1. Foreign direct investment What is foreign direct investment? Explanations for FDI Management issues in the FDI decision Government intervention in FDI Wild, Wild, & Han. Chapter 7

2. What are we talkingabout? • Foreign direct investment (FDI) The purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of management control • Portfolio investment Occurs when an investment does not involve obtaining a degree of control in a company

3. Market imperfections • The notion of a “perfect market” • Market Imperfections: When an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection • Trade barriers • Specialized knowledge

4. Eclectic theory • Firms undertake FDI when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment. • Location Advantage • Ownership Advantage • Internalization Advantage

5. Management issues in FDI decision Control FollowingRivals Partnership Benefits ofCooperation FollowingClients Issues in the FDI Decision Purchase-or-BuildDecision CustomerKnowledge ProductionCost Cost ofR & D

6. Government intervention • Home country reasons: • Investing in other nations sends resources out of the home country • Outgoing FDI may damage a nation’s balance of payments by taking the place of its exports • Jobs resulting from outgoing investments can replace jobs at home • Outward FDI can increase long term competitiveness • Can switch an economy from sunset to sunrise