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For use with Peng and Meyer, International Business 3e, 9781473758438, © Cengage Learning
EMEA 2019
Instructor Manual
Chapter 6: Investing Abroad Direct
(Prepared by Klaus E. Meyer, March 2019)
Introduction to the Topic
Learning Objectives
1. Understand the vocabulary associated with foreign direct investment (FDI)
3. Explain why ownership advantage are necessary for firms to engage in FDI
5. Explain and apply the concept on internalisation advantages
7. Explain how home and host country institutions affect FDI
9. Draw implications for action
General Teaching Suggestions
Next to trade and financial investment, direct investment is a cornerstone of international
business. This is the second chapter on basic transactions laying theoretical foundations. We
use John Dunning’s OLI framework to explain why when and where companies engage in
direct investment, and round up the chapter with a brief discussion of the impacts and the role
of institutional influences on FDI. This chapter contains a lot of vocabulary that is important
to appreciate theories of the MNE.
Opening Case Discussion Guide
The opening case outlines how Spanish firms have successfully expanded beyond their own
country since the late 1990s. It introduces some of the biggest names of Spanish business
that students elsewhere in Europe may not yet know. Ask students why they think Spanish
MNEs have evolved to forcefully over the past decade and half. For example, why did many
Spanish firms do their firm big international investments in Latin America? Moreover, the
EU integration has changed over the past several years which could stimulate some firms to
strengthen their EU operation.
Chapter Outline, Section by Section
Section 1: The FDI Vocabulary
Key Ideas
This section introduces, brief and concisely, key terms on FDI and MNEs, and introduces
some key data on FDI stock and flow on a national level.
Key Concepts
foreign direct investment (FDI)
Investment in, controlling, and managing value-added activities in other countries.
multinational enterprise (MNE)
A firm that engages in foreign direct investment and operates in multiple countries.
foreign portfolio investment (FPI)
Investment in a portfolio of foreign securities such as stocks and bonds.
joint-venture
An operation with shared ownership by several domestic or foreign companies
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.
upstream vertical FDI
A type of vertical FDI in which a firm engages in an upstream stage of the value.
downstream vertical FDI
A type of vertical FDI in which a firm engages in a downstream stage of the value chain in two
different countries.
FDI flow
The amount of FDI moving in a given period (usually a year) in a certain direction.
FDI stock
The total accumulation of inbound FDI in a country or outbound FDI from a country across a given
period of time (usually several years).
Section 2: OLI Paradigm
Key Ideas
The OLI paradigm is the most used framework to explain international production (or foreign
direct investment), most instructors are likely to be familiar with. We introduce it here in
ways that aim to familiarize students with a range of other concepts important to explain why
and where MNEs undertake FDI. Table 6.1. provides a concise overview.
Key Concepts
OLI paradigm
A theoretical framework positing that ownership (O), locational (L) and internationalization (I)
advantages combine to induce firms to engage in FDI
ownership advantages
Resources of the firm that are transferable across borders, and enable the firm to attain competitive
advantages abroad
location advantages
Advantages enjoyed by firms operating in certain locations.
internalization advantages
Advantages of organizing activities within a multinational firm rather than using a market transaction
Section 3: Ownership advantages
Key Ideas
The first element of the OLI is ownership advantages, which some authors also call firm
specific advantages. This idea is taking the idea of resources and capabilities international,
and thus a critical aspect is their transferability to other countries.
Key Concepts
location-bound resources
Resources that cannot be transferred abroad
Section 3: location advantages
Key Ideas
We introduce here different types of location advantages that enable countries (or other
geographic entities) to attract foreign investors: markets, resources agglomeration and
institutions.
Key Concepts
agglomeration
The location advantages that arise from the clustering of economic activities in certain locations.
knowledge spillover
Knowledge diffused from one firm to others among closely located firms.
Section 4: Internalization advantages
Key Ideas
This part explains and applies the concept on internalisation advantages why and MNEs
undertake FDI rather than non-equity forms of international business. High cross-board
transaction cost may result in market failure. A key advantage of FDI is its ability to reduce
transaction costs.
Key Concepts
Transaction costs
The cost of organizing a transaction
market failure
Imperfections of the market mechanism that make some transactions prohibitively costly
asset specificity
An investment that is specific to a business relationship
intra-firm trade
International trade between two subsidiaries in two countries controlled by the same MNE.
licensing
An external market transaction in which firms buy and sell technology and intellectual property rights.
dissemination risks
The risks associated with unauthorized diffusion of firm-specific know-how.
tacit knowledge
knowledge that is non-codifiable, and whose acquisition and transfer require hands-on practice.
