Theories of FDI

Then main sections
1. Introduction
2. FDI in the world Economy
3. Theories of FDI
4. Political Ideology and FDI
5. Benefits and Cost of FDI
6. Govt Policy Instruments and FDI
FDI when a firm invests directly in a foreign
country leading to a multinational enterprise.
 Two forms of FDI:
1. Greenfield investment
2. Acquiring or merging with a firm in the
foreign country.
1. See Telephonica case study
Key concepts:
1. The Flow of FDI: the amount of the FDI
undertaken over a year.
2. The Stock of FDI: the total accumulated
value of foreign owned assets at a given
3. Outflows of FDI: the flow of FDI out of the
4. Inflows of FDI: the flow of FDI into a country
Trends in FDI
The direction of FDI
The source of FDI
The form of FDI
The shift to services
Outflow of FDI from $25 billion in 1975 to
1.4 trillion in 2000.
2007 = 1.8 trillion dollars
2008 = 1.4 trillion.
2011 = 1.66 trillion an increase by 16%
See figure 1.7.
The global stock of FDI exceeded $15 trillion
by 2007.
The direction from developed to developed
$232billion in 2008 inward investment to the
EU reached 604 billion in 2007.
UK and France 323 and 272 respectively.
FDI into developing nations has increased to
reach 27.4 billion. Don't forget the emerging
economies, China for example
China attracted 60 billion of FDI in 2004 to hit 92
billion in 2008.
Gross fixed capital formation is an important
indicator see figure 7.4
USA since WWll up to 2000
UK, France, Germany and Japan.
Acquisitions Vs Greenfield Investments.
 Acquisitions account for more than
Greenfields up to 40-90 percent
 Less in developing countries of about onethird is in the form of cross-border mergers
and acquisitions. There are fewer firms to
acquire in developing nations.
Maybe you have to start from scratchGreenfield investments
Why to acquire vs undertake greenfield
Services account for about more than 70% of the
 The shift to services is driven by many factors 1including the shift from goods to services.
2-Services can not be traded internationally
because of they are inseparable
3-Regime liberalization in services –
telecommunication and power
4- the internet based global telecommunications
networks has allowed some services to relocate
some of their value creation activities to different
nations- Proctor and Gample shifting its back
office accounting function to the Philippines.
Why FDI?
Maybe it is more risky and expensive.
Why not exporting and Licensing?
What are their limitations?
Limitations of exporting
 Transportation costs and trade barriers
Limitations of licensing
 The risk of giving away valuable technological
know how to a foreign potential competitor. Be
careful of losing your secret formula.
 Lost control over important functions like
manufacturing, marketing and strategy.
 The licensee might not be able to do it right
affecting the firm’s competitive advantage.
 Culture can not be licensed! Check Toyota
example page 242. culture is immitigable
The pattern of FDI or FDI pattern: firms in the
same industry for example tend to undertake
FDI at around the same time and towards
certain locations.
Theories that explain the pattern that we
observe in FDI flows:
1-Strategic behaviour:
One theory is based on the idea that FDI is
based on strategic rivalry between firms
1-Strategic behaviour:
One theory is based on the idea that FDI is
based on strategic rivalry between firms
 Example is the rivalry in oligopolistic
 An oligopoly: like 4 firms control 80% of
domestic market. Imitation is high in prices
and DFI
Using Multipoint competition: when two or
more companies encounter each other in
different regional markets, national markets,
or industries. Playing like chess, matching
each other moves in different markets to try
to get advantage one over the other.
The case of Kodak and Fuji
Burger King Following McDonald’s
The product life cycle is not very clear in
terms of why firms use FDI not other forms
like exporting or licensing! So shift to the
Eclectic Paradigm is a very interesting one:
 location-specific advantages for FDI
including resource endowments or assets
So it is:
Location specific assets + firm’s own
capabilities = FDI
Look at the example of Silicon Valley – good
example- on top of page 245.
 The location specific advantage in Silicon
Valley is KNOWLEDGE in computer and
semiconductor industries attracting computer
companies from all over the world to DFI
Also oil companies.
1- the Radical view against FDI lead by Marxist
political theory.
2- the Free Market View – Adam Smith and David
Ricardo views theories.
3- Pragmatic Nationalism – the case of Al-Hassan
City in Jordan.
Japan weights benefits against costs of FDI- IBM
and Texas instruments.
Nissan, Toyota, and Honda are now operating in
the UK by offering tax breaks and subsidies. The
shift now is from the radical approach to the free
market approach.
Host-country benefits
1. Resource-transfer Effects-like capital,
technology, and management resources and
training managers and job creation- THE
2. Balance of payments effects; avoiding trade
deficit. China exports reached $969 Billion
in 2006 due to the presence of foreign
multinationals that invested heavily in China
during the 1990.
Effects on competition and economic growth
This improves prices, quality and economic
prosperity, R&D., productivity.
Host-country costs:
1. Adverse effects on competition
2. Adverse effects on the balance of payments
3. National sovereignty and autonomy
Home country benefits: home country balance
of payments, employment and skill
Home country costs-balance of payments and
Home country policies
Host country policies
Encouraging outward FDI
Restricting outward FDI
The first one: encouraging outward FDI:
1- insurance
2- elimination of double taxation
Using political influence to relax restriction,
barriers and rules. The Case of toys “R” Us in
The second policy is restricting outward FDI
1- to limit capital outflows for protecting the
country balance of payments
2- to create jobs at home
3- for political reasons. Ex Iran.
Encouraging inward FDI
Tax concessions, low interest loans, and grants
France and UK compete for inward FDI from
Toyota in 1995.
 Restricting inward FDI
In ownership restraints and performance
requirements. For example Inward FDI in
Natural resources like water, cement and
potash and other minerals
National security issues
Ownership restraints is also based on a belief
that local owners can help to maximize the
resource transfer and employment benefits.
International institutions and FDI
Liberalization page 256.
You need to:
 Know the differences between Greenfield
investments Vs acquisitions.
 FDI keywords like flow of FDI...etc.
 View links related to FDI in these slides.
 Have a general knowledge about trends in
FDI, direction, and sources of FDI.
 The shift to services
 Know the theories of FDI including the
internalization theory, strategic behaviour,
multipoint competition.
More important is the eclectic paradigm In The political ideology page 245 look at the
 Benefits and cost of FDI – the main elements
only like 2-3 benefits and costs of each. and
 the same thing for govt policy instruments.
Case studies (opening and closing).
Good luck to you.

similar documents