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FDI (Foreign direct Investment)

FDI (Foreign direct Investment). Chapter 8. What is DFI?. Flow of capital from a country to another to establish production or service facilities used to conduct business activities Ownership share of at least 10 or 25%

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FDI (Foreign direct Investment)

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  1. FDI (Foreign direct Investment) Chapter 8

  2. What is DFI? • Flow of capital from a country to another to establish production or service facilities used to conduct business activities • Ownership share of at least 10 or 25% • Different from (1) portfolio investment and (2) investment of earnings from FDI • Recently more rapidly growing than trade

  3. Why FDI?(What advantages of control?) • Easiness of transfer of technology and other competitive assets (Appropriability theory tells that companies deny rivals access to vital resources.) • Cost reduction through internationalization

  4. Trade and DFI • Substitution • Factor mobility (FDI) can be a substitute for trade (exporting), especially when there are some trade restrictions. • Complementarity • In the long run FDI can stimulate trade (exporting) of the home country because of need for components and capital equipments for subsidiaries and sales of home-made complementary products. • Actually 1/3 of the world trade is among controlled entities.

  5. Motives for FDI • Market expansion (market seeking) • Most FDI for this reason • Resource acquisition (resource-seeking) • Increasing trend in recent years • Risk reduction • Political motives

  6. Market Expansion(Why FDI instead of trade?) • High transportation cost  horizontal expansion • When no or low gains from scale economies • To overcome trade (tariffs, quotas) and nontrade (Nationalism) barriers • When lack of domestic capacity

  7. Resource acquisition(Why FDI instead of trade?) • Vertical integration  cost reduction • To achieve rationalized (optimal) production • To access to essential resources • To take advantage of lower costs of resources (at the maturity or decline stages of the product life cycle) • To take advantages of incentives given by the host government.

  8. Risk reduction • Diversification to minimize cyclical swings in sales and profits • To prevent competitors’ advantage • To follow customer firms

  9. Two types of FDI • Acqusition (or merge) of existing frims • No startup problems • Easier financing • Readily available resources • Establishing a new firm • No carry-over problems (e.g. debts) • New facilities (more efficient capital)

  10. FDI patterns • Who invest, where and why? • Who? • Firms of developed countries (mostly MNEs) • Where? • To developed countries • Noticeable increase in China (almost 10% of world total FDI) • Why? • Market seeking • Resource seeking

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