International Business
11e
By Charles W.L. Hill
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Chapter 8
Foreign Direct
Investment
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What Is FDI?
Foreign direct investment (FDI) occurs
when a firm invests directly in new
facilities to produce and/or market in a
foreign country
the firm becomes a multinational
enterprise
FDI can be in the form of
greenfield investments - the establishment of
a wholly new operation in a foreign country
acquisitions or mergers with existing firms in
the foreign country
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What Is FDI?
The flow of FDI - the amount of FDI
undertaken over a given time period
Outflows of FDI are the flows of FDI out of a
country
Inflows of FDI are the flows of FDI into a
country
The stock of FDI - the total accumulated
value of foreign-owned assets at a
given time
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What Are The Patterns Of FDI?
FDI Inflows by Region 1995-2013 ($ billion)
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What Are The Patterns Of FDI?
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
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What Is The Source Of FDI?
Cumulative FDI outflows, 1998–2012 ($ billions)
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What Are The Theoretical
Approaches To FDI?
The radical view - the multinational enterprise
(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
The free market view - 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
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How Does FDI Benefit
The Host Country?
There are four main benefits of inward
FDI for a host country
1. Resource transfer effects - FDI brings
capital, technology, and
management resources
2. Employment effects - FDI can bring
jobs
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How Does FDI Benefit
The Host Country?
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
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What Are The Costs Of
FDI To The Host Country?
Inward FDI has three main costs:
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
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What Are The Costs Of
FDI To The Host Country?
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
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How Does FDI Benefit
The Home Country?
The benefits of FDI for the home country
include
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
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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
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What Are The Costs Of
FDI To The Home Country?
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
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How Does Government
Influence FDI?
Governments can encourage outward FDI
government-backed insurance programs to
cover major types of foreign investment
risk
Governments can restrict outward FDI
limit capital outflows, manipulate tax rules, or
outright prohibit FDI
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How Does Government
Influence FDI?
Governments can encourage inward FDI
offer incentives to foreign firms to invest in
their countries
gain from the resource-transfer and employment
effects of FDI, and capture FDI away from other
potential host countries
Governments can restrict inward FDI
use ownership restraints and performance
requirements
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