IB 150 Lecture Notes - Lecture 12: Westphalian Sovereignty, Market Failure, Franchising

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IB 150 – Lecture 12
Foreign Direct Investment
What is Foreign Direct Investment (FDI)?
Foreign direct investment occurs whenever a firm establishes a controlling interest in a
business entity based in another country by acquiring ownership of more than 50% of the
entity’s entire stock
Practically, the U.S. Department of Commerce deems an investment FDI whenever a
U.S. citizen, organization, or affiliated group takes an interest of 10% or more in a foreign
entity
Foreign Direct Investment in the World Economy
The flow of FDI refers to the amount of FDI undertaken over a given time period
The stock of FDI refers to the total accumulated value of foreign owned assets at a given
time
The outflows of FDI refer to the flow of FDI out of a country
The inflows of FDI refers to the flow of FDI into a country
Largest Foreign Investors in US
The Direction of FDI
Historically, most FDI has been directed at the developed nations of the world as firms
based in advanced countries invested in other markets
The US has been the favorite target for FDI inflows
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While developed nations still account for the largest share of FDI inflows, FDI into
developing nations has increased
Most recent inflows into developing nations have been targeted at the emerging
economies
Characteristics of FDI
Involves ownership of entity abroad for
Production
Marketing/service
R&D
Raw materials or other resource access
Parent has direct managerial control
The degree of direct managerial control depends on the extent of ownership of
the foreign entity and on other contractual terms of the FDI
No managerial involvement is known as portfolio investment
The Shift to Services
The shift to services is being driven by four factors
Reflects the general move in many developed economies away from
manufacturing and toward service industries
Many services cannot be traded internationally
Many countries have liberalized their regimes governing FDI in services
The rise of Internet-based global telecommunications networks has allowed
some service enterprises to relocate some of their value creation activities to different
nations to take advantage of favorable factor costs
In the past two decades, the sector composition of FDI has shifted sharply away from
extractive industries and manufacturing and toward services. In 1990, some 47 percent of
outward FDI stock was in service industries; by 2003 this figure had increased to 67 percent.
Similar trends can be seen in the composition of cross-border mergers and acquisitions, in
which services are playing a much larger role.
The Concerns about Control
Investor Concern
Investors who control an organization
Are more willing to transfer technology and other competitive assets
Usually use cheaper and faster means of transferring assets
Governmental Concern
When foreign investors control a company, decisions of national importance may
be made abroad
FDI Growth in the World Economy: Some Facts
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