Global Business Management
(MGT380)
Lecture #9: Foreign Direct
Investment
Learning Objectives
Understand the patterns of FDI
 Understand the political ideology and FDI.
 Costs and benefits of FDI
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Summary of the lecture

Foreign direct investment (FDI) occurs when a firm invests
directly in new facilities to produce and/or market in a foreign
country
the firm becomes a multinational enterprise
FDI can be in the form of: greenfield investments - the establishment
of a wholly new operation in a foreign country: acquisitions or mergers with
existing firms in the foreign country
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The flow of FDI refers to the amount of FDI undertaken over a
given time period
The stock of FDI refers to the total accumulated value of
foreign-owned assets at a given time
Gross fixed capital formation - the total amount of capital
invested in factories, stores, office buildings, and the like
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FDI has grown more rapidly than world trade and world output
 firms still fear the threat of protectionism
 democratic political institutions and free market economies have
encouraged FDI
 globalization is forcing firms to maintain a presence around the world
There are several reasons for this pattern.
1) Firms are worried about protectionist measures, and see FDI as a way of
getting around trade barriers. 2) Changes in the economic and political
policies of many countries have opened new markets to investment.
Think, for example of the changes in Eastern Europe that have made it
possible for foreign firms to expand there. 3)Third, many firms see the
world as their market now, and so are expanding wherever they feel it
makes sense. Spain’s Telefonica is pursuing opportunities in Latin
America and in Europe. 4) Many manufacturers are expanding into
foreign countries to take advantage of lower cost labor, or to be closer
to customers, and so on. China has become a hot spot for firms that are
attracted to the country’s low wage rates, and large market.
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Firms prefer to acquire existing assets because
 mergers and acquisitions are quicker to execute than greenfield
investments
 it is easier and perhaps less risky for a firm to acquire desired assets
than build them from the ground up
 firms believe that they can increase the efficiency of an acquired unit by
transferring capital, technology, or management skills
Export/ License vs. FDI
Internalization theory suggests that licensing has three major
drawbacks compared to FDI i) firm could give away valuable technological
know-how to a potential foreign competitor. RCA (US firm) licensed its colortechnology to Japanese firms to Sony. (ii) does not give a firm the control over
manufacturing, marketing, and strategy in the foreign country (iii) the firm’s
competitive advantage may be based on its management, marketing, and
manufacturing capabilities. Toyota competitive advantages (management &
process capabilities) embedded in its culture
What Is The Pattern Of FDI?
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Why do firms in the same industry undertake FDI at about the
same time and the same locations?
Knickerbocker : Suggests that firms follow their domestic
competitors overseas. FDI flows are a reflection of strategic
rivalry between firms in the global marketplace
 More pertinent in Oligopolistic market. Firms A, B & C
 multipoint competition -when two or more enterprises
encounter each other in different regional markets, national
markets, or industries
 For example: Toyota and Nissan responded to investment of
Honda; Electrolux did in response of G.E and Whirlpool
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Vernon - firms undertake FDI at particular stages in the life
cycle of a product
Xerox initially build capacity in US and exported, later build
its production facilities in Europe and Japan.
This theory is did well to explain
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When demand of country support the production and shift
production to low-cost markets when competition is high
It fails to explain
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Why firm do FDI when export/license is profitable (because of
economies of scale)
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But, why is it profitable for firms to undertake FDI rather than
continuing to export from home base, or licensing a foreign
firm?
According to Dunning’s eclectic paradigm- it is important to
consider
 location-specific advantages - that arise from using
resource endowments or assets that are tied to a particular
location and that a firm finds valuable to combine with its
own unique assets. Electrolux in China,
 externalities - knowledge spillovers that occur when
companies in the same industry locate in the same area.
Firms willing to take advantage of low-cost labor/natural
resources/ technology they go accordingly. Silicon Valley in
CA.
What Are The Theoretical
Approaches To FDI?
How does a government’s attitude affect FDI?
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You can think of ideology toward FDI as being on a continuum where at one
end is the radical view that’s hostile to all FDI, and at the other end is the
noninterventionist principle of free market economies. In between these two
extremes is pragmatic nationalism.
Radical view (traces its roots to Marxist political and economic theory).
This perspective argues that the MNE is an instrument of imperialist
domination and a means of exploiting host countries for the benefit of their
capitalist-imperialist home countries.
In other words, MNE will fill all important jobs with home country citizens,
and so control key technology leaving the host nation dependent on the
capitalist country for investment, jobs, and technology.
Socialist and Nationalists
Since, then the radical stance has been in retreat as (i)collapse of USSR, (ii)
people see that the countries that embraced capitalism rather than the
radical ideology have been far more successful economically.
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Free market perspective which argues that international production should
be distributed among countries according to the theory of comparative
advantage. So, of course it traces its roots to Adam Smith and David
Ricardo.
This perspective suggests that countries specialize in the production of the
goods they can produce most efficiently and trade for everything else. It
then follows, that FDI will actually increase the overall efficiency of the
global economy.
So, if Ford moves the assembly of some of its cars to Mexico to take
advantage of cheaper labor costs, Ford is not only freeing up resources in
the U.S. which could then be used in activities in which the U.S. has a
comparative advantage, Ford’s also transferring technology, skills, and
capital to Mexico. Both countries gain!
While no country has fully adopted the pure free market stance, this
ideology has been embraced by many developed and developing nations
like the U.S., Hong Kong, and Chile. US airline 25%, US Television
broadcast network, national security.
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In the middle of the continuum is pragmatic nationalism which argues that
FDI has both benefits and costs.
Benefits include things like inflows of capital, technology, skills, and jobs,
while costs include the repatriation of profits and negative balance of
payments effects.
Pragmatic nationalism suggests that FDI should only be allowed if the
benefits outweigh the costs.
We’ve seen a shift toward the free market stance in recent years, and you
already know of course that along with that shift there’s been a surge in
FDI. Countries compete with each other to attract FDI. Britain attracted
Nissan, Toyota, Honda.
Keep in mind though, that FDI is still viewed with hostility in some countries
and in some situations. IBM and Texas Instrument went Japan- High-tec
As the Management Focus in your text outlines, the U.S. recently rejected an
effort by DP World to invest in U.S. ports.
Wal-Mart’s FDI
Discussion questions:
 What are the competitive advantages of Wal-Mart
 To what extent their strategy of FDI was successful?
Review questions
The establishment of a wholly new operation
in a foreign country is called
A) an acquisition
B) a merger
C) a greenfield investment
D) a multinational venture
The amount of FDI undertaken over a given
time period is known as
A) the flow of FDI
B) the stock of FDI
C) FDI outflow
D) FDI inflow
Most FDI is direct toward
a) developed countries
b) emerging economies
c) the United States
d) China
Advantages that arise from using resource
endowments or assets that are tied to a particular
location and that a firm finds valuable to combine
with its own unique assets are
a) First mover advantages
b) Location advantages
c) Externalities
d) Proprietary advantages
Benefits of FDI include all of the following
except
a) The resource transfer effect
b) The employment effect
c) The balance of payments effect
d) National sovereignty and autonomy
Summary of the lecture



