topic 5.6 foreign direct investment
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3Source: UNCTAD, July 2011
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Source:UNCTAD 2011
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Source: UNCTAD
2011
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First articulated by Stephen Hymer
Factors influencing FDI are strongly correlated withfactors influencing Trade eg. exploiting comparativeadvantageFDI happens when a firm invests directly in facilities
in a foreign country implies a net capital increase inthe countryA firm that engages in FDI becomes a multi nationalenterprise
FDI is more than a short-term portfolio investmentThe commitment is relatively long -term anddifficult to unwindThe investing firm has parental control
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Involves the value and supply chainsProductionMarketingR&DAccess to raw materials
Parent has direct managerial controlDegree of control (+10% according to OECD,depends on contractual terms)If there is no control then it is a portfolioinvestment , relatively easily unwound
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Forms of FDIPurchase of existing assets ( brownfield )
Quick entryLocal market knowledgeEliminate competitor
New Investment ( greenfield )No inherited problemsAssurance of process qualityBrand equity transference
Participation in an international joint ventureShared ownershipSwift access to economies of scaleBuild on local knowledge and culture
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Transportation costs andimport barriers high?
Product as source of the
competitive advantage?
Process as source of thecompetitive advantage?
Management as source ofthe competitive advantage?
No
Yes
Yes
Yes
No
No
Yes
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Transportation costs andimport barriers high?
Product as source of the
competitive advantage?
Process as source of thecompetitive advantage?
Management as source ofthe competitive advantage?
ExportNo
Yes
Yes
Yes
No
No
Yes
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Transportation costs andimport barriers high?
Product as source of the
competitive advantage?
Process as source of thecompetitive advantage?
Management as source ofthe competitive advantage?
Joint venture FDI
ExportNo
Yes
Yes
Yes
No
No
Yes
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Transportation costs andimport barriers high?
Product as source of the
competitive advantage?
Process as source of thecompetitive advantage?
Management as source ofthe competitive advantage?
Greenfield FDI
Joint venture FDI
ExportNo
Yes
Yes
Yes
No
No
Yes
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Transportation costs andimport barriers high?
Product as source of the
competitive advantage?
Process as source of thecompetitive advantage?
Management as source ofthe competitive advantage? Brownfield FDI
Greenfield FDI
Joint venture FDI
ExportNo
Yes
Yes
Yes
No
No
Yes
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Product Life Cycle theoryMove overseas to low-labour cost region duringthe mature and decline phases
Uppsala stage theory
Incremental approachDepends on psychic distance
Strategic compulsionTaking the fight to the oppositions homeland
Squeezed out of home market ChryslerFollowing a rivals lead eg. Ford-Volvo, GM-SaabForeign currency hedgeForeign currency sink outlet for excess funds
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Dunnings eclectic OLI theory made up ofother theoriesFDI when all the following are in place
Ownership advantagesOwnership of assetsIPRCompetitive advantage in the product
Location advantagesHost countrys production facilities Local factor endowments
Competitive advantage in the processInternalisation advantages
The minimisation of transaction costsAvoids dangers of opportunismCompetitive advantage in management
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BenefitsReduction of transport costsExploitation of local factor endowments eg.low labour costsLocal market dominanceResponsiveness to local market demandForeign market developmentControl over foreign resources
CostsDilution of economies of scale benefitsRisks attached to overseas activitiesLoss of overall controlNational loss of capability eg . brain drain
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BenefitsResource transferTechnology spilloverEmploymentBOP effects
Import substitutionSource of export increase
CostsAdverse BOP, capital account impactsImpact on the DS ratio
Threat to national sovereignty and autonomyLoss of economic independence, GM in Latin America
Suppression of indigenous development
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Home CountryOutward encouragement
Exports, tax incentives etcOutward restrictions
National security, BOP concerns
Host CountryInward encouragement
Employment, local investment supporting FDI
Inward restrictionsOwnership restrictions, strategic control etc
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FDI is growing in IndiaFMCG (fast moving consumer goods)represent a particularly attractive sector
Watch the following videohttp://www.youtube.com/watch?v=o5fhBRf50
mw&feature=related Do you agree with the summary?Is a similar situation possible in a developedeconomy such as the US or the UK?
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http://www.youtube.com/watch?v=o5fhBRf50mw&feature=relatedhttp://www.youtube.com/watch?v=o5fhBRf50mw&feature=relatedhttp://www.youtube.com/watch?v=o5fhBRf50mw&feature=relatedhttp://www.youtube.com/watch?v=o5fhBRf50mw&feature=related -
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Strategic Alliances Morrison J (2006) The international businessenvironment. Palgrave Macmillan: London
Jones J and Wren C (2006)Foreign directinvestment and the regional economy. Aldershot:AshgateOECD definition of FDIUNCTAD World Investment Report 2010
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