FDI Flashcards

1
Q

FDI

A

(UNCTAD) define Foreign Direct Investment as:
an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor

□ UNCTAD uses the cut-off equity stake of 10%

□ Arbitrary number, convention, lower than 10% is a portfolio, greater than is FDI (if from a different country)

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2
Q

Why are FDI’s different from portfolio investments

A

no direct control
□ No influence over the company, just to get a return in the country
□ Buy stocks in foreign stock exchange
□ Not typically held over a long term

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3
Q

multinational enterprises

A

“Companies coordinating and controlling operations in more than one country, even if it does not own them” (Dicken)

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4
Q

FDI stock

A

the level of direct investment at a given point in time, FDI that it already in the country (cumulative amount)

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5
Q

FDI Flow

A

the value of cross-border transactions related to direct investment in a given period of time (in and out) - new FDI

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6
Q

Inward FDI

A

(investment in a country come from other countries)

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7
Q

Outward FDI

A

(a firm expands operations to a foreign country)

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8
Q

Characteristics of FDI

A

greenfield investments

M&As (mergers and acquisitions)

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9
Q

Greenfield investment

A

a company decides to invest in another country rom scratch, rather than buying an existing company

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10
Q

M&A

A

taking over an existing company

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11
Q

brownfield investments

A

a firm that purchases existing production facilities to launch a new production activity.

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12
Q

OLI framework

A

Also dubbed the eclectic paradigm as it draws on economics, economic geography and organization theory

§ Ownership advantages:

§ Location advantages:

§ Internalization advantages:

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13
Q

Ownership advantages:

A

□ firms need to have some advantage of ownership,
e.g.
® patents or substantial R&D knowledge, or
® advantage of nationality: access to strong domestic networks

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14
Q

Location advantages:

A

□ the location into which a firm wants to expand should be attractive enough for the firm by offering certain advantages

□ (e.g. large market, low taxes etc.)

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15
Q

Internalization advantages:

A

□ it should be advantageous to the firm to organize the investment itself, rather than through a partnership arrangement or outsourcing

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16
Q

criticism of OLI

A
  • Eclectic- too many theories brought together; self-evident for companies to have successful FDI
    • Tautology
    • Do firms need ownership advantages to make an FDI?
      ○ E.g. China
      ○ Or M&A to achieve patents and rights

e.g. Aldi

17
Q

CAGE Distance Framework

A

Cultural

  • different values and norms
  • different languages
  • different religions, network systems

Administrative

  • different legal system
  • lack of colonial ties
  • not in the same trading bloc, currency

Geographic

  • physical distance
  • no common border
  • differences in climate

Economic

  • differences in consumer income
  • differences in resources
  • differences in business systems
18
Q

What are determinants of FDI?

A
Economists
○ Size of the economy
○ Distance and transportation costs
○ Taxation 
○ Former colony
○ Resource endowments 
Business scholars 
○ Firm’s motive
○ Match between firm-specific advantages and location advantages 
○ Transaction costs
○ Firm’s portfolio
19
Q

Does FDI by emerging market MNEs differ from that of their developed economy counterparts?

A

○ Aggressive acquisition strategy (rather than greenfield)?

○ Experience navigating environments with comparatively underdeveloped institutions can be of use in other developing economies and give EMNEs a competitive edge

○ Home-country governments typically play a more important role for the internationalization trajectories of EMNEs

20
Q

Criticism – FDI statistics

A

Business scholars would object, and also point at the discussed trends (Beugelsdijk et al., 2010)

  • Inward FDI does not necessarily mean inward MNE activity
  • A lot of FDI goes towards tax havens
  • MNEs also raise funds locally
  • Labor productivity varies in an MNE’s foreign affiliate network
  • FDI statistics capture intricacies of MNE global strategy?
21
Q

FDI Policy

A

Governments have a range of measures at their disposal that potentially influence inward and outward FDI decisions:

  • Information provision
  • Ministerial support (missions)
  • Subsidies, loans
  • Investment insurance
  • Tax breaks
  • Antitrust laws – merger control
  • Governments may also work together to create a more secure investment climate
    ○ International investment agreements, bilateral investment treaties
22
Q

FDI Summary

A

Foreign direct investment plays an important role in a world increasingly characterized by globalization

• Yet, FDI flows vary from year to year despite several structural trends
• Different perspectives apply: country-level or firm-level
determinants?
• Scope for governments to influence FDI with policy measures

23
Q

Are all industrialised economies losing FDI inflows and developing and transition economies increasing it?

A

Developing countries
○ Face a decrease in investment of roughly 27%
○ US acquisitions were mainly all in the US
○ China acquisition in other countries decreased

  • Spain, Australia, Italy growing
    ○ Improving, incentive to invest outwards more
  • Why do some country FDI increase
    ○ UK- Brexit: doesn’t attract foreign investment as economy is unsure
    ○ USA- protectionist measures to avoid foreign investment
    ○ Tarde war between USA and China