COMMERCE 4SA3 Chapter Notes - Chapter 7: Double Taxation, Longrun, Greenfield Project
24 Jan 2019
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Chapter 7 – Foreign Direct Investment
In the U.S., once a firm takes 10% interest in foreign entity it becomes a ‘multinational
enterprise’. FDI can take 2 forms; greenfield investment (establishing new operation) or
acquiring/merging w. existing firm
FDI in the World Economy
- Transnational companies (TNCs) ranked south Asia and Latin America as very important
while EU and NA remain most important region for FDI by TNCs
- Over past 30 years, FDI has grown more quickly than growth in world trade and world
output, although FDI outflows fell 17% in 2012. Reason for this growth are 1) FDI is a
way of avoiding trade barriers 2)shift of many nations to democratic and free market
3)firms see world as market due to globalization
- U.S. was the largest source country for FDI since WW2, but now many of the top
prospective host countries are from the developing world (i.e. India, Indonesia, Brazil
and Thailand)
- Acquisitions/mergers are more common than greenfield investments because 1) quicker
to execute 2) acquire firms that have valuable strategic assets like brand loyalty
3)increase efficiency of acquired unit by transferring management, capital or technology
- Canada’s FDI outflows > FDI inflows. Until 2007, Canada was top exporter to U.S., but
now it’s China
Theories of Foreign Direct Investment
Why FDI?
- FDI is more costly and risky than exporting and licensing. Internalization theory tries to
show how transportation costs and trade barriers can make exporting less appealing
than FDI (ex. Wave of Japan auto companies in U.S. driven by protectionism threats
from the U.S.)
- Internalization theory also explains why firms prefer FDI over licensing; 1) a firm may
have valuable know-how that cannot be protected with licencing (i.e. RCA) 2) firm may
need tight controls in things like marketing or strategy to maximize market share and
earnings 3) a firm’s competitive advantage is not amenable to licensing (i.e. Toyota’s
culture of ‘lean manufacturing’)
Pattern of FDI
- Knickerbocker’s theory says that firms in oligopoly will show imitative behaviour; when
one firm goes international, the others will soon follow to ensure rival doesn’t gain a
competitive advantage
- Vernon’s product life cycle theory says that firms shift to FDI when demand in that
country will support local production and when cost and price pressures become
intense
- Electric paradigm argument by John Dunning says that there are location-specific
advantages that explain FDI. Firms mix their unique capabilities with the resources or
assets located in another part of the world
Ex. Oil companies going to where the oil is located. Silicon Valley where you can find the
knowledge with regard to design and manufacturing of computers and semiconductors
Political ideology and FDI
Document Summary
In the u. s. , once a firm takes 10% interest in foreign entity it becomes a multinational enterprise". Fdi can take 2 forms; greenfield investment (establishing new operation) or acquiring/merging w. existing firm. Transnational companies (tncs) ranked south asia and latin america as very important while eu and na remain most important region for fdi by tncs. Over past 30 years, fdi has grown more quickly than growth in world trade and world output, although fdi outflows fell 17% in 2012. Reason for this growth are 1) fdi is a way of avoiding trade barriers 2)shift of many nations to democratic and free market. 3)firms see world as market due to globalization. U. s. was the largest source country for fdi since ww2, but now many of the top prospective host countries are from the developing world (i. e. india, indonesia, brazil and thailand)
