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Questions and Answers
What does FDI stand for?
Foreign Direct Investment
What is the total accumulated value of foreign-owned assets at a given time called?
Stock of FDI
What are the outflows of FDI?
The flow of FDI out of a country
What is the flow of FDI into a country known as?
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What is Foreign Portfolio Investment?
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What is the main difference between FDI and portfolio investment?
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What is a multinational enterprise (MNE)?
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What characterizes manufacturing FDI?
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What is inward FDI?
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What is outward FDI?
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Give an example of service FDI.
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Study Notes
Foreign Direct Investment (FDI) Overview
- Stock of FDI represents the total accumulated value of foreign-owned assets at a specific point in time.
- Outflows of FDI indicate the funds invested by a home country into foreign countries.
- Inflows of FDI reflect investments made by foreign firms into the local country.
Importance of FDI
- FDI is crucial for integrating the global economy and expanding international business operations.
- Increased mobility of production factors makes FDI a key strategy for corporations.
- FDI involves acquiring ownership of overseas business entities to manage and control them.
Types of Investments
- Foreign portfolio investment involves acquiring financial instruments like stocks and bonds rather than real assets, typically involving lower risk and no direct management control.
- FDI targets real or physical assets, such as factories and facilities, ensuring effective management and control of foreign production operations.
Entry Strategies for International Markets
- Exporting is a lower-risk strategy for entering foreign markets but lacks management control over operations in the target country.
- FDI allows firms to gain direct access to local markets and leverage opportunities unavailable through mere exporting.
Types of FDI
- Inward FDI refers to foreign firms investing in and controlling domestic assets, exemplified by Coca-Cola's bottling facilities around the globe.
- Outward FDI occurs when domestic firms invest abroad to acquire control over foreign operations, like Citigroup's acquisition of Confia in Mexico.
- Foreign subsidiaries are units established due to FDI, facilitating foreign market penetration and local operational management.
FDI Classification
- Horizontal FDI involves investment in the same industry abroad to achieve market share, whereas vertical FDI pertains to investments along the supply chain, either backward or forward.
Conceptual Considerations
- Portfolio Theory addresses the behavior of investors managing large financial assets aiming for optimal risk-adjusted returns.
- Financial risk is identified as the variability in returns on an asset over time, highlighting the importance of strategy in investment decisions.
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Description
This quiz explores the key concepts of Foreign Direct Investment (FDI), including its importance and types. Learn about the differences between FDI and foreign portfolio investment, and understand the implications of FDI for global business integration. Test your knowledge on the accumulation and flow of foreign investments.
