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8-2
8-2 Explain the different theories of FDI.
8-4 Describe the benefits and costs of FDI to home and host countries.
8-6 Identify the implications for managers of the theory and government policies associated with
FDI.
Chapter Summary
This chapter focuses on the topic of foreign direct investment (FDI). FDI occurs when a firm
invests directly in new facilities to produce and/or market a product in a foreign country. At the
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Chapter Outline
Geely Goes Global
1. Why did Geely choose to acquire the design and engineering skills it needed to compete in the
auto industry rather than develop those skills itself?
2. China is now the largest market for Volvo. How would you characterize Volvo today? Is it a
Chinese company or a Swedish company? What are the implications of your response for sales
of Volvos outside of China?
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Lecture Note: To extend this discussion and explore what makes the relationship between Geely
and Volvo work so well, consider
https://www.forbes.com/sites/pamelaambler/2018/01/23/volvo-geely-the-unlikely-marriage-of-
establishment of a wholly new operation in a foreign country. The second involves acquiring or
merging with an existing firm in the foreign country.
Foreign Direct Investment in the World Economy
A) The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a
year). The stock of FDI refers to the total accumulated value of foreign-owned assets at a given
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E) South, East, and Southeast Asia, and particularly China, are now seeing an increase of FDI
inflows. China attracted $136 billion in FDI in 2017. Latin America is also emerging as an
important region for FDI. Inward investment to the region was about $151 billion in 2017.
F) Because of the region’s political unrest, conflict, and changing economic policy, Africa is the
recipient of the smallest amount of inward investment with just $42 billion in 2017.
Teaching Tip: The United Nations Conference on Trade and Development (UNCTAD) provides
extensive statistics on the flows of foreign direct investment and the operations of transnational
companies. For more information, go to https://unctad.org.
THE SOURCE OF FDI
G) Not only has the flow of FDI been accelerating, but its composition has also been changing.
For most of the period after World War II, the United States was by far the largest source
country for FDI. Other important source countries include the United Kingdom, the Netherlands,
France, Germany, and Japan. Together, these countries accounted for 60 percent of all FDI
outflows from 1998 to 2012. Chinese firms have also emerged as major foreign investors
accounting for $125 billion in 2017.
Did You Know Video Clip
The video clip asks: “Did you know that America is the world’s largest foreign investor and the
largest recipient of foreign investment?”
1. Why is the U.S. the largest recipient of FDI from companies in other countries?
2. Why is the U.S. often the largest source of FDI? Did you think it was China?
3. What are companies from other countries looking for when they invest in the U.S.?
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Teaching Tip: To learn more about FDI inflows and outflows, consider
http://www.oecd.org/daf/inv/mne/statistics.htm and https://unctad.org.
1. Consider the challenges involved with investing in China. How does China’s political position
and economic situation affect its ability to attract foreign direct investment?
2. Discuss China’s efforts to encourage investment in its underdeveloped areas. What effect will
investment have on these areas? How can firms prepare for the unique challenges of operating in
these areas?
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road-belt-xi-jinping-khorgos-kazakhstan-infrastructure and
https://www.theatlantic.com/international/archive/2017/10/china-belt-and-road/542667.
THE FORM OF FDI: ACQUISITIONS VERSUS GREENFIELD INVESTMENTS
H) The majority of cross-border investment is in the form of mergers and acquisitions rather than
greenfield investments. Firms prefer to acquire existing assets rather than undertake greenfield
investments because (1) mergers and acquisitions are quicker to execute than greenfield
investments; (2) it is easier and perhaps less risky for a firm to acquire desired assets than build
them from the ground up; and (3) firms believe that they can increase the efficiency of an
acquired unit by transferring capital, technology, or management skills.
CONNECT
Video Case
Foreign Investment
Summary
This activity focuses on patterns of foreign investment. Foreign investment has grown
substantially since World War II with the United States being both the largest recipient of
foreign investment and the largest source of foreign investment.
Activity
Students are asked to watch a video on foreign investment and then respond to a series of
questions related to the video.
Class Discussion
Understanding patterns of foreign investment can help international managers better understand
the global marketplace. Ask students whether the United States is becoming more or less
welcoming of foreign investment and what that means to the country and to the global economy.
Theories of Foreign Direct Investment
A) In this section of the text, several theories of foreign direct investments are discussed. These
theories attempt to explain the observed pattern of foreign direct investment flows.
WHY FOREIGN DIRECT INVESTMENT?
B) Why do so many firms apparently prefer FDI to either exporting (producing goods at home
and then shipping them to the receiving country for sale) or licensing (granting a foreign entity
the right to produce and sell the firm’s product in return for a royalty fee on every unit that the
foreign entity sells)? The answer lies in the limitations of these methods for exploiting foreign
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Limitations of Exporting
C) The viability of an exporting strategy is often constrained by transportation costs and trade
1. Discuss the problems associated with Burberry’s licensing arrangement in Japan. What were
the benefits of establishing a relationship with Sanyo Shokai in the country?
2. Reflect on the new strategy that Burberry is undertaking in Japan. Given that this is a shift
away from Sanyo Shokai’s past strategy, what can you expect in the near future concerning
performance in the country? What is Burberry’s goal in the long term?
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Lecture Note: To extend this discussion, consider further exploring Burberry’s efforts to regain
(1) Licensing may result in a firm’s giving away valuable technological know-how to a
potential foreign competitor.
(3) A problem arises with licensing when the firm’s competitive advantage is based not
so much on its products as on the management, marketing, and manufacturing
capabilities that produce those products. Such capabilities are often not amenable to
licensing.
E) When one or more of the following conditions holds, markets fail as a mechanism for selling
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the interdependence of the major players: what one firm does can have an immediate impact on
the major competitors forcing a response in kind.
I) Knickerbocker’s theory can be extended to embrace the concept of multipoint competition
CONNECT
Case Analysis
Exporting, Licensing, or FDI
Summary
This activity explores the strategic decisions firms must make between licensing and foreign
A) Historically, ideology toward FDI has ranged 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
B) The radical view traces its roots to Marxist political and economic theory. Radical writers
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almost everywhere because of 1) the collapse of communism in Eastern Europe; 2) the generally
abysmal economic performance of those countries that embraced the radical position, and a
growing belief by many of these countries that, contrary to the radical position, FDI can be an
negative balance of payments effect.
E) Recognizing this, countries adopting a pragmatic stance pursue policies designed to maximize
the national benefits and minimize the national costs. According to this view, FDI should be
allowed only if the benefits outweigh the costs.
SHIFTING IDEOLOGY
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Benefits and Costs Of FDI
A) Most governments take a pragmatic nationalist approach to FDI, and weigh its costs and
benefits when making policy decisions. The costs and benefits of FDI differ according to
that would otherwise not be created there.
Balance-of-Payments Effects
E) The effect of FDI on a country’s balance-of-payments accounts is an important policy issue
for most host governments. A country’s balance-of-payments account is a record of a country’s
payments to and receipts from other countries. The current account is a record of a country’s
competition can lead to increased productivity growth, product and process innovation, and
greater economic growth.
Video Note: Mercedes-Benz Questioned in China Pricing Probe explores how German
automaker Mercedes is dealing with an adverse political situation in China. Find it in the
International Business Library at http://bit.ly/MHEIBVideo. Click “Ctrl+F” on your keyboard to
