Investing Abroad Directly PDF

CHAPTER 6: Investing Abroad Directly Wade C. Roberts, Ph.D. C211 GLOBAL BUSINESS INTRODUCTION… Course Mentor: Wade Roberts Education: PhD in Economics – University of Utah Expert Fields: Development, Labor, Public...

CHAPTER 6: Investing Abroad Directly Wade C. Roberts, Ph.D. C211 GLOBAL BUSINESS INTRODUCTION… Course Mentor: Wade Roberts Education: PhD in Economics – University of Utah Expert Fields: Development, Labor, Public, Health, Gender Current Research (Cambodia): Microfinance, Poverty, Inequality, Socioeconomics LEARNING OBJECTIVES After studying this chapter, you should be able to: 6-1 Use the resource-based and institution-based views to answer why foreign direct investment (FDI) takes place. 6-2 Understand how FDI results in ownership, location, and internalization (OLI) advantages. 6-3 Identify different political views on FDI based on an understanding of its benefits and costs to host and home countries. 6-4 Participate in two leading debates concerning FDI. 6-5 Draw implications for action. FDI VOCABULARY Foreign direct investment (FDI) Putting money in 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, such as stocks and bonds, of companies in countries outside one’s own but does not entail the active management of foreign assets Management control rights Authority to appoint key managers and establish control mechanisms HORIZONTAL AND VERTICAL FDI Horizontal FDI Producing the same products or offering the same 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 through FDI UPSTREAM AND DOWNSTREAM VERTICAL FDI Upstream vertical FDI Using FDI in an earlier activity in the value chain Downstream vertical FDI Using FDI in an later activity in the value chain FDI FLOW AND STOCK FDI flow Amount of FDI moving in a given period (usually a year) in a certain direction 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 WHY FIRMS BECOME MNEs BY ENGAGING IN FDI OLI advantages Quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages Ownership MNEs’ possession and leveraging of certain valuable, rare, hard-to- imitate, and organizationally embedded (VRIO) assets overseas QUESTION: Can you name some OLI advantages for a familiar firm? OLI ADVANTAGES Location Features unique to a place, such as its natural or labor resources or its location near particular markets, that provide certain advantages to firms doing business there Internalization Replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries OLI ADVANTAGES Licensing Selling technology or intellectual property for a fee Market imperfection (market failure) Imperfect rules governing international transactions FDI VS LICENSING Dissemination risk Possibility of unauthorized diffusion of firm-specific know-how LOCATION Agglomeration Clustering of economic activities in certain locations Knowledge spillover Diffusion of knowledge from one firm to others among closely located firms that attempt to hire individuals from competitors LOCATION Location advantages refer to the advantages one firm obtains when operating in a location due to its firm- specific capabilities Oligopoly An industry dominated by a small number of players OVERCOMING MARKET FAILURE THROUGH FDI Intrafirm trade Transactions occur between two subsidiaries in two countries controlled by the same MNE POLITICAL VIEWS ON FDI Radical view Treats FDI as an instrument of imperialism and a vehicle for exploiting domestic resources, industries, and people by foreign capitalists and firms Free market view Unrestricted by government Intervention FDI will enable countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services POLITICAL VIEWS ON FDI Pragmatic nationalism Considering both the pros and cons of FDI and approving FDI only when its benefits outweigh its costs QUESTION: What is your opinion of FDI? BENEFITS AND COSTS OF FDI TO HOST COUNTRIES Technology spillover Domestic diffusion of foreign technical knowledge and processes Demonstration effect Local rivals, after observing foreign technology, may recognize its feasibility and strive to imitate Contagion (imitation) effect Local rivals, after observing foreign technology, may recognize its feasibility and strive to imitate HOW MNEs AND HOST GOVERNMENTS BARGAIN Bargaining power Ability to extract favorable outcome from negotiations due to one party’s strengths HOW MNEs AND HOST GOVERNMENTS BARGAIN Obsolescing bargain Requirements of a deal previously struck between an MNE and a host government is changed after the initial FDI entry Expropriation Confiscating foreign assets Sunk cost Already invested sums SOVEREIGN WEALTH FUNDS Sovereign wealth fund (SWF) State-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets