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Final Exam Study Notes - Chapter 7-Foreign Direct Investment

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University of Toronto Mississauga

MGT491 FINAL EXAM NOTES Chapter 7: Foreign Direct Investment N Foreign direct investment (FDI) when a firm invests directly in facilities to produce or market a product in a foreign country N Ex. Occurs whenever a US citizen, organization, or affiliated group takes an interest of 10% or more in a foreign business entity. N Once a firm undertakes FDI, it becomes a multinational enterprise N 2 main forms of FDI: o Greenfield investment involves the establishment of a new operation in a foreign country o Acquiring or merging with an existing firm in the foreign country Acquisitions can be as a minority (where the foreign firm takes a 10%-49% interest in the firm), majority (foreign interest of 50%-99%) or full outright stake (foreign interest of 100%). Foreign Direct Investment in the World Economy N Flow of FDI refers to the amount of FDI undertaken over a given time period (usually a year) N Stock of FDI total accumulated value of foreign-owned assets at a given time N Outflows of FDI flow of FDI out of a country N Inflows of FDI flow of FDI into a country Trends in FDI N Past 30 years increase in flow and stock of FDI in the world economy N The flow of FDI has been accelerating faster than the world trade and world output o Despite the general decline in trade barriers over the past 30 years, business firms still fear protectionist pressures executives see FDI as a way of circumventing future trade barriers o Much of the recent increase in FDI is driven by the political and economic changes that are occurring in many 419K0Z47O80;0O45L3J3,9L438 general shift toward democratic political institutions and free market economies has encouraged FDI o Asia, Eastern Europe, Latin America economic growth, economic deregulation, privatization programs open to foreign investors, and removal of many restrictions have made these countries more attractive to foreign multinationals Since 2002 Latin America has had less favorable regulations that make FDI less welcome o General desire of governments to facilitate FDI has also been reflected in the increase in number of bilateral investment treaties designed to protect and promote investment between two countries o Globalization of the world economy also having a positive impact on the volume of FDI - the whole world is now the fL7282,7N09,384:3079,N0,942,N08:709K0K,;0,8LJ3L1L.,39570803.0L32,370JL438 of the world o Many firms also believe it is important to have production facilities based close to their major customers, creates pressure for greater FDI The Direction of FDI N Historically most FDI has been directed at the developed nations as firms based in advanced countries invested in 0,.K49K0782,7N098 N US has been an attractive target for FDI because of its large and wealthy domestic markets, dynamic and stable economy, favorable political environment, openness of the country to FDI N Developed nations of the European Union are also recipients of significant FDI inflows N FDI into developing nations has increased much of this accounted for by growing importance of China as a recipient of FDI (see p. 245) N Latin America is the next most important region in the developing world for FDI inflows o Mexico and Brazil historically the two top recipients of inward FDI in Latin America o Africa usually has the smallest amount of inward investment its inability to attract greater investment is in part a reflection of the political unrest, armed conflict, and frequent changes to economic policy of the region N Another way to look at importance of FDI inflows is to express them as a percentage of gross fixed capital formation N Gross Fixed Capital Formation summarizes the total amount of capital invested in factories, stores, office buildings, etc. the greater the capital investment in an economy, the more favorable its future growth prospects are likely to be. In this way, FDI can be seen as an important source of capital investment and determinant of the future growth rate of an economy. N L110703.08L3,110.994,3,9L4380.434209. .,3-00[5O,L30-0.,:80411,.947s including perceived ease and attractiveness of investing in a nation. o Ex. Japan and india restrict opportunities for foreign investment in their countries, and they may be hurting themselves by limiting their access to needed capital investments The Source of FDI N US has been largest source country for FDI since WW2 N Other important source countries incl. UK, France, Germany, Netherlands, Japan
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