Chapter 08 – Foreign Direct Investment
Foreign Direct Investment
Learning objectives
Recognize current trends regarding foreign direct investment (FDI) in the world
economy.
Explain the different theories of FDI.
Understand how political ideology shapes a government’s attitudes towards FDI.
Describe the benefits and costs of FDI to home and host countries.
Explain the range of policy instruments that governments use to influence FDI.
Identify the implications for managers of the theory and government policies
associated with FDI.
The focus of this chapter is foreign direct investment (FDI). The growth of
foreign direct investment in the last 25 years has been phenomenal. FDI can take
the form of a foreign firm buying a firm in a different country, or deciding to
invest in a different country by building operations there.
With FDI, a firm has a significant ownership in a foreign operation and the
potential to affect managerial decisions of the operation.
The goal of our coverage of FDI is to understand the pattern of FDI that occurs
between countries, and why firms undertake FDI and become multinational in
their operations as well as why firms undertake FDI rather than simply exporting
products or licensing their know-how.
The opening case describes Volkswagen’s greenfield investment in Russia and the
effect of changing oil prices on its profitability. The closing case explores the flow
of FDI into Nigeria, particularly as the country began to transition toward a more
stable, democratic form of government in the early twenty-first century. Today,
Nigeria is one of the leading recipients of FDI in sub-Saharan Africa, although the
country still faces a number of obstacles to economic development.
OUTLINE OF CHAPTER 8: FOREIGN DIRECT INVESTMENT
Opening Case: Volkswagen in Russia
8-1
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
8
7
Chapter 08 – Foreign Direct Investment
Introduction
Foreign Direct Investment in the World Economy
Trends in FDI
The Direction of FDI
The Source of FDI
Country Focus: Foreign Direct Investment in China
The Form of FDI: Acquisitions versus Greenfield Investments
Theories of Foreign Direct Investment
Why Foreign Direct Investment?
Management Focus: Foreign Direct Investment by Cemex
The Pattern of Foreign Direct Investment
The Eclectic Paradigm
Political Ideology and Foreign Direct Investment
The Radical View
The Free Market View
Pragmatic Nationalism
Shifting Ideology
Management Focus: DP World and the United States
Benefits and Costs of FDI
Host-Country Benefits
Host-Country Costs
Home-Country Benefits
Home-Country Costs
International Trade Theory and FDI
Government Policy Instruments and FDI
Home-Country Policies
Host-Country Policies
International Institutions and the Liberalization of FDI
Focus on Managerial Implications
The Theory of FDI
Government Policy
Chapter Summary
Critical Thinking and Discussion Questions
Closing Case: Foreign Direct Investment in Nigeria
CLASSROOM DISCUSSION POINT
Ask students for examples of foreign firms that have invested in the U.S. Jot them down
on the board.
Then, discuss why these companies invested in the U.S. Try to follow the framework
presented in the text, and refer back to the board during the presentation of the material.
8-2
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Chapter 08 – Foreign Direct Investment
Next, explore what the investment means for the U.S.
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The PPT slides include additional notes that can be viewed by
clicking on “view,” then on “notes.” The following provides a brief overview of each
Power Point slide along with teaching tips and additional perspectives.
Slides 8-3 and 8-4 What Is Foreign Direct Investment?
Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to
produce and/or market in a foreign country. Once a firm undertakes FDI it becomes a
multinational enterprise.
Another Perspective: Each year Fortune magazine publishes a list of the 500 largest
global corporations in the world. Fortune calls its list the “Global 500.” This list can be
accessed at {http://fortune.com/global500/}. The article contains an excellent discussion
of the role of global firms in the world economy.
FDI can take the form of a greenfield investment, in which a wholly new operation is
established in a foreign country, or it can take place via acquisitions or mergers with
existing firms in the foreign country.
Another Perspective: Another web site that provides an excellent discussion of the role of
multinational corporations in the world economy is available at
{http://www.oecdobserver.org/news/fullstory.php/aid/446/The_trust_business.html}.
The flow of FDI refers to the amount of FDI undertaken over a given time period, while
the stock of FDI refers to the total accumulated value of foreign-owned assets at a given
time. Outflows of FDI are the flows of FDI out of a country, and inflows of FDI are the
flows of FDI into a country.
Slides 8-5 through 8-9 Trends in FDI
There has been a marked increase in both the flow and stock of FDI in the world
economy over the past 30 years.
While the United States remains a top destination for FDI flows, South, East, and
Southeast Asia, and particularly China, are now seeing an increase of FDI inflows, and
Latin America is also emerging as an important region for FDI.
