Foreign Direct Investment in China

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Questions and Answers

What is the main factor influencing foreign firms' decisions to establish a presence in China, aside from tariff rates?

  • The presence of inexpensive labor and tax incentives.
  • The need to develop guanxi, crucial relationship networks. (correct)
  • The opportunity to access a large and growing domestic market.
  • The availability of skilled labor and technological infrastructure.

Why were enterprises from countries with a long history of trading at the forefront of foreign investment trends?

  • They were already established as major exporters of goods and services. (correct)
  • They benefited from favorable government policies towards foreign investment.
  • They had access to cheaper labor and resources than other countries.
  • They were able to leverage existing relationships with foreign markets.

What factor is described as making China an attractive base for exporting goods to Asian or world markets?

  • The presence of a highly skilled workforce that can produce high-quality goods.
  • The government's focus on promoting exports and supporting multinational enterprises.
  • The availability of cheap labor and tax incentives. (correct)
  • The accessibility of raw materials and resources at competitive prices.

What is mentioned as a potential factor that could make China less attractive for exporting?

<p>The increasing cost of labor. (C)</p> Signup and view all the answers

What year marked a significant surge in outward investment by Chinese multinationals?

<p>2010 (B)</p> Signup and view all the answers

What is the approximate amount of international investments made by Chinese firms in 2005?

<p>$12 billion (A)</p> Signup and view all the answers

Which of the following is NOT mentioned as a factor contributing to a favorable investment environment in China?

<p>The strong legal framework and transparent regulatory system. (C)</p> Signup and view all the answers

Why is the rise of China's outward investment potentially upsetting the established narrative of foreign investment trends?

<p>It challenges the assumption that only developed nations are major investors. (C)</p> Signup and view all the answers

Which of the following countries received a significant amount of Chinese Foreign Direct Investment (FDI) in 2016 and 2017?

<p>United States (B)</p> Signup and view all the answers

What is the primary motive behind Chinese firms investing in extractive industries in less developed nations?

<p>To gain access to raw materials. (B)</p> Signup and view all the answers

Which of the following is NOT a form of Foreign Direct Investment (FDI)?

<p>Portfolio investment (B)</p> Signup and view all the answers

What is the approximate percentage of FDI inflows that were in the form of mergers and acquisitions between 1998 and 2020, according to UN estimates?

<p>40-80% (C)</p> Signup and view all the answers

How does the percentage of FDI in the form of mergers and acquisitions in developing nations compare to that in developed nations?

<p>It is significantly lower in developing nations. (C)</p> Signup and view all the answers

What is a major factor contributing to the lower percentage of mergers and acquisitions as a form of FDI in developing nations?

<p>Limited number of target firms to acquire in developing nations. (A)</p> Signup and view all the answers

Based on the text, what prompted a decline in Chinese investment in the United States in 2018 and 2019?

<p>The ongoing trade conflicts between the two nations. (B)</p> Signup and view all the answers

Which of the following is a TRUE statement regarding the trend of Chinese outward Foreign Direct Investment (FDI)?

<p>Chinese firms are gradually shifting their investments toward more advanced nations, such as the United States. (A)</p> Signup and view all the answers

What is the main advantage of exporting compared to foreign direct investment (FDI)?

<p>Exporting is cheaper than FDI as it does not require the establishment of production facilities abroad. (D)</p> Signup and view all the answers

Based on the information provided in the text, which of the following is a key reason why companies might choose licensing over foreign direct investment?

<p>Licensing can be a cost-effective way to enter a foreign market without the significant investment required for FDI. (D)</p> Signup and view all the answers

Why do firms often prefer mergers and acquisitions over greenfield investments?

<p>Mergers and acquisitions can provide immediate access to strategic assets. (C)</p> Signup and view all the answers

What are some valuable strategic assets that firms seek when acquiring other firms?

<p>Brand loyalty, customer relationships, and trademarks. (A)</p> Signup and view all the answers

What is a potential benefit of acquiring a foreign firm?

<p>Ability to transfer capital, technology, or management skills. (D)</p> Signup and view all the answers

Which of the following statements regarding mergers and acquisitions is true?

<p>Many mergers and acquisitions do not achieve expected gains. (B)</p> Signup and view all the answers

What aspect of the business environment influences the quick execution of mergers and acquisitions?

<p>Rapid market evolution. (D)</p> Signup and view all the answers

When considering foreign direct investment, which option is typically a priority for firms?

