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THE FDI TERMINOLOGY
foreign direct investment (FDI) - Investments in activities that control and manage value creation in other countries
multinational enterprise (MNE) - A firm that engages in foreign direct investment
THE FDI VOCABULARY
foreign portfolio investment (FPI) - Investment in a portfolio of foreign securities such as stocks and bonds that do not entail the active management of foreign assets
management control rights - The rights to appoint key managers and establish control mechanisms
THE FDI VOCABULARY
FDI is direct - requires significant equity ownership and provides the combination of equity ownership rights and management control rights
significant ownership rights provide much needed management control rights
FPI represents essentially insignificant ownership rights and no management control rights
To compete successfully, firms need to deploy overwhelming resources and capabilities to overcome their liabilities of foreignness; FDI provides one of the best ways to facilitate extension of firm-specific resources and capabilities abroad
THE FDI VOCABULARY
horizontal FDI - A type of FDI in which a firm duplicates its home country-based activities at the same value chain stage in a host country
vertical FDI - A type of FDI in which a firm moves upstream or downstream in different value chain stages in a host country
OLI Advantages
A firm’s quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages:
Ownership - Refers to MNEs’ possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI
Location - Refers to advantages enjoyed by firms operating in certain areas
Internalization - Refers to the replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating in two or more countries
OWNERSHIP ADVANTAGES
dissemination risks - risks associated with unauthorized diffusion of firm-specific know-how
LOCATION ADVANTAGES
agglomeration - location advantages that arise from the clustering of economic activities in certain locations
knowledge spillovers - Knowledge diffused from one firm to others among closely located firms that attempt to hire individuals from competitors
INTERNALIZATION ADVANTAGES
international transaction costs - tend to be higher than domestic costs - laws and regulations are typically enforced on a nation-state basis
intrafirm trade - international trade between two subsidiaries in two countries controlled by the same MNE
REALITIES OF FDI – POLITICAL VIEWS
radical view - political view that is hostile to FDI
free market view - political view that suggests that FDI, unrestricted by government intervention, will enablecountries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services
pragmatic nationalism - political view that approves FDI only when its benefits outweigh its costs
Benefits and Costs of FDI to Host Countries
technology spillovers - foreign technology
diffused domestically that benefits domestic firms and industries
demonstration effect (contagion or imitation effect) - reaction of local firms to technology spillovers
Benefits and Costs of FDI to Home Countries
Repatriated earnings of profits from FDI
Increased exports of components and services to host countries
Learning via FDI from operations abroad
HOW MNEs AND HOST GOVERNMENTS BARGAIN
obsolescing bargain - deal struck by MNEs and host governments, which change their requirements after initial FDI entry
expropriation - Government’s tactics that include removing incentives, demanding a higher share of profits and taxes, and confiscating foreign assets
sunk costs - point at which a firm has invested substantial sums of resources
FDI versus Outsourcing
A strategic debate is whether FDI (captive sourcing) or outsourcing will serve firms’ purposes better?
Facilitating versus Confronting Inbound FDI
Can foreigners and foreign firms be trusted in making decisions important to the local economy?