Foreign Investment

1. Foreign Investment • Foreign Direct Investment (FDI) • Foreign Indirect Investment

2. Direct Investment Patterns • Location of ownership • For worldwide FDI • Location of investment • Most FDI occurs in developed countries (Why ??) • Economic sector of investment

3. Reasons for the Growth of FDI • Globalization • Mergers and acquisitions • Entrepreneurs and small businesses

4. Theories of ForeignDirect Investment International Product Life Cycle Eclectic Paradigm Market Power Market Imperfections

5. International Product Life Cycle • Stating that a company will begin by exporting its product and later undertake foreign direct investment as a product moves through its life cycle.

6. International Product Life Cycle Model production High Income Countries consumption Quantity 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Medium Income Countries 1 2 3 7 4 5 6 8 9 10 11 12 13 14 15 Low Income Countries Time 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 New Product Maturing Product Standardized Product Stages of Product Life Cycle

7. Market Imperfections (Internalization) • When an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection.

8. Eclectic Theory • Stating that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment.

9. Market Power Theory • A firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. • Vertical integration – extension of company activities into stages of production that provide a firm’s inputs (backward integration) or absorb its output (forward integration).

10. Motivation for FDI as an Alternative or Supplement to Trade • SALES EXPANSION OBJECTIVES • Overcome high transport costs • Domestic capacity • Gains from scale economies • Trade restrictions • Barriers because of country- of-origin effects (nationalism, product image, delivery risk) • Lower productions costs abroad

11. Motivation for FDI as an Alternative or Supplement to Trade (cont.) • RESOURCE ACQUISITION OBJECTIVES • Savings through vertical integration • Savings through rationalized production • Gain access to cheaper or different resources and knowledge • Need to lower costs as product matures • Gain governmental investment incentives

12. Motivation for FDI as an Alternative or Supplement to Trade (cont.) • RISK MINIMIZATION OBJECTIVES • Diversification of customer base (same motivation as for sales expansion) • Diversification of supplier base (same motivation as for resource acquisition objectives • Following customers • Preventing competitors’ advantage

13. Motivation for FDI as an Alternative or Supplement to Trade (cont.) • POLITICAL OBJECTIVES • Influence companies, usually through factors under resource acquisition objectives

14. Reasons for Host-Country Interventions Controlling the Balance of Payments Obtaining Resources and Benefits

15. Reasons for Home-Country Interventions

16. Government Policy and FDI Methods of Restricting FDI Methods of Promoting FDI • Ownership Restrictions • Performance Demands • Tax Incentives • Low-Interest Loans • Improve Infrastructure Host Countries • Differential Tax Rates • Sanctions • Insurance • Loans • Tax Breaks • Political Pressure Home Countries