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FORMS OF FDI
Purchase of existing assets in a foreign country
New investment in property, plant and equipment
Participation in joint venture with a local partner
Transfer of many types of assets like human resources, systems, technological know-how in
exchange for equity in foreign companies
Export of goods for equity. This method may not be used in the initial stage of the
establishment of the company
Through trading in equity: Companies also invest in the equity of the foreign companies by
purchasing the equity shares of the foreign company
INTERNATIONAL INVESTSMENT THEORIES
OWNERSHIP ADVANTAGE THEORY
Firms having competitive advantage domestically derived from its valuable assets
like technology, brand name and large scale economies extend their operations to
foreign markets through FDI
Caterpillar & Komatsu established its manufacturing facilities in North & south
America, Europe and Asia -- companies have competitive advantage domestically
in technology and brand name and established their operations in foreign countries
INTERNALISATION THEORY
Explains the process by which firms acquire and retain one or more value-chain activities
inside the firm retaining control over foreign operations and avoiding the disadvantages of
dealing with external partners.
In contrast to arms-length entry strategies (exporting and licensing) which imply
developing contractual relationships with external business partners,
FDI provides the firm with control and ownership of resource
Internalization theory states that the domestic companies enter a foreign market through
FDI when the cost of transaction with a foreign firm is high
The domestic companies under these conditions internalizes its production, marketing and
other operations in foreign markets through FDI
Resource Availability Companies locate their production facilities close to the source of
critical input (eg) U.S based oil- refining companies established their oil refining facilities
in Saudi Arabia and other Gulf countries
Availability of Quality Human Resource at low cost High quality human resources add
to the high value addition to the product. If such human resources are available at low cost ,
productivity increases and cost of value addition gets reduced
Access To Technology Firms prefer to have FDI in order to have access to existing key
technology rather than developing technologies
FACTORS INFLUENCING FDI DEMAND FACTORS
Demand Factors Companies select the FDI strategy in order to increase the total demand
for the products. These factors include:
Customer Access Certain business firms particularly fast food, service oriented and retail
outlets should locate their operations close to customers.
Marketing Advantages Companies can enjoy a number of marketing advantage by
locating their operations in a host country. These advantages include lower marketing costs,
accessibility to hands-on experience regarding customer and market handling, improving
customer service etc
Exploitation of Competitive Advantages Companies which enjoy competitive
advantage through, trademark , brand name , technology etc go for FDI in order to exploit
its competitive advantage in various foreign markets
Customer Mobility The companies which have one or few customers select the FDI
strategy along with their customers. In other words, the ancillary industrial units locate their
production facilities in those foreign countries where their parent companies locate their
production facilities
FACTORS INFLUENCING FDI POLITICAL FACTORS
Political Factors Companies enter foreign markets through FDI in order to overcome the
trade barriers imposed by the host country or in order to avail the incentives offered by the
host governments
Avoidance Of Trade Barriers Companies establish production facilities in foreign markets
in order to avoid trade barriers like high tariffs, quotas etc
Economic Development Incentives- Government at different levels (i.e) Local, State and
National Levels offer incentives to attract domestic as well as foreign investment
REASONS FOR FDI
Increase in sales and profits
To enter rapidly growing markets
Reduced costs
Consolidated Trade Blocs
Protect domestic markets
Acquire technological and managerial know-how
Negative Effects on BOP Foreign companies repatriate their dividends to their home
countries that affect the current account. MNCs import the goods from its subsidiaries from
other countries (imports result in debit on the current account of BOP of the host country).
Some of the host governments fear that FDI affects the sovereignty and autonomy of the
country