25 Questions
What are the limitations of exporting?
High transportation costs and trade barriers
According to the eclectic paradigm, how is FDI explained?
With location-specific advantages and knowledge spillovers
What influences the pattern of FDI in oligopolistic industries?
Strategic behavior and multipoint competition
What does the radical view, rooted in Marxist theory, see MNEs as?
Instruments of exploitation
What does pragmatic nationalism seek to do?
Maximize national benefits and minimize costs by aggressively courting FDI
What has led to a surge in FDI worldwide?
Economic liberalization and technological advancements
What is the definition of Foreign Direct Investment (FDI)?
Investing in new facilities to produce or market in a foreign country
When does a firm become a multinational enterprise (MNE)?
When it undertakes FDI
What are greenfield ventures in the context of FDI?
Building up subsidiaries from scratch
What does the 'stock of FDI' refer to?
Total accumulated value of foreign-owned assets at a given time
Where historically has most Foreign Direct Investment (FDI) been directed?
Developed nations
Which country has been a target for FDI inflows due to large and wealthy domestic markets, dynamic and stable economy, and favorable political environment?
United States
Which countries account for 60% of all FDI outflows from 2000 to 2020?
United States, United Kingdom, France, Germany, Japan, Netherlands
What is the growing importance of China in the context of FDI?
Major recipient of FDI inflows from other countries
What are greenfield investments in the context of FDI?
Form of FDI where a parent company starts a new venture by constructing new operational facilities from the ground up.
Which region is emerging as an important region for Foreign Direct Investment (FDI)?
Latin America
What is the main characteristic of greenfield ventures in the context of Foreign Direct Investment (FDI)?
They involve building up subsidiaries from scratch
What does the 'stock of FDI' refer to?
Total accumulated value of foreign-owned assets at a given time
In the context of Foreign Direct Investment (FDI), what is the significance of China's role around 2005?
It became a major foreign investor, especially in less developed nations
What characterizes the direction of historically most Foreign Direct Investment (FDI)?
Most directed at developed nations
What is the main characteristic of outflows in the context of Foreign Direct Investment (FDI)?
Flows of FDI out of a country
What has been the growing importance of China in the context of Foreign Direct Investment (FDI)?
It has emerged as a major foreign investor, especially in less developed nations.
What is the primary characteristic of joint ventures in the context of Foreign Direct Investment (FDI)?
They involve collaboration with local businesses to establish new ventures.
What is the main characteristic that defines when a firm becomes a multinational enterprise (MNE) through Foreign Direct Investment (FDI)?
The firm undertakes an investment with at least a 10% interest in a foreign country.
What characterizes the source of Foreign Direct Investment (FDI) historically?
The U.S. has been the largest source since WWII.
Study Notes
Theories of Foreign Direct Investment (FDI) and Its Alternatives
- FDI is favored over exporting and licensing due to its control over operations and strategy, but it is expensive and risky.
- Exporting involves producing goods at home and shipping them to a foreign country, while licensing grants a foreign entity the right to produce and sell a firm’s product.
- Limitations of exporting include transportation costs and trade barriers, while licensing may result in giving away valuable technological know-how and lack of tight control over production.
- Advantages of FDI include maintaining control over technology and capabilities not amenable to licensing.
- Strategic behavior and multipoint competition influence the pattern of FDI in oligopolistic industries.
- The eclectic paradigm, championed by John Dunning, explains FDI with location-specific advantages and knowledge spillovers.
- The radical view, rooted in Marxist theory, sees MNEs as instruments of exploitation, while the free market view supports FDI as beneficial for both source and host countries.
- Pragmatic nationalism seeks to maximize national benefits and minimize costs by aggressively courting FDI and pursuing policies to achieve this.
- The decline in radical ideology and increase in free market ideology have led to a surge in FDI worldwide, with some nations being more hostile to FDI.
- Host-country benefits of FDI include resource-transfer effects, employment effects, and BoP effects, while costs include adverse effects on competition and national sovereignty.
- Home-country benefits of FDI include capital inflow and employment effects, while costs include BoP deficits and loss of valuable skills from foreign markets.
- Offshore production as FDI may stimulate economic growth and make a company more competitive, according to international trade theory.
Theories of Foreign Direct Investment (FDI) and Its Alternatives
- FDI is favored over exporting and licensing due to its control over operations and strategy, but it is expensive and risky.
- Exporting involves producing goods at home and shipping them to a foreign country, while licensing grants a foreign entity the right to produce and sell a firm’s product.
- Limitations of exporting include transportation costs and trade barriers, while licensing may result in giving away valuable technological know-how and lack of tight control over production.
- Advantages of FDI include maintaining control over technology and capabilities not amenable to licensing.
- Strategic behavior and multipoint competition influence the pattern of FDI in oligopolistic industries.
- The eclectic paradigm, championed by John Dunning, explains FDI with location-specific advantages and knowledge spillovers.
- The radical view, rooted in Marxist theory, sees MNEs as instruments of exploitation, while the free market view supports FDI as beneficial for both source and host countries.
- Pragmatic nationalism seeks to maximize national benefits and minimize costs by aggressively courting FDI and pursuing policies to achieve this.
- The decline in radical ideology and increase in free market ideology have led to a surge in FDI worldwide, with some nations being more hostile to FDI.
- Host-country benefits of FDI include resource-transfer effects, employment effects, and BoP effects, while costs include adverse effects on competition and national sovereignty.
- Home-country benefits of FDI include capital inflow and employment effects, while costs include BoP deficits and loss of valuable skills from foreign markets.
- Offshore production as FDI may stimulate economic growth and make a company more competitive, according to international trade theory.
Test your knowledge of the theories and alternatives related to Foreign Direct Investment (FDI), including the advantages and disadvantages of FDI compared to exporting and licensing. Explore the factors influencing FDI patterns and the differing perspectives on its impact on source and host countries.
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