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Global Business 2e
C ha p t e r 6
Investing Abroad
Directly
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Define the key terms associated with foreign direct
investment (FDI).
2. Explain how FDI results in ownership, location, and
internalization (OLI) advantages.
3. Identify ownership advantages associated with FDI.
4. List ways firms can acquire and neutralize location
advantages.
5. Appreciate the benefits of internalization advantages.
6. Articulate the different political views on FDI based on an
understanding of its benefits and costs to host and home
countries.
7. Understand how multinational enterprises (MNEs) and
host country governments bargain.
8. Participate in three leading debates on FDI.
9. Draw implications for action.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
FDI VOCABULARY
Foreign direct investment (FDI)
Putting money in activities that control and manage
value-added activities in other countries
Multinational enterprise (MNE)
Firms that engage in FDI
Foreign portfolio investment (FPI)
Holding securities, such as stocks and bonds, of
companies in countries outside one’s own but does
not entail the active management of foreign assets
Management control rights
Authority to appoint key managers and establish
control mechanisms
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
HORIZONTAL AND
VERTICAL FDI
Horizontal FDI
Producing the same products or offering
the same services in a host country as
firms do at home
Vertical FDI
Firm moves upstream or downstream in
different value chain stages in a host
country through FDI
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
UPSTREAM AND
DOWNSTREAM VERTICAL FDI
Upstream vertical FDI
Using FDI in an earlier activity in the value
chain
Downstream vertical FDI
Using FDI in an later activity in the value
chain
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
FDI FLOW AND STOCK
FDI flow
Amount of FDI moving in a given period (usually a
year) in a certain direction
FDI inflow
FDI moving into a country in a year
FDI outflow
FDI moving out of a country in a year
FDI stock
Total accumulation of inbound FDI in a country or
outbound FDI from a country
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
WHY FIRMS BECOME MNEs
BY ENGAGING IN FDI
OLI advantages
Quest for ownership (O) advantages, location (L)
advantages, and internalization (I) advantages
Ownership
MNEs’ possession and leveraging of certain valuable, rare,
hard-to-imitate, and organizationally embedded (VRIO)
assets overseas
? Can you name some OLI advantages for a
familiar firm?
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
OLI ADVANTAGES
Location
Features unique to a place, such as its natural or
labor resources or its location near particular
markets, that provide certain advantages to
firms doing business there
Internalization
Replacement of cross-border markets (such as
exporting and importing) with one firm (the
MNE) locating and operating in two or more
countries
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
OLI ADVANTAGES
Licensing
Selling technology or intellectual property for a fee
Market imperfection (market failure)
Imperfect rules governing international
transactions
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
FDI VS LICENSING
Dissemination risk
Possibility of unauthorized diffusion of
firm-specific know-how
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LOCATION
Agglomeration
Clustering of economic activities in
certain locations
Knowledge spillover
Diffusion of knowledge from one firm to
others among closely located firms that
attempt to hire individuals from
competitors
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LOCATION
Location advantages refer to the
advantages one firm obtains when
operating in a location due to its firmspecific capabilities
Oligopoly
An industry dominated by a small
number of players
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
OVERCOMING MARKET
FAILURE THROUGH FDI
Intrafirm trade
Transactions occur between two
subsidiaries in two countries
controlled by the same MNE
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
POLITICAL VIEWS ON FDI
Radical view
Treats FDI as an instrument of imperialism and a
vehicle for exploiting domestic resources,
industries, and people by foreign capitalists and
firms
Free market view
Unrestricted by government Intervention FDI will
enable countries to tap into their absolute or
comparative advantages by specializing in the
production of certain goods and services
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
POLITICAL VIEWS ON FDI
Pragmatic nationalism
Considering both the pros and cons of FDI
and approving FDI only when its benefits
outweigh its costs
? What is your opinion of FDI?
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
BENEFITS AND COSTS OF FDI
TO HOST COUNTRIES
Technology spillover
Domestic diffusion of foreign technical knowledge
and processes
Demonstration effect
Local rivals, after observing foreign technology,
may recognize its feasibility and strive to imitate
Contagion (imitation) effect
Local rivals, after observing foreign technology,
may recognize its feasibility and strive to imitate
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
HOW MNEs AND HOST
GOVERNMENTS BARGAIN
Bargaining power
Ability to extract favorable outcome from
negotiations due to one party’s
strengths
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
HOW MNEs AND HOST
GOVERNMENTS BARGAIN
Obsolescing bargain
Requirements of a deal previously struck between
an MNE and a host government is changed after
the initial FDI entry
Expropriation
Confiscating foreign assets
Sunk cost
Already invested sums
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
SOVEREIGN WEALTH
FUNDS
Sovereign wealth fund (SWF)
State-owned investment fund composed of
financial assets such as stocks, bonds,
real estate, or other financial instruments
funded by foreign exchange assets
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.