<p>Acquiring existing assets instead of starting new ventures. (A)</p> Signup and view all the answers

What do theories of foreign direct investment aim to explain regarding firms in the same industry?

<p>Why firms undertake foreign direct investment simultaneously. (D)</p> Signup and view all the answers

Which of the following is NOT a reason firms prefer to acquire rather than build their assets through greenfield investments?

<p>Lower costs associated with acquisitions. (D)</p> Signup and view all the answers

What was one major way the persistent U.S. current account deficit has been financed since the 1980s?

<p>By steady sale of U.S. assets to foreigners. (C)</p> Signup and view all the answers

How can foreign direct investment (FDI) act as a substitute for imports?

<p>By enhancing local production that would otherwise be imported. (A)</p> Signup and view all the answers

What is a potential benefit of foreign multinationals investing in a country?

<p>Significant growth in exports from the host country. (B)</p> Signup and view all the answers

Which countries have seen an increase in FDI due to the liberalization of their FDI regimes in the past 20 years?

<p>China, India, and Vietnam (A)</p> Signup and view all the answers

What effect does greenfield investment through FDI typically have on market competition?

<p>It creates new enterprises, increasing market players. (C)</p> Signup and view all the answers

How does increased competition resulting from FDI impact consumer welfare?

<p>It typically drives down prices and improves consumer welfare. (D)</p> Signup and view all the answers

What significant actions did Bolivia take regarding foreign direct investment under President Evo Morales?

<p>Evicted foreign firms unless they paid 80% of their revenues (D)</p> Signup and view all the answers

What was a notable change in China's export value from 1985 to 2018 attributed to FDI?

<p>Exports increased dramatically to over $2 trillion. (D)</p> Signup and view all the answers

Which term best describes governments that assess the costs and benefits of FDI?

<p>Pragmatic nationalists (B)</p> Signup and view all the answers

What typically stimulates firms to invest more in capital and R&D in a competitive market resulting from FDI?

<p>Increased competition requiring firms to improve their offerings. (C)</p> Signup and view all the answers

What was a notable reaction in the U.S. to the proposed takeover of Unocal by a Chinese company?

<p>There was a highly negative reaction in Congress (A)</p> Signup and view all the answers

What did the governments of Venezuela and Bolivia do regarding contracts with foreign enterprises in 2005 and 2006?

<p>Unilaterally rewrote contracts to increase royalty rates (D)</p> Signup and view all the answers

Which of the following correctly describes a government preference regarding current account balances?

<p>Governments typically favor current account surpluses. (B)</p> Signup and view all the answers

What was a major consequence of the hostile political reaction in Europe in 2006?

<p>The takeover of Arcelor by Mittal Steel was blocked (A)</p> Signup and view all the answers

What is a characteristic of the treatment of FDI in many developed nations?

<p>Increasing evidence of hostile reactions to inward FDI (D)</p> Signup and view all the answers

What has been a significant trend in the volume of foreign direct investment globally?

<p>Surging and outpacing world trade growth (D)</p> Signup and view all the answers

Flashcards

Foreign Direct Investment (FDI)

Investment made by a company in one country in business interests in another country.

Outward FDI

Investment by a country’s firms in foreign countries, typically for business expansion.

Greenfield Investment

Establishing a new operation in a foreign country from scratch.

Mergers and Acquisitions

Combining with or purchasing existing companies in foreign nations.

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Chinese Outward Investment

Increased investment by Chinese firms in foreign countries, particularly in raw materials.

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Investment in Developing Nations

Investment flows into developing countries often have fewer mergers and acquisitions.

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US-China Investment Trend

Chinese investment in the US fell dramatically during trade conflicts.

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FDI Inflows

Capital flowing into a country from foreign investors, critical for economic growth.

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Guanxi

Crucial relationship networks in Chinese business culture.

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Special Economic Zones

Regions in China with favorable tax and business regulations.

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Chinese Multinationals

Chinese companies investing abroad to expand their markets.

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Labor Costs

Expenses associated with hiring workers, which are rising in China.

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Trading Nations

Countries with a long history of exporting and importing goods.

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Outward Investment

Investing abroad to expand business operations and assets.

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$12 billion in 2005

Amount invested by Chinese firms internationally in 2005.

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Strategic Assets

Valuable resources like brand loyalty and customer relationships that firms aim to acquire.