Why do firms in the same industry undertake FDI at about the
same time and the same locations?
Knickerbocker : Suggests that firms follow their domestic
competitors overseas. FDI flows are a reflection of strategic
rivalry between firms in the global marketplace; More
pertinent in Oligopolistic market. For example: Toyota and
Nissan responded to investment of Honda; Electrolux did in
response of G.E and Whirlpool.
Vernon - firms undertake FDI at particular stages in the life
cycle of a product; Xerox; This theory is did well to explain


When demand of country support the production and shift
production to low-cost markets when competition is high
It fails to explain that why firm do FDI when export/license is
profitable (because of economies of scale)



According to Dunning’s eclectic paradigm- it is important to
consider: location-specific advantages - that arise from using
resource endowments or assets that are tied to a particular
location and that a firm finds valuable to combine with its own
unique assets. Electrolux in China, externalities - knowledge
spillovers that occur when companies in the same industry
locate in the same area. Firms willing to take advantage of
low-cost labor/natural resources/ technology they go
accordingly. Silicon Valley in CA.
How does a government’s attitude affect FDI?
1. Radical view (traces its roots to Marxist political and
economic theory). This perspective argues that the MNE is an
instrument of imperialist domination and a means of exploiting
host countries for the benefit of their capitalist-imperialist home
countries. Socialists and Nationalists , world is changing


Free market perspective which argues that international
production should be distributed among countries according to
the theory of comparative advantage. This perspective
suggests that countries specialize in the production of the
goods they can produce most efficiently and trade for
everything else. It then follows, that FDI will actually increase
the overall efficiency of the global economy. Not fully
embraced.
In the middle of the continuum is pragmatic nationalism which
argues that FDI has both benefits and costs. Benefits include
things like inflows of capital, technology, skills, and jobs, while
costs include the repatriation of profits and negative balance
of payments effects. Pragmatic nationalism suggests that FDI
should only be allowed if the benefits outweigh the costs.