International Business Ch. 8 Midterm Vocab/Ideas Flashcards Preview

International Business Summer 1 > International Business Ch. 8 Midterm Vocab/Ideas > Flashcards

Flashcards in International Business Ch. 8 Midterm Vocab/Ideas Deck (33):

Foreign Direct Investment

occurs when a firm invests directly in new facilities to produce and/or market in a foreign country
-the firm becomes a multinational enterprise

-Can be a GREENFIELD INVESTMENT or done through a merger/acquisition


Multinational Enterprise

when a firm has production facilities outside of their home country


Greenfield Investment

- the establishment of a wholly new operation in a foreign country


Flow of FDI

the amount of FDI undertaken over a given time period

-typically a year
-calculated by taking the total new FDI in the past year minus foreign assets that are retired.
-more FDI is targeted at developed nations
-Developing nations are targeting FDI at developed nations to gain access to developed economies


Outflows of FDI

are the flows of FDI out of a country


Inflows of FDI

are the flows of FDI into a country

-Current trend shows that inflows between developed and developing nations are beginning to even out.


Stock of FDI

the total accumulated value of foreign-owned assets at a given time

-Calculated based on surveys of foreign companies performed by the host country


Sources of FDI

USA, Germany, Netherlands, UK, Japan, and France account for 60% of all FDI outflows.


The growth of FDI is a result of:

1) a fear of protectionism
-want to circumvent trade barriers

2) political and economic changes
-deregulation, privatization, fewer restrictions on FDI

3) new bilateral investment treaties
-designed to facilitate investment

4) the globalization of the world economy
-many companies now view the world as their market
-need to be closer to their customers


Gross Fixed Capital Formation

the total amount of capital invested in factories, stores, office buildings, and the like

-the greater the capital investment in an economy, the more favorable its future prospects are likely to be

*So, FDI is an important source of capital investment and a determinant of the future growth rate of an economy


Why Do Firms Choose Acquisition Versus Greenfield Investments?

Most cross-border investment is in the form of mergers and acquisitions rather than greenfield investments

-between 40-80% of all FDI inflows per annum from 1998 to 2009 were in the form of mergers and acquisitions

*but in developing countries two-thirds of FDI is greenfield investment because:
- there are fewer companies available to target in developing countries


Why Do Firms Choose Acquisition Versus Greenfield Investments?

Firms prefer to acquire existing assets because

-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 unit by transferring capital, technology, or management skills



producing goods at home and then shipping them to the receiving country for sale

-exports can be limited by transportation costs and trade barriers

-FDI may be a response to actual or threatened trade barriers such as import tariffs or quotas



granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit that the foreign entity sells


Internalization Theory

theory (aka market imperfections theory) - compared to FDI licensing is less attractive

-firm could give away valuable technological know-how to a potential foreign competitor (Intellectual theft)

-does not give a firm the control over manufacturing, marketing, and strategy in the foreign country (QC issues)

-the firm’s competitive advantage may be based on its management, marketing, and manufacturing capabilities (Greater competitive advantage)



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


Multipoint Connection

-when two or more enterprises encounter each other in different regional markets, national markets, or industries



firms undertake FDI at particular stages in the LIFE CYCLE OF A PRODUCT


Dunning's Eclectic Paradigm

it is important to consider:

-LOCATION-SPECIFIC ADVANTAGES - that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets

-EXTERNALITIES - knowledge spillovers that occur when companies in the same industry locate in the same area
i.e. Silicon Valley


Location Specific Advantages

advantages that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets



- knowledge spillovers that occur when companies in the same industry locate in the same area



is an industry composed of a limited number of large firms (e.g. an industry in which four firms control 80% of a domestic market)


The Radical View of FDI

- the MNE is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries

-in retreat almost everywhere (Cuba)


The Free Market View of FDI

international production should be distributed among countries according to the theory of comparative advantage

-embraced by advanced and developing nations including the United States and Britain, but no country has adopted it in its purest form


Pragmatic Nationalism View of FDI

FDI has both benefits (inflows of capital, technology, skills and jobs) and costs (repatriation of profits to the home country and a negative balance of payments effect)

-FDI should be allowed only if the benefits outweigh the costs


Four Main Benefits of Inward FDI on a Host Country:

1) Resource transfer effects - FDI brings capital, technology, and management resources

2) Employment effects - FDI can bring jobs

3) Balance of payments effects - FDI can help a country to achieve a current account surplus

4) Effects on competition and economic growth - greenfield investments increase the level of competition in a market, driving down prices and improving the welfare of consumers

-can lead to increased productivity growth, product and process innovation, and greater economic growth


3 Main Costs of Inward FDI on a Host Country:

1) Adverse effects of FDI on competition within the host nation
-subsidiaries of foreign MNEs may have greater economic power than indigenous competitors because they may be part of a larger international organization

2) Adverse effects on the balance of payments
-when a foreign subsidiary imports a substantial number of its inputs from abroad, there is a debit on the current account of the host country’s balance of payments

3) Perceived loss of national sovereignty and autonomy
decisions that affect the host country will be made by a foreign parent that has no real commitment to the host country, and over which the host country’s government has no real control


Balance-of-Payments Accounts

track both a country's payments and receipts from other countries
-Governments normally are concerned when their country is running a deficit on the current account of their balance of payments.


Current Account

tracks the export and import of goods and services.


Current Account Deficit

also called a trade deficit, occurs when a country is importing more goods and services than it is exporting.


How Does FDI Benefit The Home Country?

1) The effect on the capital account of the home country’s balance of payments from the inward flow of foreign earnings

2) The employment effects that arise from outward FDI

3) The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country


What Are The Costs of FDI To The Home Country?

1) The home country’s balance of payments can suffer

-from the initial capital outflow required to finance the FDI
-if the purpose of the FDI is to serve the home market from a low cost labor location
-if the FDI is a substitute for direct exports

2) Employment may also be negatively affected if the FDI is a substitute for domestic production

-But, international trade theory suggests that home country concerns about the negative economic effects of offshore production (FDI undertaken to serve the home market) may not be valid

-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


Offshore Production

FDI undertaken to benefit the home market