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Efficiency Increase

Improving operations of an acquired firm through better resources or skills.

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Theories of FDI

Frameworks explaining why firms choose direct investment over alternatives like exporting and licensing.

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Market Evolution

The rapid changes in markets that influence investment decisions.

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Acquisition Risks

Potential losses or failures in realizing gains post-merger or acquisition.

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Eclectic Paradigm

A theoretical perspective that combines elements from multiple theories to explain foreign direct investment.

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Exporting

The process of producing goods at home and selling them in foreign markets.

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Licensing

Granting a foreign entity the right to produce and sell a firm's product for royalties.

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Limitations of Exporting

Challenges such as transportation costs and trade barriers that restrict exporting.

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Cost of FDI

The expenses associated with establishing or acquiring production facilities abroad.

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Risks of FDI

Challenges faced by foreign firms in a different culture, leading to costly mistakes.

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Preferences for FDI

Reasons why firms choose FDI over exporting or licensing despite higher costs and risks.

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Current Account Deficit

The scenario when a country spends more on foreign trade than it earns.

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Substituting Imports

FDI that allows local production to replace imported goods or services.

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Export-led Growth

Economic growth driven by increasing exports, often supported by foreign investments.

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Market Competition

The presence of multiple firms leading to better prices and services for consumers.

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Economic Welfare

The overall economic well-being of individuals in a society, often improved by competition.

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Multinational Enterprises (MNEs)

Companies that operate in multiple countries, often facilitating international trade.

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Surge in FDI

Rapid increase in Foreign Direct Investment globally.

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FDI Liberalization

Relaxation of restrictions on foreign direct investment in a country.

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Hostile FDI Approach

Negative government response to foreign direct investment.

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Evo Morales' Nationalization

Bolivian president's action to take control of gas fields.

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Political Reaction to Takeovers

Government opposition to foreign company acquisitions.

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Pragmatic Nationalists

Governments weighing costs and benefits of FDI projects.

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Benefits of FDI

Positive economic impacts from foreign investments.

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Study Notes

Foreign Direct Investment (FDI) in China

  • Many foreign firms find a substantial presence in China necessary for building guanxi (relationship networks).
  • Cheaper labor and tax incentives, especially in special economic zones, make China attractive for exporting to Asian and global markets.
  • China's outward investment surged after 2010.
  • Chinese firms invested $12 billion internationally in 2005, increasing to $133 billion in 2020.
  • Hong Kong-based firms contributed another $53 billion in 2019 and $102 billion in 2020.
  • Investments often target extractive industries in developing nations, like African countries, to gain access to raw materials.
  • There's a growing trend of Chinese firms investing in developed nations, notably the US.
  • US investments by Chinese firms were around $46 billion in 2016 and $30 billion in 2017, but declined significantly to approximately $5 billion in 2018 and 2019 due to trade conflicts.

Forms of FDI

  • FDI takes two forms:
    • Greenfield investment: establishing a new operation in a foreign country.
    • Mergers and acquisitions (M&As): acquiring or merging with an existing firm in a foreign country.
  • M&As comprise a majority of FDI inflows (40-80% between 1998 and 2020), with a lower percentage in developing countries (less than one-third).
  • Factors influencing firms' preference for M&A over greenfield investment include speed of execution, acquisition of valuable assets (brand loyalty, customer relationships), and potential efficiency gains from transferring capital, technology, and management skills.
  • However, M&As often fall short of anticipated gains.

Theories of FDI

  • FDI theories explain why firms choose FDI over exporting or licensing.
  • Exporting limitations often occur due to transportation costs and trade barriers.
  • FDI has experienced a surge globally, surpassing the growth rate of world trade.
  • FDI has increased in countries with liberalized FDI regimes.
  • Some countries exhibit hostility towards FDI, such as Venezuela and Bolivia, which have renegotiated contracts with foreign firms.

Benefits and Costs of FDI

  • Governments often consider the benefits and costs of FDI (pragmatic nationalism).
  • FDI can substitute for imports, improving a host country's current account balance of payments.
  • FDI can help export-led economic growth in developing and developed countries. This was evident in the growth of Chinese exports from $26 billion in 1985 to over $2 trillion in 2018.
  • Greenfield investments increase market competition, lowering prices and boosting consumer welfare.
  • Increased competition stimulates capital investment (plant, equipment, R&D).

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