export targets

GBE (9 decks)

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