Foreign Direct Investment

1. Foreign Direct Investment

2. Characterize global FDI flows and patterns Discuss each theory that tries to explain FDI Identify important management issues in the FDI decision Explain why home and host nations intervene in FDI flows List the methods that nations use to promote and restrict FDI Chapter Preview International Business 3e

3. Purchase of physical assets or significant amount of ownership of a company in another country to gain some measure of management control By contrast, portfolio investment does not involve obtaining a degree of control in a company Foreign Direct Investment International Business 3e

4. Increasing globalization International mergers and acquisitions Entrepreneurship and small firms Reasons for FDI Growth International Business 3e

5. World FDI inflows Developed (70%), developing (30%) European Union: 57% of world FDI Developing nations China: 8% of world FDI All of Africa: 2% of world FDI 64,000 multinationals with 870,000 affiliates Worldwide FDI Flows International Business 3e

6. A company begins by exporting its product and later undertakes foreign direct investment as a product moves through its life cycle International Product Life Cycle International Business 3e

7. Company undertakes FDI to internalize a transaction that is being made inefficient by a market imperfection Trade barriers (e.g., tariffs) Specialized knowledge (e.g., managerial ability) Market Imperfections (Internalization) International Business 3e

8. A firm undertakes FDI when location, ownership and internalization advantages combine to make a location appealing Location advantage (optimal location) Ownership advantage (special asset) Internalization advantage (efficiency) Eclectic Theory International Business 3e

9. A firm undertakes FDI to establish a dominant presence in an industry Market power = Greater profits Vertical integration Extends company’s activities into stages of production that provide its inputs (backward integration) or absorb its outputs (forward integration) Market Power International Business 3e

10. Control Partnership requirements Benefits of cooperation Purchase-or-build decision Production costs Rationalized production Cost of R&D Customer knowledge Following clients Following rivals Management Issues and FDI International Business 3e

11. National accounting system that records all payments to entities in other countries and all receipts coming into the nation Current account Records transactions involving the import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country Capital account Records transactions involving the purchase or sale of assets (including assets such as property and shares of common stock in a company) Balance of Payments International Business 3e

12. Balance of Payments (+) Initial FDI boosts economy FDI may decrease import demand FDI may generate exports Obtain resources and benefits (+) Access technology Access management skills Create employment Why Host Intervenes in FDI International Business 3e

13. Removes resources from the nation Can eliminate an export market Might eliminate domestic jobs May improve national competitiveness Can offshore ‘sunset’ industries Why Home Intervenes in FDI International Business 3e

14. Financial incentives Low or waived taxes Low-interest loans Infrastructure improvements Improved seaports, roads, and telecommunications networks Host Promotion Methods International Business 3e

15. Ownership restrictions Prohibit investment in certain industries or businesses Performance demands Local content requirements Technology transfers Export targets Host Restriction Methods International Business 3e

16. Insurance on assets abroad Loans and loan guarantees Special tax treaties Tax breaks on profits earned abroad Persuade other nations to accept FDI Home Promotion Methods International Business 3e

17. Higher tax rates on foreign income Sanctions on specific nations Home Restriction Methods International Business 3e