CHAPTER 7

FOREIGN DIRECT
INVESTMENT (FDI)

LEARNING OBJECTIVES

WORLDWIDE PATTERN OF FDI

SUMMARY OF THEORY OF FDI EXPLANATION
IMPORTANT MANAGEMENT ISSUES IN FDI DECISION
REASONS GOVERNMENT INTERVENE IN FDI
POLICY INSTRUMENT GOVERNMENTS USE TO
PROMOTE AND RESTRICT FDI

WORLDWIDE PATTERN OF FDI

Volkswagen Group (www.vw.com)

48 production facilities worldwide
Sells to more than 150 countries
Top-selling manufacturer in South America and China
China accounts for around 30% of VWs total sales

VWs U.S. expansion

Modular strategy

Special protection in Germany

VW in Portugal assembly plant
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FOREIGN DIRECT INVESTMENT

Purchase of physical assets or a

significant amount of the ownership
Foreign
(stock) of a company in another
Direct
country to gain a measure of
Investment
management control

Portfolio
Investment

Investment that does not involve

obtaining a degree of control in a
company
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PATTERN OF FOREIGN DIRECT INVESTMENT

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DRIVERS OF FDI FLOWS

Drivers of FDI Flows

Globalization
Mergers and Acquisitions

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VALUE OF CROSS-BORDER MERGERS AND

ACQUISITIONS

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WORLDWIDE FLOWS OF FDI

Driving FDI growth are more than 100,000 multinational

companies with more than 900,000 affiliates abroad.
In 2012, developing countries attracted greater FDI inflows
than did developed countries.
Developed countries account for 42 percent ($561 billion) of
total global FDI inflows.
FDI inflows to developing countries accounted for around 52
percent of world FDI inflows ($703 billion).
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QUICK STUDY 1

The purchase of physical assets or significant ownership of a

company abroad to gain a measure of management control is
called a what?
What are the main drivers of foreign direct investment flows?
Why might a company engage in a cross-border merger or
acquisition?

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SUMMARY OF THEORY OF FDI

EXPLANATION
1. International Product Life Cycle
2. Market Imperfections (Internalization)
3. Eclectic Theory
4. Market Power

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SUMMARY OF THEORY OF FDI

EXPLANATION

1. International Product Life Cycle

states that a company begins by exporting its product and
then later undertakes FDI as a product moves through its life
cycle.

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SUMMARY OF THEORY OF FDI

EXPLANATION

2.

Market Imperfections (Internalization)

states that when an imperfection in the market makes a
transaction less efficient than it could be, a company will
undertake FDI to internalize the transaction and thereby remove
the imperfection.

Copyright 2016 Pearson Education Limited

SUMMARY OF THEORY OF FDI

EXPLANATION

3.

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

Copyright 2016 Pearson Education Limited

SUMMARY OF THEORY OF FDI

EXPLANATION

4.

Market Power
states that a firm tries to establish a dominant market
presence in an industry by undertaking FDI.

Copyright 2016 Pearson Education Limited

QUICK STUDY 2

What imperfections are relevant to the discussion of market

imperfections theory?
Location, ownership, and internalization advantages combine
in which FDI theory?
Which FDI theory depicts a firm establishing a dominant
market presence in an industry?

Copyright 2016 Pearson Education Limited

IMPORTANT MANAGEMENT ISSUES IN

FDI DECISION

Control
Purchase-or-Build Decision
Production Costs
Rationalized production
Mexicos Maquiladora
Cost of research and
development

Customer Knowledge
Following Clients
Following Rivals

IMPORTANT MANAGEMENT ISSUES IN

FDI DECISION

Control
Partnership Requirement
Benefits of Cooperation
http://www.moneycontrol.com/news/business/executive-orderneeded-to-solve-fdi-insurance-issue-ey_1643561.html

IMPORTANT MANAGEMENT ISSUES IN

FDI DECISION

Purchase-or-Build Decision
Greenfield investment
Acquisition or build subsidiary
http://www.investopedia.com/video/play/green-field-investment/

IMPORTANT MANAGEMENT ISSUES IN

FDI DECISION

Production Costs
Rationalized production
Component production
Assembly plant

Cost of research and

development
Powerful competitive
advantage
Conducted by affiliates in
other countries

Mexicos Maquiladora
Special economic region
Low-wage economy
Split by wage or technology gaps

REASONS GOVERNMENT
INTERVENE IN FDI

REASONS GOVERNMENT
INTERVENE IN FDI

REASONS GOVERNMENT
INTERVENE IN FDI

REASONS GOVERNMENT
INTERVENE IN FDI

POLICY INSTRUMENT GOVERNMENTS USE

TO PROMOTE AND RESTRICT FDI

POLICY INSTRUMENT GOVERNMENTS USE

TO PROMOTE AND RESTRICT FDI

POLICY INSTRUMENT GOVERNMENTS USE

TO PROMOTE AND RESTRICT FDI

Globalization
Mergers &
Acquisitions

Ups &
down of
FDI

International Product Life Cycle

Worldwide
flows of
FDI

Market Imperfections (Internalization)

Trade Barriers
Specialized Knowledge

Eclectic Theory

Host Countries

Market Power

Promotion
Financial Incentives
Infrastructure
Improvements
Restriction
Ownership Restriction
Performance
Demands

Pattern
Theories
Policy
Instruments

Home Countries
Promotion
Restriction

Balance of
Payments
Current
Account
Capitol
Account

Reasons for
Intervention by
the Host Country
Control Balance
of payments
Obtain
Resources &
Benefits

Chapter 7
(FDI)
Government
Intervention

Reasons for
Intervention by the
Home Country

Management
issues

Purchase-or-Build Decision

Control

Customer Knowledge

Partnership Requirements
Benefits of Cooperation

Following Clients

Production Costs

Following Rivals

Rationalized Production
Mexicos Maquiladora
Cost of Research and
Development