Another Perspective: Tanzania has recently been named one of Africa’s top FDI hotspots.
To learn more about this trend go to
{http://www.dailynews.co.tz/index.php/local-news/17188-dar-named-among-africa-s-top-
fdi-hotspots}.
Slides 8-10 and 8-11 The Source of FDI
8-3
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Chapter 08 – Foreign Direct Investment
Since World War II, the U.S. has been the largest source country for FDI. The United
Kingdom, the Netherlands, France, Germany, and Japan are other important source
countries.
Slides 8-12 and 8-13 The Form of FDI: Acquisitions Versus Greenfield Investments
Most cross-border investment is in the form of mergers and acquisitions rather than
greenfield investments.
Slides 8-14 and 8-15 Why Choose Foreign Direct Investment?
Why do firms choose FDI instead of exporting or licensing? Internalization theory
(also known as market imperfections theory) suggests that licensing has three major
drawbacks.
Slide 8-16 Think Like a Manager: Exporting, Licensing, or FDI?
Slides 8-17 and 8-18 The Pattern of Foreign Direct Investment
Knickerbocker looked at the relationship between FDI and rivalry in oligopolistic
industries (industries composed of a limited number of large firms) and suggested that
FDI flows are a reflection of strategic rivalry between firms in the global marketplace.
According to the eclectic paradigm, in addition to the various factors discussed earlier, it
is important to consider:
location-specific advantages – that arise from using resource endowments or
assets that are tied to a particular location and that a firm finds valuable to
combine with its own unique assets and
externalities – knowledge spillovers that occur when companies in the same
industry locate in the same area
Slides 8-19 and 8-20 Political Ideology and Foreign Direct Investment
Ideology toward FDI ranges from a radical stance that is hostile to all FDI to the
non-interventionist principle of free market economies. Between these two extremes is
an approach that might be called pragmatic nationalism.
The radical view argues that the MNE is an instrument of imperialist domination and a
tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist
home countries.
According to the free market view, international production should be distributed among
countries according to the theory of comparative advantage.
Pragmatic nationalism suggests that FDI has both benefits, such as inflows of capital,
technology, skills and jobs, and costs, such as repatriation of profits to the home country
and a negative balance of payments effect.
Recently, there has been a strong shift toward the free market stance creating:
a surge in FDI worldwide
an increase in the volume of FDI in countries with newly liberalized regimes
Slides 8-21 and 8-22 Host Country Benefits of FDI
Government policy is often shaped by a consideration of the costs and benefits of FDI.
There are four main benefits of inward FDI for host countries: resource transfer effects;
employment effects; balance of payments effects, and effects on competition and growth.
Slides 8-23 and 8-24 Host Country Costs
There are three mains costs from inward FDI for the host country: the possible adverse
effects of FDI on competition within the host nation; adverse effects on the balance of
payments; and the perceived loss of national sovereignty and autonomy.
Slide 8-25 Home Country Benefits
8-4
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Chapter 08 – Foreign Direct Investment
The benefits of FDI for the home country include: the effect on the capital account of the
home country’s balance of payments from the inward flow of foreign earnings; the
employment effects that arise from outward FDI; and the gains from learning valuable
skills from foreign markets that can subsequently be transferred back to the home
country.
Slides 8-26 and 8-27 Home Country Costs
The home country’s balance of payments can suffer from the initial capital outflow
required to finance the FDI; if the purpose of the FDI is to serve the home market from a
low cost labor location; and if the FDI is a substitute for direct exports.
International trade theory suggests that home country concerns about the negative
economic effects of offshore production (FDI undertaken to serve the home market) may
not be valid.
Slides 8-28 and 8-29 Government Policy Instruments and FDI
Home countries and host countries use various policies to regulate FDI.
Another Perspective: The World Bank offers information on the business environment in
different countries. To explore the information, go to {http://www.worldbank.org/}, click
on “countries”, and select the country in question.
Governments can both encourage and restrict FDI.
To encourage inward FDI, governments offer incentives to foreign firms to invest in their
countries, while they restrict inward FDI through ownership restraints and performance
requirements.
Slide 8-30 International Institutions and the Liberalization of FDI
The World Trade Organization is trying to establish a universal set of rules designed to
promote the liberalization of FDI.
Slides 8-31 through 8-33 Implications for Managers
Managers need to consider what trade theory implies, and the link between government
policy and FDI.
The direction of FDI can be explained through the location-specific advantages argument
associated with John Dunning.
A host government’s attitude toward FDI is an important variable in decisions about
where to locate foreign production facilities and where to make a foreign direct
investment.
8-5
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.