International Business – Chapter 8 – Foreign Direct Investment
FDI in the world economy
- the flow of FDI: the amount of FDI undertaken over a given time period (a
- The stock of FDI: the total accumulated value of foreign-owned assets at a
Trends in FDI
- has increased since the past 30 years.
- Firstly, firms still fear protectionist pressures.
- Secondly, in crease in FDI has been driven by the political and economic
changes that have been occurring in many of the world’s developing nations.
General shift toward democratic political institutions and free market
economies has encouraged FDI. Programs are open to foreign investors, and
removal of many restrictions on FDI. The globalization of the world economy
impacts the volume of FDI.
The direction of FDI
- has been directed at the developed nations because of its large and wealthy
domestic markets, dynamic and stable economy, a favourable political
environment and openness of the country to FDI.
- FDI into developing nations has increased. Recent inflows into developing
nations have been targeted at the emerging economies of South, East and
- Gross fixed capital formation summarizes the total amount of capital
invested in factories, stores, office buildings, and the like. The greater the
capital investment in an economy, the more favourable its future growth
prospects are likely to be.
The source of FDI – largest source country is the U.S.
The form of FDI: Acquisitions versus Greenfield investments
- majority is in the form of mergers and acquisition.
- FDI flows into developed nations differ markedly from those into developing
- Why acquire existing assets rather than undertake Greenfield investment?
Firstly, mergers and acquisitions are quicker to execute. Secondly, foreign
firms have valuable strategic assets. Thirdly, firms believe they can increase
the efficiency of the acquired unit by transferring capital, tech, or
management skills. Why FDI?
- FDI is expensive because a firm must bear the costs of establishing
production facilities in a foreign country or of acquiring a foreign enterprise.
It is risky because of the problems associated.
- Limitations of exporting: transportation costs, trade barriers.
- Limitations of licensing: internationalize theory explains why firms prefer
FDI over licensing due to three drawbacks. 1) a firm giving away its valuable
resources. 2) does not give a firm tight control over its operation. 3) the
firm’s competitive advantage is based not as much on its products as on the
management, marketing, and manufacturing capabilities.
- Advantages of FDI: entry strategy, maintain control over its tech. know-how,
its operations and business strategy.
The pattern of FDI
Strategic behaviour – a reflection of strategic rivalry between firms in the global
marketplace. Oligopoly is an industry composed of a limited number of large firms.
What one firm does can have an immediate impact on the major competitors,
forcing a response in kind? Imitative behaviour can take many forms
(Knickerbocker’s theory). Multipoint competition arises when two or more
enterprises encounter each other in different regional markets, national markets, or
The PLC theory – same firms undertake FDI to produce a product for consumption
in foreign markets. However, fails to explain why it is profitable for a firm to
undertake FDI at such times.