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Questions and Answers
What is a primary reason companies engage in foreign direct investment (FDI) related to their clients?
What is a primary reason companies engage in foreign direct investment (FDI) related to their clients?
What is a potential concern for home countries regarding outbound foreign direct investment (FDI)?
What is a potential concern for home countries regarding outbound foreign direct investment (FDI)?
How do FDI decisions typically behave in industries with a few large firms?
How do FDI decisions typically behave in industries with a few large firms?
Which of the following is a motivation for host countries to intervene in foreign direct investment?
Which of the following is a motivation for host countries to intervene in foreign direct investment?
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Which of the following is NOT a promotion strategy used by host countries to encourage FDI?
Which of the following is NOT a promotion strategy used by host countries to encourage FDI?
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What restriction might host countries impose to control foreign direct investments?
What restriction might host countries impose to control foreign direct investments?
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Which of the following strategies is used by home countries to promote outbound FDI?
Which of the following strategies is used by home countries to promote outbound FDI?
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What is a method used by home countries to limit the effects of outbound FDI?
What is a method used by home countries to limit the effects of outbound FDI?
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Which component is NOT part of the eclectic theory framework for foreign direct investment?
Which component is NOT part of the eclectic theory framework for foreign direct investment?
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What is a potential drawback of complete ownership in foreign direct investment?
What is a potential drawback of complete ownership in foreign direct investment?
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What type of market imperfection can potentially scare off investors?
What type of market imperfection can potentially scare off investors?
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Why might a firm choose greenfield investment over a merger or acquisition?
Why might a firm choose greenfield investment over a merger or acquisition?
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What does rationalized production aim to achieve?
What does rationalized production aim to achieve?
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Which aspect is crucial for gaining customer knowledge through foreign direct investment?
Which aspect is crucial for gaining customer knowledge through foreign direct investment?
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What condition may lead multinational corporations to pursue cross-border alliances?
What condition may lead multinational corporations to pursue cross-border alliances?
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Which theory describes a company trying to establish dominant market presence through foreign direct investment?
Which theory describes a company trying to establish dominant market presence through foreign direct investment?
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What is the main characteristic of foreign direct investment (FDI)?
What is the main characteristic of foreign direct investment (FDI)?
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Which investment type involves constructing new facilities in another country?
Which investment type involves constructing new facilities in another country?
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In 2014, which type of countries attracted more foreign direct investment than developed nations for the first time?
In 2014, which type of countries attracted more foreign direct investment than developed nations for the first time?
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What does the international product life cycle theory indicate about a company's product?
What does the international product life cycle theory indicate about a company's product?
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Which of the following is a characteristic of portfolio investment?
Which of the following is a characteristic of portfolio investment?
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Historically, which nations have been the largest recipients of foreign direct investment?
Historically, which nations have been the largest recipients of foreign direct investment?
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What drives a company to undertake foreign direct investment due to market imperfections?
What drives a company to undertake foreign direct investment due to market imperfections?
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Which of the following is NOT a form of foreign direct investment?
Which of the following is NOT a form of foreign direct investment?
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Study Notes
Foreign Direct Investment
- Foreign direct investment (FDI) is the purchase of physical assets or a significant amount of ownership (stock) of a company in another country to gain managerial control.
- Portfolio investment does not include a degree of control in a company.
Forms of FDI
- Greenfield investment: Building new facilities or an entire subsidiary from scratch in another country.
- Merger or acquisition (M&A): Acquiring an existing company in another country to gain market access, boost global competitiveness, fill product line gaps, or reduce costs.
FDI Flows
- Developing countries have surpassed developed countries in attracting FDI, with China leading in 2020.
- Developed countries remain the primary source of FDI globally.
Theories of FDI
- International product life cycle: Companies initially export products and eventually undertake FDI as the product matures and becomes standardized.
- Market imperfections: Companies invest abroad to overcome market imperfections like trade barriers or specialized knowledge.
- Eclectic theory: FDI occurs when location advantages (e.g., skilled labor), ownership advantages (e.g., brand recognition), and internalization advantages (e.g., avoiding licensing costs) align at a particular location.
- Market power: Companies invest abroad to establish dominance in a market.
- Vertical integration: Companies expand into stages of production that provide inputs (backward integration) or absorb outputs (forward integration) to gain cost advantages or control over production processes.
Management Issues in FDI
- Control: Complete ownership does not guarantee control.
- Purchase-or-build decision: Mergers and acquisitions offer immediate operational capacity, while greenfield investments are suitable when existing facilities are lacking or costly to adapt.
- Production costs: Rationalized production, where components are made in locations with the lowest cost, is a strategy used by companies like Apple to minimize expenses.
- Customer knowledge: FDI can help companies gain valuable insights about local customers, leverage national quality reputations (e.g., German engineering), and follow existing customer bases.
- Following rivals: Companies often follow competitors into foreign markets to avoid being shut out of potentially lucrative opportunities.
Government Intervention in FDI
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Host country intervention:
- Control balance of payments.
- Acquire technology, skills, and employment.
- Protect national industries from foreign competition.
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Home country intervention:
- Influence balance of payments.
- Protect domestic jobs.
- Improve national competitiveness.
Government Policy Instruments for FDI
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Host country promotion:
- Financial incentives (tax breaks, low-interest loans).
- Infrastructure improvements (ports, roads, telecommunications).
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Host country restriction:
- Ownership restrictions (in cultural industries and companies crucial to national security).
- Performance demands (influencing company operations in the host nation).
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Home country promotion:
- Insurance, loans, tax breaks, political pressure.
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Home country restriction:
- Differential tax rates, sanctions.
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Description
This quiz explores key concepts related to Foreign Direct Investment (FDI), including its different forms like greenfield investment and mergers or acquisitions. Learn about the global dynamics of FDI flows, especially the shift towards developing countries. Understand the theories explaining FDI and their implications for international business.
