© 2013 Cengage Learning. All rights reserved. CHAPTER 6 GLOBAL2 PENG © Nadine Hutton/Bloomberg...

© 2013 Cengage Learning. All rights reserved.

CHAPTER 6

GLOBAL2 PENG

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CHAPTER 6 LEARNING OBJECTIVES

After studying this chapter, you should be able to:

1. Identify and define the key terms associated with foreign direct investment (FDI).

2. Use the resource-based and institution-based views to answer why FDI takes place.

3. Explain how FDI results in ownership advantages.

4. Identify the ways you can acquire and neutralize location advantages.


CHAPTER 6 LEARNING OBJECTIVES

After studying this chapter, you should be able to:

5. List the benefits of internalization.

6. Identify different political views on FDI and understand its benefits and costs to host and home countries.

7. List three things you need to do as your firm considers FDI.


LO1: KEY TERMS ASSOCIATED WITH FDI

Terms to know: Foreign portfolio investment (FPI) Foreign direct investment (FDI) Management control rights Horizontal FDI Vertical FDI FDI flow FDI inflow FDI outflow FDI stock


LO1: HORIZONTAL FDIWhen a firm takes the same activity at the same value-chain stage from its home country and duplicates it in a host country.


LO1: VERTICAL FDIWhen a firm moves upstream or downstream in different value-chain stages in a host country through FDI.


LO2: WHY DOES FDI TAKE PLACE?

FDI provides gains to a firm through OLI:


LO3: HOW DOES FDI RESULT IN OLI ADVANTAGES?

OWNERSHIP ADVANTAGES

Direct is the key word in FDI.

Direct ownership provides combination of equity ownership rights and management control rights.


LO3: OWNERSHIP ADVANTAGES

FDI vs. Licensing


LO4: LOCATION ADVANTAGES

Some locations possess geographical features that are difficult to match.

Location advantage can arise from agglomeration – the clustering of economic activities in certain locations.


LO4: LOCATION ADVANTAGES

Results from: Knowledge spillover

Industry demand for skilled workers

Industry demand that facilitates a pool of specialized suppliers and buyers in a region


LO4: ACQUIRING AND NEUTRALIZING LOCATION ADVANTAGES

Location advantage does not entirely overlap with country-level advantages.

Refers to advantage that firm obtains when operating in a specific location due to firm-specific resources.

When one firm enters a foreign country through FDI, competitors are likely to increase FDI in order to acquire or neutralize location advantages.


LO5: THE BENEFITS OF INTERNALIZATION

Reduces cross-border transaction costs.

Replaces external market relationship with single organization spanning both countries.


LO5: INTERNATIONAL MARKET TRANSACTION


LO5: ONE COMPANY IN TWO COUNTRIES


LO6: DIFFERENT POLITICAL VIEWS ON FDI

Radicalview

Pragmatic nationalism

Free market view


LO6: BENEFITS AND COSTS OF FDI


LO6: BENEFITS AND COSTS OF FDI TO HOST COUNTRIES

Benefits1. Capital inflow2. Technology

spillovers3. Advanced

management know-how

4. Creates jobs

Benefits1. Capital inflow2. Technology

spillovers3. Advanced

management know-how

4. Creates jobs

Costs1. Loss of

economic sovereignty

2. Loss of domestic firms

3. Capital outflow

Costs1. Loss of

economic sovereignty

2. Loss of domestic firms

3. Capital outflow


LO6: BENEFITS AND COSTS OF FDI TO HOME COUNTRIES

Benefits1. Repatriated

earnings from FDI profits

2. Increased exports

3. Learning via FDI from operations abroad

Benefits1. Repatriated

earnings from FDI profits

2. Increased exports

3. Learning via FDI from operations abroad

Costs

1.Capital outflow

2. Job loss

Costs

1.Capital outflow

2. Job loss


LO7: THREE THINGS TO DO


DEBATE: WELCOMING VS. RESTRICTING SOVEREIGN WEALTH FUND INVESTMENTS

SWFs have recently provided much needed cash to struggling firms.

SWFs may be politically motivated (national security). SWFs lack transparency.

PRO CON

© 2013 Cengage Learning. All rights reserved. CHAPTER 6 GLOBAL2 PENG © Nadine Hutton/Bloomberg...

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