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Stage 1
Low incoming FDI, but foreign companies are beginning to
discover the advantages of the country
No outgoing FDI – no specific advantages owned by the
domestic firms
Stage 2
Growing incoming FDI do the advantages of the country -
especially the low labour costs
The standards of living are rising which is drawing more
foreign companies to the country
Still low outgoing FDI
Five Stage Theory - John Dunning
Stage 3
Still strong incoming FDI, but their nature is changing
due to the rising wages
The outgoing FDI are taking off as domestic companies
are getting stronger and develop their competitive
advantages
Stage 4
Strong outgoing FDI seeking advantages abroad (low
labour costs)
Five Stage Theory - John Dunning
Stage 5
Investment decisions are based on the strategies of
TNCs
The flows of outgoing and incoming FDI come into
equilibrium
Incoming and outgoing FDI in China between
2001-2004
70000
60000
50000
40000
30000 FDI inflow
FDI outflow
20000
10000
0
-10000
2001 2002 2003 2004
Incoming and outgoing FDI in South Korea between 2001-2004
8000
7000
6000
5000
4000 FDI inflow
FDI outflow
3000
2000
1000
0
2001 2002 2003 2004
Incoming and outgoing FDI in Japan between
2001-2004
40000
35000
30000
25000
20000 FDI inflow
FDI outflow
15000
10000
5000
0
2001 2002 2003 2004
FDI theories on micro level
Existence of firm specific advantages (Hymer)
Access to raw materials
Economies of scale
Intangible assets such as trade names, patents, superior
management etc
Reduced transaction costs when replacing an arm's length
transaction in the market by an internal firm transaction
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Resource seeking FDI
To seek and secure natural resources e.g.
minerals, raw materials, or lower labor costs for
the investing company
For example, a German company opening a
plant in Slovakia to produce and re-export to
Germany
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Market seeking FDI
To identify and exploit new markets for the firms`
finished products
Unique possibility for some type of services for
which production and distribution have to be
contemporaneous (telecom, water supply, energy
supply)
Automotive TNCs have invested heavily in China
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Efficiency seeking FDI
To restructure its existing investments so as to
achieve an efficient allocation of international
economic activity of the firms
International specialization whereby firms seek to
benefit from differences in product and factor prices and
to diversify risk
Global sourcing – resource saving and improved
efficiency by rationalizing the structure of their global
activities. Undertaken primarily by network based
MNCs with global sourcing operations.
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Strategic asset/capabilities seeking FDI
MNCs pursue strategic operations through the
purchase of existing firms and/or assets in order to
protect O specific advantages in order to sustain or
advance its global competitive position
Acquisition of key established local firms
Acquisition of local capabilities including R&D, knowledge
and human capital
Acquisition of market knowledge
Pre empting market entrance by competitors
Pre empting the acquisition by local firms by competitors
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