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global4_peng_ch06.pptxChapter 6, Investing Abroad Directly
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Investing Abroad Directly
6
Learning Outcomes
Identify and define the key terms associated with foreign direct investment (FDI)
Use the resource-based and institution-based views to answer why FDI takes place
Explain how FDI results in ownership advantages
Identify the ways your firm can acquire and neutralize location advantages
LEARNING OUTCOMES
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Learning Outcomes
List the benefits of internalization
Identify different political views on FDI and understand its benefits and costs to host and home countries
List three things you need to do as your firm considers FDI
LEARNING OUTCOMES (continued)
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International Investment
Occurs in two ways
Foreign portfolio investment (FPI): Holding securities of firms in other countries but without a controlling interest
FDI - Investing equity stake of 10 percent or more in a foreign-based enterprise
Holding large equity enables one to exercise management control rights
LO 1
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Essentially, foreign portfolio investment (FPI) is foreign indirect investment.
The key word in FDI is direct—namely, the direct, hands-on management of foreign assets
Management control right: Right to appoint key managers and establish control mechanisms
Types of FDI
Horizontal FDI: Firm produces same products or offers the same services in a host country as at home
Vertical FDI: Firm moves upstream or downstream in different value chain stages in a host country
Upstream vertical FDI: Firm engages in an upstream stage of the value chain
Downstream vertical FDI: Firm engages in a downstream stage of the value chain
LO 1
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FDI can be horizontal or vertical.
6.1 - Horizontal FDI
LO 1
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Exhibit
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6.2 - Vertical FDI
LO 1
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Exhibit
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FDI Flow and Stock
FDI flow: Amount of FDI moving in a given period in a certain direction
FDI inflow: FDI moving into a country in a year
FDI outflow: FDI moving out of a country in a year
FDI stock: Total accumulation of inbound FDI in a country or outbound FDI from a country across a given period of time
LO 1
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MNE versus Non-MNE
Firm that engages in FDI when doing business abroad
MNE
Firm that does business abroad by exporting and importing, licensing and franchising, outsourcing, or engaging in FPI
Non-MNE
LO 1
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6.3 - Reasons for Firms to Engage in FDI
LO 1
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Exhibit
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From an institution-based view, internalization is a response to the imperfect rules governing international transactions, known as market imperfections (or market failure).
Firms become MNEs because FDI provides OLI advantages that they otherwise would not obtain.
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Benefits of Direct Ownership
Lie in the combination of equity ownership rights and management control rights
Ownership rights provide the management control rights
FDI facilitates firm-specific resources and capabilities abroad to overcome foreign liabilities
LO 3
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6.4 - Why Firms Prefer FDI to Licensing
LO 3
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Exhibit
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Dissemination risk: The possibility of unauthorized diffusion of firm-specific know-how
Location Advantages - Agglomeration
Clustering of economic activities in certain locations
Advantages arise from:
Diffusion of knowledge from one firm to others among closely located firms
Industry demand that creates a skilled labor force
Industry demand that facilitates a pool of specialized suppliers and buyers in a region
LO 4
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Acquiring and Neutralizing Location Advantages
Location advantages
Obtained by a firm when operating in a location owing to its firm-specific capabilities
When a firm enters a foreign country through FDI, its competitors are likely to increase FDI in the host country
Rivals hope to acquire or neutralize location advantages
Mostly followed by oligopolistic industries
LO 4
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Advantages of Internalization
Domestic transaction costs are cheaper than international transaction costs
Combats market failure by replacing the external market with in-house links
International trade between two independent firms in two countries is transformed into intrafirm trade
LO 5
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Intrafirm trade: International trade between two subsidiaries in two countries controlled by the same MNE
Political Views on FDI
Radical view: FDI is an instrument of imperialism and a vehicle for foreign exploitation
Government nationalizes MNE assets or bans inbound MNEs
LO 6
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Radical view: Hostile and treats FDI as an instrument of imperialism
Political Views on FDI (continued)
Free market view: When FDI is unrestricted by government intervention, it enables countries to tap into their absolute and comparative advantages
By specializing in the production of certain goods and services
Pragmatic nationalism: FDI is approved only when its benefits outweigh its costs
LO 6
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Free market view: Suggests that FDI will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods or services
Pragmatic nationalism: Considers both the pros and cons of FDI
6.7 - Effects of FDI on Home and Host Countries
LO 6
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Exhibit
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6.8 - Implications for Action
LO 7
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Exhibit
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Debate: Welcoming versus Restricting Sovereign Wealth Fund (SWF) Investments
Struggling firms are provided with much-needed cash
Welcoming SWFs
Concerns are raised over national security
SWFs may be politically motivated
Inadequate transparency
Restricting SWFs
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A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets.
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Key Terms
Foreign portfolio investment (FPI)
Management control right
Horizontal FDI
Vertical FDI
Upstream vertical FDI
Downstream vertical FDI
FDI inflow
FDI outflow
FDI stock
OLI advantages
Ownership
Location
Internalization
Licensing
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KEY TERMS
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Key Terms (Continued)
Market imperfection (market failure)
Dissemination risk
Agglomeration
Intrafirm trade
Radical view on FDI
Free market view on FDI
Pragmatic nationalism view on FDI
Technology spillover
Demonstration effect (contagion or imitation effect)
Sovereign wealth fund
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KEY TERMS (continued)
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Summary
International investment occurs through FDI and FPI
Resource-based and institution-based views explain the need for firms to engage in FDI
All investments, including both FDI and FPI, entail ownership of assets
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SUMMARY
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Summary (Continued 2)
Location advantages are obtained by a firm when operating in a location based on its firm-specific capabilities
Internalization helps combat imperfections in international market transactions
Political views on FDI - Radical, free market, and pragmatic nationalism
FDI is not recommended if ownership and internalization advantages are not deemed critical
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SUMMARY
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