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Chapter 7

ADM 3318 - Chapter 7 Notes - Foreign Direct Investment.docx

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University of Ottawa

ADM 3318International BusinessDecember 3 2012Chapter 7 Foreign Direct InvestmentIntroductionForeign Direct Investment FDI Occurs when a firm invests directly in facilities to produce or market a product in a foreign countryoMultinational Enterprise MNEs A firm that undertakes FDIoGross Fixed Capital Formation The summary of the total amount of capital invested in factories stores offices and the likeTwo main forms1Greenfield Investment Establishing a new operation in a foreign country2Acquiring or merging with an existing firm in the foreign countryFDI in the World EconomyFlow of FDI the amount of FDI undertaken over a given time period normally a yearStock of FDI The total accumulated value of foreignowned assets at a given timeTrends in FDI FDI has grown more rapidly than world trade and world output for several reasons1Firms fear protectionist pressures despite the decline in trade barriers over the last 30 yearsoFirms see FDI as a way of circumventing future trade barriers2Recent increases in FDI are being fueled by the political and economic changes that have been occurring in the worlds developing nationsoThe shift toward democracy and free market economies are fueling FDI3Globalization of the world economy Firms see the whole world as their market4Creation of a more FDIfriendly global environment trade agreements and treatiesChina and FDI In late 1978 Chinas leadership decided to move the economy away from a centrally planned socialist system to one that was more market driven The result has been three decades of sustained how economic growth rates and a exponential increase in FDI inflows1With a population of 1 billion people China represents the largest market in the world oImport tariffs have made it difficult to serve this market via exports so FDI was required if a company wanted to tap into the countrys huge potential2In order to attract more FDI the Chinese government has committed itself to invest more than 800 billion in infrastructure projects over 10 years oBy doing so they will be giving firms more incentives to invest in ChinaProblems China although developing is still a poor nation Most people cannot afford western consumer goodsoPoor infrastructure and a highly regulated environment both of which make conducting business problematicThe Source of FDI Since WWII the US has been the largest source country for FDI Other important sources include UK France Germany the Netherlands and JapanForm of FDIMA vs Greenfield Investments Why do firms prefer MAs over Greenfield investments1MAs are quicker to execute2Foreign firms are acquired because they have valuable strategic assets3The acquiring firms believe they can increased the efficiency of the acquired unit by transferring capital technology or management skills
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