Global Business 3e Chapter 6 Investing Abroad Directly © 2014 Cengage Learning. All Rights...

Global Business 3eChapter 6

Investing Abroad Directly

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


LEARNING OBJECTIVESAfter studying this chapter, you should be able to:6-1 use the resource-based and institution-based views to

answer why foreign direct investment (FDI) takes place.6-2 understand how FDI results in ownership, location, and

internalization (OLI) advantages.6-3 identify different political views on FDI based on an

understanding of its benefits and costs to host and home countries.

6-4 participate in two leading debates concerning FDI.6-5 draw implications for action.


FDI VOCABULARY

Foreign direct investment (FDI)Putting money in activities that control and manage value-added activities in other countries

Multinational enterprise (MNE)Firms that engage in FDI

Foreign portfolio investment (FPI)Holding securities, such as stocks and bonds, of companies in countries outside one’s own but does not entail the active management of foreign assets

Management control rightsAuthority to appoint key managers and establish control mechanisms

HORIZONTAL AND VERTICAL FDIHorizontal FDIProducing the same products or offering the same services in a host country as firms do at home

Vertical FDIFirm moves upstream or downstream in different value chain stages in a host country through FDI


UPSTREAM AND DOWNSTREAM VERTICAL FDI

Upstream vertical FDIUsing FDI in an earlier activity in the value chain

Downstream vertical FDIUsing FDI in an later activity in the value chain


FDI FLOW AND STOCKFDI flowAmount of FDI moving in a given period (usually a year) in a certain direction

FDI inflowFDI moving into a country in a year

FDI outflowFDI moving out of a country in a year

FDI stockTotal accumulation of inbound FDI in a country or outbound FDI from a country© 2014 Cengage Learning. All Rights

Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

WHY FIRMS BECOME MNEsBY ENGAGING IN FDI

OLI advantagesQuest for ownership (O) advantages, location (L)

advantages, and internalization (I) advantages

OwnershipMNEs’ possession and leveraging of certain

valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas


? Can you name some OLI advantages for a familiar firm?

OLI ADVANTAGES

LocationFeatures unique to a place, such as its

natural or labor resources or its location near particular markets, that provide certain advantages to firms doing business there

InternalizationReplacement of cross-border markets (such

as exporting and importing) with one firm (the MNE) locating and operating in two or more countries © 2014 Cengage Learning. All Rights


OLI ADVANTAGES

LicensingSelling technology or intellectual property

for a fee

Market imperfection (market failure)Imperfect rules governing international transactions


FDI VS LICENSING

Dissemination riskPossibility of unauthorized diffusion of firm-specific know-how


LOCATION

AgglomerationClustering of economic activities in certain locations

Knowledge spilloverDiffusion of knowledge from one firm to others among closely located firms that attempt to hire individuals from competitors



Location advantages refer to the advantages one firm obtains when operating in a location due to its firm-specific capabilities

LOCATION

OligopolyAn industry dominated by a smallnumber of players

OVERCOMING MARKET FAILURE THROUGH FDI

Intrafirm tradeTransactions occur between two

subsidiaries in two countries controlled by the same MNE


POLITICAL VIEWS ON FDI

Radical viewTreats FDI as an instrument of imperialism

and a vehicle for exploiting domestic resources, industries, and people by foreign capitalists and firms

Free market viewUnrestricted by government Intervention

FDI will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services © 2014 Cengage Learning. All Rights


POLITICAL VIEWS ON FDI

Pragmatic nationalismConsidering both the pros and cons

of FDI and approving FDI only when its benefits outweigh its costs


? What is your opinion of FDI?

BENEFITS AND COSTS OF FDI TO HOST COUNTRIES

Technology spilloverDomestic diffusion of foreign technical knowledge and processes

Demonstration effectLocal rivals, after observing foreign technology, may recognize its feasibility and strive to imitate

Contagion (imitation) effectLocal rivals, after observing foreign technology, may recognize its feasibility and strive to imitate


HOW MNEs AND HOSTGOVERNMENTS BARGAIN

Bargaining powerAbility to extract favorable outcome from negotiations due to one party’s strengths


HOW MNEs AND HOSTGOVERNMENTS BARGAINObsolescing bargainRequirements of a deal previously struck between an MNE and a host government is changed after the initial FDI entry

ExpropriationConfiscating foreign assets

Sunk costAlready invested sums


SOVEREIGN WEALTH FUNDS

Sovereign wealth fund (SWF)State-owned investment fund composed

of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets


Global Business 3e Chapter 6 Investing Abroad Directly © 2014 Cengage Learning. All Rights...

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