Section 5: Benefits and costs of FDI
Key Ideas
This section provides a very brief introduction to the FDI spillovers literature by introducing
the main (possible) effects that FDI has on others in the home economy. Table 6.2 provides a
very condensed summary of a sprawling literature.
Instructors who feel this introduction is too brief can supplement it with my paper in JIBS
(2004, see reading to Chapter 1) or with the introduction to the paper collection (see readings
to this chapter).
Key Concepts
No new concepts
Section 6: National institutions and FDI
Key Ideas
Applying the institution-based view, we look at some of the institutions in home and host
economies that influence FDI decisions. This theme will be further deepened in Chapter 12
on foreign entry strategies.
Two In Focus deepen this section, one of state owned enterprises as MNEs, and one of
taxation and foreign investment. Both are highly topical issues. On SOEs, I have written two
blogs with Forbes and EIU, see links below. On Corporate taxation, I recommend the essay
by James Nebus in AIB Insights in issue 2/2016.
• http://www.forbes.com/sites/ceibs/2016/01/25/is-a-chinese-takeover-good-or-bad-for-your-
job/#116eff367ccb
• http://viewswire.eiu.com/index.asp?layout=EBArticleVW3&article_id=1873904171&channel_id=788
The ability to extract a favourable outcome from negotiations due to one party’s strengths.
obsolescing bargain
Refers to the deal struck by MNEs and host governments, which change their requirements after the
initial FDI entry.
sunk cost
Up-front investments that are non-recoverable if the project is abandoned.
expropriation
Government’s confiscation of private (foreign-owned) assets.
emerging economy MNEs
MNEs that originate from an emerging economy and are headquartered there.
sovereign wealth fund (SWF)
A state-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other
financial instruments
Section 8: Implications for Practice
Key Ideas
The implications focus on the strategic decision to set up FDI projects, and thus link forward
to chapter 12.
Key Concepts
No new concepts
Review Questions
Review questions are provided to students on the website accompanying the book. They
directly ask to summarize the material provided in the text. Instructors may also use the
questions to structure their lectures or review sessions.
Review Questions
(as provided to students on the website)
Material in the Book
1. Distinguish key terminology with respect to FDI:
direct versus portfolio investment, horizontal
Pages 152-153
For use with Peng and Meyer, International Business 3e, 9781473758438, © Cengage Learning
EMEA 2019
versus vertical FDI, upstream versus downstream
FDI,
2. What inferences can you draw from analysing
respectively FDI stock or FDI flow data?
3. When do we call a firm a ‘multinational enterprise
(MNE)’?
4. Why do firms need ownership advantages to
5. What sort of locational advantages can attract
foreign investors, and why?
6. Why would firms want to ‘internalize’ cross-border
transactions within their organization?
7. Why would firms set up a FDI sales operation,
rather than export from the home country?
8. Why would firm set up a subsidiary to exploit a
technology rather than licensing that technology to
a local partner?
9. Why would firms set up a subsidiary to
manufacture abroad rather than outsource the
activity to an independent manufacturer?
10. What policies do national governments use to
control or restrict the activities of foreign MNEs?
11. What policies do national governments use to
control or restrict the activities of MNEs from their
own country?
12. How does national corporate taxation affect the
patterns of FDI?
13. What are the potential benefits and disadvantages
that local firms may experience as a result of FDI
coming to their country?
14. What are the potential benefits and disadvantages
that ordinary people – as consumer or workers –
may experience as a result of FDI coming to their
country?
15. Is FDI good or bad for the natural environment?
16. Explain the phenomenon of ‘obsolescing bargain’
in the relationship between MNEs and host
governments!
17. What is the role of sovereign wealth funds in the
global economy?
18. Explain the emergence of emerging economy
MNEs
Page 153-156
Page 152
Page 156-158 incl Table 6.1
Page 158-162 and Table 6.1
Page 163-164 and Table 6.1
Page 158
Page 165
Page 166
Page 166-168
Page 173-174
Page 172
Page 168-169, especially
Table 6.2
Page 167-167
Page 167
Page 173-174
Page 174-175
Page 174
Critical Discussion Questions
Closing Case
The closing case provides further opportunities to apply ideas and concepts learned in this
chapter in a real world setting. The Closing Case for this Chapter is “Politics and FDI in
Argentina” and focuses on FDI in an emerging economy, Argentina. Below are some indicative
responses to the case discussion questions.
Case Discussion Questions
(as provided in the book)
Indicative Responses
1. From a resource-based perspective,
what has motivated Repsol’s direct
investment in Argentina?
2. From an institution-based view,
how can companies protect their
interest in countries with instable
institutions, such as Argentina?
3. Why did the Argentinian
government act the way it did?
1. The key to this question is for
students to correctly identify
resources (also see Chapter 4), and
how they contribute to the firm’s
internationalization as O-
advantages.
