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Lecture 7

BUEC342 Lecture 7: Chapter 7

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Department
Business Economics
Course
BUEC342
Professor
Runjuan Liu
Semester
Winter

Description
Learning Ohjectives Recog trends regarding foreign direct investm (FDI) in the Explain the different theories of FDI 3. lUnd d h ideology shape tud d FD 4. Describe the benefit and costs of FDI to home and host countries. 5. Explain the range of policy instruments governments use to influence FDI that Definitions Foreign Direct Investment (FDD: The acquisition or construction of phys a firm from one (source) country in another (host) country r Multinational Enterprise MNE: Afirm that owns business operations in more than country Foreign Direct Investment in the world Eeonomy oasadds f FDI ref FD dertake time period year) stock of FDI refers to the tola aeeumulated value of foreign assets at a given time Outfl f FD to the fl f FDI OUTof a country This would mean Canadian companies buying property and/o etting up operations in another country Examp TD Bank in C da buying Co rp in the US. acquiring all of their branche mort hotel Infl ry, bought bu Sand. R f FD the fl FDI INTO When the CPR being buil da, the g d to the CP pany and this land the cPR b of which became famous Canadian landmarks like the Royal York Hotel in Toronto 6, F CP H old out for $3.8 billion to Saudi Prince Alwaleed bin Talal bin Abdulaziz Alsaud Therefore CP Hotels were now foreign owned In 2010 the Prince sold some shares and dropped to 35 per cent from58 p cent efe ship to be Forms of FDI: Acquisitions vs. Green Field FDI can take the form of. Acquisition of or a merger with, an existing the d Green Field Investment in m the destinati The majority of cross-border investment is in the form of mergers and ther than G Field In developed UNCTAD Many people talking about FDI quote information from UNCTAD CTAD, a United Nations entity, is the most aut tativcand reliable source of boul global FDI by try and by activity and its statisti d diagr coul ed eq y by the right and left World Investment Report Se 2016 Crisis The Direction of FDI ed at the developed nations of the world, with th ally, FDI has been d United St being a fa te targ FDI infl d high d for the U d State d also the European Union South, East, and South Asia, and parti y Chi Latin Am FD port rging World W the U.S. has been th try for FD Other important source countries the United Kingdom, the Neth ds, Fran rmany, and Japan these countries also predominate in rankings of the World' multinational The world's top 10o non-financial TNCs, ranked by foreign assets, 2012 Learning Ohjectives Recog trends regarding foreign direct investm (FDI) in the Explain the different theories of FDI 3. lUnd d h ideology shape tud d FD 4. Describe the benefit and costs of FDI to home and host countries. 5. Explain the range of policy instruments governments use to influence FDI that Definitions Foreign Direct Investment (FDD: The acquisition or construction of phys a firm from one (source) country in another (host) country r Multinational Enterprise MNE: Afirm that owns business operations in more than country Foreign Direct Investment in the world Eeonomy oasadds f FDI ref FD dertake time period year) stock of FDI refers to the tola aeeumulated value of foreign assets at a given time Outfl f FD to the fl f FDI OUTof a country This would mean Canadian companies buying property and/o etting up operations in another country Examp TD Bank in C da buying Co rp in the US. acquiring all of their branche mort hotel Infl ry, bought bu Sand. R f FD the fl FDI INTO When the CPR being buil da, the g d to the CP pany and this land the cPR b of which became famous Canadian landmarks like the Royal York Hotel in Toronto 6, F CP H old out for $3.8 billion to Saudi Prince Alwaleed bin Talal bin Abdulaziz Alsaud Therefore CP Hotels were now foreign owned In 2010 the Prince sold some shares and dropped to 35 per cent from58 p cent efe ship to be Forms of FDI: Acquisitions vs. Green Field FDI can take the form of. Acquisition of or a merger with, an existing the d Green Field Investment in m the destinati The majority of cross-border investment is in the form of mergers and ther than G Field In developed UNCTAD Many people talking about FDI quote information from UNCTAD CTAD, a United Nations entity, is the most aut tativcand reliable source of boul global FDI by try and by activity and its statisti d diagr coul ed eq y by the right and left World Investment Report Se 2016 Crisis The Direction of FDI ed at the developed nations of the world, with th ally, FDI has been d United St being a fa te targ FDI infl d high d for the U d State d also the European Union South, East, and South Asia, and parti y Chi Latin Am FD port rging World W the U.S. has been th try for FD Other important source countries the United Kingdom, the Neth ds, Fran rmany, and Japan these countries also predominate in rankings of the World' multinational The world's top 10o non-financial TNCs, ranked by foreign assets, 2012Figure FDI lows, by region, 2013-2015 Figure IA I FDI top 20 host economies. and 2015 2014 2015 United deeloping France teres eaiet states 2015 204 Figure 1.11. Global inward FDI stock, by sector, 2014 (Inalons of and per cano Gr KPH, $26 tn n assets God Utilities Elettricty, Eas and water) dian FDI Position dur financial RSS. where do Canadian invest? 2001 2003 2005 2007 2009 2011 2013 2015 Canadan direct anvestment abroad Foreign direct investment in Canada Net direct investment position Figure FDI lows, by region, 2013-2015 Figure IA I FDI top 20 host economies. and 2015 2014 2015 United deeloping France teres eaiet states 2015 204 Figure 1.11. Global inward FDI stock, by sector, 2014 (Inalons of and per cano Gr KPH, $26 tn n assets God Utilities Elettricty, Eas and water) dian FDI Position dur financial RSS. where do Canadian invest? 