Foreign Investment Foreign Direct Investment FDI Foreign Indirect

Foreign Investment • Foreign Direct Investment (FDI) • Foreign Indirect Investment

Direct Investment Patterns Location of ownership • For worldwide FDI Location of investment • Most FDI occurs in developed countries (Why ? ? ) Economic sector of investment

Reasons for the Growth of FDI • Globalization • Mergers and acquisitions • Entrepreneurs and small businesses

Theories of Foreign Direct Investment International Product Life Cycle Eclectic Paradigm Market Power Market Imperfections

International Product Life Cycle – Stating that a company will begin by exporting its product and later undertake foreign direct investment as a product moves through its life cycle.

International Product Life Cycle Model production High Income Countries consumption Q u a n ti t y 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Medium Income Countries 1 2 3 4 5 6 7 8 Low Income Countries 1 2 3 4 New Product 5 6 7 8 Maturing Product Stages of Product Life Cycle Standardized Product Time

Market Imperfections (Internalization) – When an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection.

Eclectic Theory – Stating that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment.

Market Power Theory – A firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. • Vertical integration – extension of company activities into stages of production that provide a firm’s inputs (backward integration) or absorb its output (forward integration).

Motivation for FDI as an Alternative or Supplement to Trade SALES EXPANSION OBJECTIVES • Overcome high transport costs • Domestic capacity • Gains from scale economies • Trade restrictions • Barriers because of country- of-origin effects (nationalism, product image, delivery risk) • Lower productions costs abroad

Motivation for FDI as an Alternative or Supplement to Trade (cont. ) RESOURCE ACQUISITION OBJECTIVES • Savings through vertical integration • Savings through rationalized production • Gain access to cheaper or different resources and knowledge • Need to lower costs as product matures • Gain governmental investment incentives

Motivation for FDI as an Alternative or Supplement to Trade (cont. ) RISK MINIMIZATION OBJECTIVES • Diversification of customer base (same motivation as for sales expansion) • Diversification of supplier base (same motivation as for resource acquisition objectives • Following customers • Preventing competitors’ advantage

Motivation for FDI as an Alternative or Supplement to Trade (cont. ) POLITICAL OBJECTIVES • Influence companies, usually through factors under resource acquisition objectives

Reasons for Host. Country Interventions Controlling the Balance of Payments Obtaining Resources and Benefits

Reasons for Home-Country Interventions

Government Policy and FDI Methods of Restricting FDI • Ownership Restrictions Host Countries • Performance Demands Methods of Promoting FDI • Tax Incentives • Low-Interest Loans • Improve Infrastructure • Insurance Home • Differential Tax Rates Countries • Sanctions • Loans • Tax Breaks • Political Pressure