Lecture 7-2: Foreign Direct
Investments (2)
(Chapter 8)
February 25, 2025
February 27, 2025
February 28,2025
Recap
Trade versus FDI
In International Market
Theories
• Monopolistic Advantage and Market Power
• Liability of Foreignness
• Knowledge-based theories of the Firm
• Incremental Internationalization
• Eclectic (aka OLI) Paradigm
Lecture
Learning Objectives
• Understand the Motivations of foreign direct
investment.
• Understand the benefits and costs of FDI to
home and host countries.
Motivation of FDI?
• Exploitation (asset-exploitation)
• “….. firms should possess certain types of proprietary
resources to exploit in the host country” (Makino et al.,
2002: 405)
• Exploration (asset-seeking)
• “Recent studies have recognized that firms invest in
foreign countries not only to exploit but also to develop
their firm specific advantages or acquire necessary
strategic assets in a host country” (Makino et al., 2002:
406)
Motivation of FDI (Dunning 2000)
Dunning, J. H. 2000. The Eclectic Paradigm as an Envelope for
Economic and Business Theories of MNE Activity. International
Business Review 9(2): 163-190. 9
• Market Seeking: That designed to satisfy a particular
foreign market, or set of foreign markets
• Resource Seeking: That designed to gain access to
resources, e.g. minerals, agricultural products, unskilled
labor
• Efficiency seeking: That designed to promote a more
efficient division of labor or specialization of an existing
portfolio of foreign and domestic assets by MNEs
• Strategic asset seeking: That designed to protect or
augment the existing ownership-specific advantages of the
investing firms and/or to reduce those of their competitors
Dunning, J. H. 2000. The Eclectic Paradigm as an Envelope for
Economic and Business Theories of MNE Activity. International
Business Review 9(2): 163-190. 9
Strategic asset seeking
•
•
•
•
Supply related clusters based on asset augmenting
activities, local accumulation of knowledge, and
exchange of information and learning experiences
Mainly incentives to promote innovation-driven alliances
Invest in those countries which offer the greatest
opportunities accumulated for upgrading their existing
core competencies
To tap into learning and experience related assets and to
speed up the innovation process.
Amazon in India
What are Amazon’s motivation to invest in India?
• Benefits
• Costs
Smart choice for Amazon?
https://www.youtube.com/watch?v=aONna7ZgRTw
Benefits and Costs of FDI:
Home and Host Countries
Benefits and Costs of FDI
How does FDI Benefit the Host Country?
There are four main benefits of inward FDI for a host country
1. Resource transfer effects - FDI brings capital,
technology, and management resources
2. Employment effects – FDI can bring jobs
3. Balance of payments effects – FDI can help a country
to achieve a current account surplus
4. Effects on competition and economic growth –
greenfield investments increase the level of competition
in a market, driving down prices and improving the
welfare of consumers
•
Can lead to increased productivity growth, product and process
innovation, and greater economic growth
▪ An employee uses a robotic arm to fit a wheel onto a
Volkswagen A G Vento automobile on the production
line at the Volkswagen India Pvt. plant in Chakan,
Maharashtra, India.
What are the Costs of FDI to the Host
country?
Inward FDI has three main costs:
1. Adverse effects of FDI on competition within the host
nation
• subsidiaries of foreign MNEs may have greater economic power
than indigenous competitors because they may be part of a larger
international organization
2. Adverse effects on the balance of payments
• when a foreign subsidiary imports a substantial number of its
inputs from abroad, there is a debit on the current account of the
host country’s balance of payments
3. Perceived loss of national sovereignty and autonomy
• decisions that affect the host country will be made by a foreign
parent that has no real commitment to the host country, and over
which the host country’s government has no real control
https://www.ien.com/video/video/21980835/toyota
-overtakes-gm-as-top-us-automaker
How does FDI Benefit the Home Country?
The benefits of FDI for the home country include:
1. The effect on the capital account of the home country’s
balance of payments from the inward flow of foreign
earnings
2. The employment effects that arise from outward FDI
3. The gains from learning valuable skills from foreign
markets that can subsequently be transferred back to the
home country
What are the Costs of FDI to the Home
country?
1. The home country’s balance of payments can suffer
• from the initial capital outflow required to finance the FDI
• if the purpose of the FDI is to serve the home market from a low
cost labor location
• if the FDI is a substitute for direct exports
2. Employment may also be negatively affected if the FDI is
a substitute for domestic production
• But, international trade theory suggests that home country
concerns about the negative economic effects of offshore
production (FDI undertaken to serve the home market) may not
be valid
Wrap Up
Theories
• Monopolistic Advantage and Market Power
• Liability of Foreignness
• Knowledge-based theories of the Firm
• Incremental Internationalization
• Eclectic (aka OLI) Paradigm
• Exploitative versus Explorative FDI
Benefits and Costs of FDI
• Home Country
• Host Country
Next Week
Required Reading
• Case Study from Chapter 15: Vanguard in China
Suggested Readings
• Chapter 9 of textbook on Regional Economic
Integration
• Chapter 15 of textbook on Entry Modes
Questions?
Question
Toyota USA
• Japanese Car?
• American Car?
Source: The Economist (various issues)
Who is us?
• “So who is US? The answer is, the American work force, the American
people, but not particularly the American corporation.
• The implications of this new answer are clear: if we hope to revitalize
the competitive performance of the United States economy, we must
invest in people, not in nationally defined corporations.
• We must open our borders to investors from around the world rather
than favoring companies that may simply fly the U.S. flag.
• And government policies should promote human capital in this country
rather than assuming that American corporations will invest on "our"
behalf.
• The American corporation is simply no longer “us.” (Reich, 1990: 54)
Reich, R. B. 1990. Who Is Us? Harvard Business Review 68(1): 5364.
Who is them?
• “But "us" is not necessarily companies based in the United States.
"Them" is not foreign nations.
• Rather, us is the people – most prominently, the work force - of the
United States.
• And them is the growing cadre of global managers ― supranational
corporate players, whose allegiance is to enhanced worldwide
corporate performance, not to anyone nation's economic success…….
• In the global enterprise, the bonds between company and country –
between them and us - are rapidly eroding.” (Reich, 1991: 77)
Reich, R. B. 1990. Who Is Us? Harvard Business Review 68(1): 5364.