2001 2003 2005 2007 2009 2011 2013 2015 Canadan direct anvestment abroad Foreign direct investment in Canada Net direct investment positionnited Kingdom 703 fee trade agreement FDI in Canada Foreign direct investment Canada an Why Foreign Direct Investment ...when two alternatives are available? Exporting: producing good at home and then shipping them tothe receiving country for sale /Import Licensing: granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit that the foreign entity sell The question is an important one given that foreign direct investment can be both Ahame compared to exporting and licensing. Busines Lpunstable itical envionment national &ation FDI is expensive because a firm must bear the costs of establishing production facilities in a foreign country or of acquiring a foreign enterprise FDI is risky because of the problems associated with doing business in a different culture ere the rules of the game" may be very different. Because limitations of exporting and licensing are means for capitalizing on foreign market opportunities. RCA. Exporting ed by tran ternal theory explai trad often pref irect investment over ay result in a firm giving how to a counftie ological be produced 2.Li control over manufacturing marketing, and transport costs are norm y a very al landed hen the firm's competitive advantage electro rnuch on its products, as on personal computers, medical equipment that prod prod Advantages of Foreign Direct Investment A firm will favor FDI over exporting when transportation costs are high. trade b are high A firm will favor FDI over licensing when it wants control over its technological know-how it wants control over its operati and business trategy the firm's capabilities are not amenable to licensing Pattern of Foreign Direct Investment Strategic Behaviour oligopoly Multipoint competition The Product Life Cycl ectic Paradigm Location-specific advantage egic Behavior od faj: Wodak d ri Knickerbock d th ship be oligopolistic industries (industries composed of a limited number of large nited Kingdom 703 fee trade agreement FDI in Canada Foreign direct investment Canada an Why Foreign Direct Investment ...when two alternatives are available? Exporting: producing good at home and then shipping them tothe receiving country for sale /Import Licensing: granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit that the foreign entity sell The question is an important one given that foreign direct investment can be both Ahame compared to exporting and licensing. Busines Lpunstable itical envionment national &ation FDI is expensive because a firm must bear the costs of establishing production facilities in a foreign country or of acquiring a foreign enterprise FDI is risky because of the problems associated with doing business in a different culture ere the rules of the game" may be very different. Because limitations of exporting and licensing are means for capitalizing on foreign market opportunities. RCA. Exporting ed by tran ternal theory explai trad often pref irect investment over ay result in a firm giving how to a counftie ological be produced 2.Li control over manufacturing marketing, and transport costs are norm y a very al landed hen the firm's competitive advantage electro rnuch on its products, as on personal computers, medical equipment that prod prod Advantages of Foreign Direct Investment A firm will favor FDI over exporting when transportation costs are high. trade b are high A firm will favor FDI over licensing when it wants control over its technological know-how it wants control over its operati and business trategy the firm's capabilities are not amenable to licensing Pattern of Foreign Direct Investment Strategic Behaviour oligopoly Multipoint competition The Product Life Cycl ectic Paradigm Location-specific advantage egic Behavior od faj: Wodak d ri Knickerbock d th ship be oligopolistic industries (industries composed of a limited number of largeKnickerbocker-EDuflows are a reflection of strategi valry between firms in th global ketplace This theory can be extended to embrace the concept of multipoint competition (when two or more enterprises encounter each other in different regional markets, national markets, or industries) 2. The Product Life Cycle Old Vernon-firms undertake FDI at particular stages in the life cycle of a product they have pioneered firms invest in other advanced countries when local demand in tho grows larg gh to support local prod hift producti hen p ping standardization and market saturation giverise to price competition and cost pressures The Eclectic Paradigm Dunning's eclectie paradigm in addition to the various factors discussed earlier, two additional factors must be considered when explaining both the rationale for and the direction of foreign direct investment location-specific advantages that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with it own unique assets externalities- knowledge spill that occur when companies in the same industry ding with his ectic theory. g tried to fi John D gap ssed, th Already di dditi Dunning th ke FDI p d externali tion specific fa that come from using resources or ation specific advantages refer to the advant tag assets that are tied to a specific location or that a firm finds valuable to combine with its knowledge spi the same industry locate in the same So, firms that want to take advantage of low cost labor, ha to go to wh like oil h take ad d. F tag the kn dge b to take ad he oil d. F design and manufacture of computers and semiconductors have Silt Valley specific fact explai g's theory So, D DI fl The "Political Environment" and FDI: How Political Ideology e
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