International Business Chapter 6

Chapter 6: Investing Abroad Directly

• Foreign Direct Investment (FDI): Putting money into activities that control and manage value-added activities in other countries.
• Multinational Enterprise (MNE): Firms that engage in FDI.
• Foreign Portfolio Investment (FPI): Holding securities (stocks and bonds) of companies in other countries, but without actively managing those assets.
• Management Control Rights: Authority to appoint key managers and establish control mechanisms.

Learning Objectives

• 6-1: Use resource-based and institution-based views to explain why FDI occurs.
• 6-2: Understand how FDI creates ownership, location, and internalization (OLI) advantages.
• 6-3: Identify different perspectives on FDI's benefits and costs for host and home countries.
• 6-4: Participate in key debates regarding FDI.
• 6-5: Draw implications for action regarding FDI.

FDI Vocabulary

• FDI flow: Amount of FDI moving in a certain direction (inbound or outbound) during a specific period (usually a year).
• 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.

Horizontal and Vertical FDI

• Horizontal FDI: Producing the same products or services in a host country as firms do at home.
• Vertical FDI: Firm moves upstream or downstream in different value chain stages in a host country.
  • Upstream FDI: FDI in an earlier activity in the value chain.
  • Downstream FDI: FDI in a later activity in the value chain.

Top 10 Economies Receiving FDI Inflows (2011) and Generating FDI Outflows (2011)

• Data presented for both inflows and outflows (billions of dollars)
• Note: Exact figures are not included in text.

Why Firms Become MNEs by Engaging in FDI: OLI Advantages

• OLI: A framework for understanding FDI—the quest for ownership, location, and internalization advantages.
  • Ownership advantages: MNEs' valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets in a foreign country.
  • Location advantages: Unique characteristics (natural resources, labor, and markets) of a particular location that are beneficial to a business.
  • Internalization advantages: Firms' replacing cross-border markets (such as exporting or importing) by operating directly in multiple countries.
    • Licensing: Selling technology or intellectual property for a fee.

OLI Advantages Detailed

• Location: Specific features of a place (natural resources, labor, or proximity to markets) that are beneficial to a business.
• Internalization: Replacing cross-border markets (e.g., exporting/importing) with direct operation by the MNE in different countries.
• Licensing Considerations: When licensing is less favorable than FDI

FDI vs. Licensing

• Dissemination risk: Potential for unauthorized diffusion of a company's proprietary knowledge through licensing, which is considered a downside of licensing from the company's point of view.

Location Advantages

• Agglomeration: Clustering of economic activities in certain locations.
• Knowledge spillover: Diffusion of knowledge among closely located firms.
• Oligopoly:Industry dominated by a small number of players.

Political Views on FDI

• Radical view: Views FDI as an instrument of imperialism and exploitation.
• Free market view: Believes that FDI increases specialization and creates advantages for both host and home countries.
• Pragmatic nationalism: The perspective that supports FDI only when the benefits outweigh the costs.

Effects of FDI on Home and Host Countries

• Table 6.1: A matrix showing benefits and costs of FDI to host and home countries (e.g., capital inflow/outflow, job creation/loss).

Benefits and Costs of FDI to Host Countries

• Technology spillover: Diffusion of foreign technical knowledge and processes in the host country.
• Demonstration effect: Local firms observing foreign technology and striving to imitate it.
• Contagion effect: Local rivals understanding the feasibility of adopting foreign technology.

Bargaining Power in FDI Negotiations

• Bargaining power: The ability to extract a favorable outcome from negotiations due to one party's strengths.
• Obsolescing bargain: When the initial agreement between an MNE and a host government changes after the FDI entry.
• Expropriation: Confiscating foreign assets.
• Sunk costs: Already invested funds

Sovereign Wealth Funds (SWFs)

• SWF: State-owned investment funds composed of financial assets.

Implications of FDI for Action

• Assess whether FDI is warranted over other options, such as outsourcing and licensing.
• Consider optimal locations in tandem with strategic goals.
• Understand the institutional parameters guiding FDI to enhance its legitimacy.

Explore Chapter 6 of International Business, focusing on Foreign Direct Investment (FDI) and its implications. Learn about multinational enterprises, portfolio investments, and the advantages of FDI from various perspectives. Engage in debates surrounding FDI's impact on host and home countries.