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Chapter 08 ‒ Foreign Direct Investment
8-1
Foreign Direct Investment
Learning objectives
• Recognize current trends regarding
• Explain the different theories of
FDI.
• Describe the benefits and costs of
FDI to home and host countries.
• Identify the implications for
managers of the theory and
The focus of this chapter is foreign direct
investment (FDI). The growth of foreign direct
investment in the last 25 years has been
building operations there.
With FDI, a firm has a significant ownership in a
foreign operation and the potential to affect
the pattern of FDI that occurs between countries,
and why firms undertake FDI and become
multinational in their operations as well as why
The opening case describes India’s highly
fragmented retail sector and the restrictions
limiting foreign retailers from capitalizing on its
products in Japan via a licensing agreement with a
local company. Recently, though, Burberry made
the decision to end its licensing arrangement and
expand directly into Japan.
8
Chapter 08 ‒ Foreign Direct Investment
8-2
OUTLINE OF CHAPTER 8: FOREIGN DIRECT INVESTMENT
Opening Case: Foreign Direct Investment in Retailing in India
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
Pragmatic Nationalism
Shifting Ideology
Benefits and Costs of FDI
Host-Country Benefits
Host-Country Costs
Host-Country Policies
International Institutions and the Liberalization of FDI
Focus on Managerial Implications
The Theory of FDI
Government Policy
Chapter 08 ‒ Foreign Direct Investment
8-3
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.
Next, explore what the investment means for the U.S.
OPENING CASE: Foreign Direct Investment in Retailing in India
Summary
The opening case explores India’s complicated retailing sector. On the surface, India’s
huge population would seem to be a marketer’s dream, yet foreign investment in the
country is very limited thanks to a series of highly restrictive policies for foreign
companies. The policies, aimed at protecting the country’s vast number of small stores,
were recently loosened yet many companies are still staying away. Under the new
regulations, foreign retailers must source 30 percent of their inventory locally, a demand
that is too costly for many companies. Furniture and home goods retailer IKEA is one
exception to this trend. The company has plans to open 25 stores in the country.
Discussion of the case can begin with the following questions:
QUESTION 1: What benefits could foreign retailers like Tesco and IKEA bring to India?
Do you see any drawbacks?
ANSWER 1: India’s retailing sector is a highly fragmented system of small stores. The
country’s infrastructure is underdeveloped making it difficult to establish strong supply
chains. Most students will suggest that foreign retailers like Tesco and IKEA could bring
QUESTION 2: For years, India prevented foreign retailers from developing a presence in
the country. In 2012, regulations were changed to allow foreign retailers to enter the
market as long as they sourced 30 percent of their inventory locally. IKEA made the
decision to comply with the policy and expand into the country, but other retailers like
Apple did not. Discuss these responses.
ANSWER 2: With its huge population, India represents one of the biggest market
Chapter 08 ‒ Foreign Direct Investment
8-4
opportunities in the world, yet it is largely untapped. For years, many foreign retailers
have lamented the fact that government regulations prevented them from developing a
disadvantages were clearly outweighed by the advantages of being a first-mover.
QUESTION 3: As part of its loosening of regulations for foreign companies, India allows
100 percent ownership of online retail marketplaces. Why do you think these are
permitted, while traditional retailers still face restrictions?
ANSWER 3: Following the change in entry restrictions, online retailer Amazon quickly
moved into the Indian market. Unlike its traditional operation where it takes ownership of
the goods it sells, in India Amazon sells products offered through its platform by third
Another Perspective: For more information on India’s retail sector, go to
{https://www.cnbc.com/2017/06/05/india-overtakes-china-as-the-most-promising-
market-for-retail-expansion.html}.
Teaching Tip: To extend this discussion and learn about Apple’s experiences in India,
consider Apple Eyes India’s Smartphone Market in the International Business Library
at http://bit.ly/MHEIBVideo. Click “Ctrl+F” on your keyboard to search for the video
title.
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
clicking on “view,” then on “notes.” The following provides a brief overview of each
Power Point slide along with teaching tips and additional perspectives.
Slide 8-3 What Is Foreign Direct Investment?
Chapter 08 ‒ Foreign Direct Investment
8-5
Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to
flows of FDI into a country.
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.
16.pdf}.
The Source of FDI
Since World War II, the U.S. has been the largest source country for FDI. The United
Chapter 08 ‒ Foreign Direct Investment
8-6
Why do firms choose FDI instead of exporting or licensing? Internalization theory
(also known as market imperfections theory) suggests that licensing has three major
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
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
• a surge in FDI worldwide
• an increase in the volume of FDI in countries with newly liberalized regimes
Slides 8-23 ‒ 8-30 Benefits and Costs of FDI
Host-Country Benefits of FDI
Government policy is often shaped by a consideration of the costs and benefits of FDI.
