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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?

    20

    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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