Unit 2.

Foreign Direct Investment

A. foreign direct investment (FDI)

1. Foreign direct investment (FDI): Purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of management control. 2.Portfolio investment: Investment that does not involve obtaining a degree of control in a company.

B. Reasons for growth of FDI

1. Globalization. 2. Mergers and Acquisitions +Get a foothold in a new geographic market +Increase a firms global competitiveness +Fill in companies product lines in a global industry +Reduce costs in such areas as R&D, production, or distribution 3. Role of entrepreneurs and small businesses

C. Explanations for FDI: Theories

1. International product lifecycle: Theory stating that a company will begin by exporting its product and later undertake FDI as a product moves through its lifecycle. -In the new product stage: A good is produced in the home country because of uncertain domestic demand and to keep production close to the research department that developed the product. -In the maturing product stage: The company directly invests in production facilities in those countries where demand is great enough to warrant its own production facilities. -In the final standardized product stage: increased competition creates pressure to reduce production costs.

FDI theories: Market imperfection

2. Market imperfection: Theory stating that when an imperfection in the market make a transaction less efficient than it could be, a company will undertake FDI to internalize the transaction and thereby remove the imperfection. -Trade barriers such as tariffs -Specialized knowledge

FDI theories: Eclectic theory:

3. Eclectic theory: Theory stating that firms undertake FDI when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment.

Eclectic theory
-A location advantage is the advantage of locating a
particular economic activity in a specific location -An ownership advantage is an advantage that the

company has due to its ownership of some special

asset, such as brand recognition. -An internalizing advantage is the advantage that

arises from internalizing a business activity rather

than leaving it to relatively inefficient market

FDI theories: Market power

4. Market power: Theory stating that a firm tries to establish a dominant market presence in an industry by undertaking FDI. -Way to achieve market power: +Vertical integration :Backward integration & forward integration

D. Management issues in the FDI decision

1. Control
2. Purchase or build decision 3. Production costs 4. Customer knowledge 5. Following clients 6. Following rivals

E. Government intervention in FDI

1. Reason for host country intervention -Balance of payment -Obtain resources and benefits
+Access to technology.
+Management skills and employment

E. Government intervention in FDI

2. Reasons for home country intervention -Investing in other nations sends resources out of the home country -Outgoing FDI may ultimately damage a nations balance of payments by taking the place of its exports. -Jobs resulting from outgoing investment may replace jobs at home

F. Government policy instrument and FDI

1. Host countries: Restriction -Owner restriction -Performance demands 2. Host countries: Promotion -Financial incentives -Infrastructure improvement

F. Government policy instrument and FDI

3. Home countries: Restriction -Impose differential tax rates -Impose outright sanctions 3. Home countries: Promotion -Offer insurance to cover the risks of investment abroad -Grant loans -Offer tax break on profits earned abroad -Apply political pressure on other nation

Questions to answer
1. What is FDI? Explain how FDI differs from portfolio investment. 2. What are three factors contributing to

the growth in FDI?

3. Describe how the international product lifecycle explain FDI. What are the three product stages?

Questions to answer
4. Explain the electic theory. Identify the 3 advantages that must be present for FDI to occur, according to the theory? 5. How does the theory of market power explain the occurrence of FDI?
6. For what reason do host countries intervene in FDI? 7. What reasons do home counties intervene FDI?

Questions to answer
8. What are the main methods host countries use to restrict and promote FDI? 9. What methods do home countries use to intervene in FDI? 10. Why is control important to the FDI decisions?

Thank you very much!!!