2. This question is about identifying
possibly relevant institutions and
thus to demonstrate understanding
of the concept of institutions.
3. This question challenges students
to compare countries they know.
Key differences relate to influences
and results of privatisation and
renationalisation.
Further Learning Activities
In addition to the cases and discussion questions provided in the book, instructors may want
to use any of the following activities to further engage students with the material.
1. The Integrative Case “BMW faces Technological Disruptions” provides a brief
introduction to numerous technological changes affecting the automotive industry. In
2. The Integrative Case “Bharti Airtel Acquires Resources and Capabilities” have
been prepared to discuss the different strategies and motivations that drive FDI
For use with Peng and Meyer, International Business 3e, 9781473758438, © Cengage Learning
EMEA 2019
capabilities (Chapter 4). They can also be used to discuss foreign entry strategies
(Chapter 12).
3. The case SSI Schaefer: Internationalization of Intra-Logistics introduces the notion
that companies traditionally operating as ‘manufacturing’ are moving to become
‘solutions provider’. This requires not only much higher degrees of customization and
4. Your MNE is looking to evaluate the industrial capability of various locations
worldwide. Based on readily available data concerning the potential and performance
of different countries, the information you provide will drive future investment by
your company. Choose a country each from Asia, Europe, North America, and South
America and summarize your findings about each. Of the four countries from four
continents, how would you rank them? Why?
5. The main premise for development at your company in the coming years is to shift its
offshore services to Africa. As such, you have been asked to develop a report that
evaluates which African countries have increased the possibility of creating a long-
term advantage for your company. Also, be sure to include the African countries that
have decreased their capacity to create a long-term advantage. Can you please
generate a top five list and a bottom five list from Africa for this purpose?
For use with Peng and Meyer, International Business 3e, 9781473758438, © Cengage Learning
EMEA 2019
One resource which can be used is “A.T. Kearney: The Global Services Location
Index”. This website can be found by entering the search term “offshore services” at
the globalEDGE™ Resource Desk search box located at
http://globaledge.msu.edu/resourceDesk/. Once at the website, click on the View Data
link (found in the middle). Then, scroll to page 4 of the report for an evaluation of the
countries which have been included in the past two reports. Given the parameters of
the question, South Africa and Tunisia are the two countries which have increased as
a location to improve your company’s long-term advantage while Egypt and Ghana
have decreased. The nature of the measures used to determine the index can be found
on page 15 of the report. As such, there are three main categories (with the
appropriate sub-categories): financial attractiveness (compensation costs,
infrastructure costs, and tax and regulatory costs), people and skills availability
(remote services sector experience and quality ratings, labor force availability,
education and language, and attrition risk), and business environment (country
environment, infrastructure, cultural exposure, and security of intellectual property).
Search Term: “offshore services”
Resource Name: A.T. Kearney: The Global Services Location Index
Website: http://www.atkearney.com/index.php/Publications/global-services-location-
index.html
globalEDGE™ Tag: Rankings
Further Readings
At the end the chapter, suggested further readings are provided. The primary aim is to
provide students a starting point for further work, for example when preparing a class
assignment or dissertation. These references also are recommended for instructors not
familiar with the topic and wishing to ‘get ahead of the students’ before lecturing on a topic.
P.J. Buckley, 2018, The Global Factory, Cheltenham: Elgar – explores the networks and value
chains managed by MNEs from the perspective of internationalization theory.
M. Casson, 2018, The Multinational Enterprise: Theory and History, Cheltenham: Elgar –
collection of papers by one of the foremost theorists on the MNE.
J.H. Dunning, 2000, The eclectic paradigm as an envelope for economic and business theories of
MNE activities, IBR, 12, 141-171 – a summary of the OLI paradigm.
J.H. Dunning & S. Lundan, 2008, Multinational Enterprises and the Global Economy, 2nd ed.,
Cheltenham: Elgar – the most comprehensive book on the multinational enterprise, including
theoretical foundations, empirical evidence, and policy issues.
M. Forsgren, 2013, Theories of the multinational firm, 2nd ed., Cheltenham: Elgar – a monograph
critically reviewing five alternative theoretical perspectives on MNEs
For use with Peng and Meyer, International Business 3e, 9781473758438, © Cengage Learning
EMEA 2019
R. Grosse, ed., 2005, International Business and Government Relations in the 21st Century,
Cambridge: Cambridge University Press – a collection of articles examining institutions and
politics surrounding multinational enterprises.
K.E. Meyer, ed., 2008, Multinational Enterprises and Host Economies (2 vols), Cheltenham:
Elgar – A collection of articles on the theme of benefits of costs of FDI.
UNCTAD, annual, World investment Report, Geneva: United Nations – A rich source for FDI
data and analysis of current trends.
