This document defines foreign direct investment and outlines some of the main theories, forms, strategies, and costs/benefits associated with FDI. It defines FDI as long-term investments involving control or influence over management. The key theories discussed are the MacDougall-Kemp hypothesis of capital moving from abundant to scarce economies, and industrial organization and location-specific theories. The main forms are greenfield investment, mergers and acquisitions, and brownfield investment. Strategies include firm-specific advantages and lowering costs. Benefits are factors of production, economic growth, and balance of payments, while costs include cultural influence and resource overuse.

1. FOREIGN DIRECT INVESTMENT
PRESENTED BY TITO R.MHAGAMA
MBA-3rd SEMESTER
SMBS-MG. UNIVERSITY.

2. OUT LINE
 Definitions.
 Theories of FDI.
 Forms of FDI.
 Strategies of FDI
 Cost Benefits of FDI
 Conclusion.
 Reference.

3. DEFINING FDI
 Is a process where by residents of one country(source
country) acquire ownership of assets for the purpose of
controlling the production and distribution and other
activities.
 IMF’s Balance of Payment manual defines FDI as an
investment that is made to acquire lasting interest in an
enterprise operating in an economy other than that of an
investor, the investor’s purpose being to have voice in the
management of the enterprise.
 The United Nations(1999)World Investment
Report(UNICTAD)defines FDI as an investment having
involving long term relationship and reflecting a lasting
interest and control of resident entity in one economy in
an enterprise resident in an economy other than that of
the foreign direct investor.

4. Cont…
 United States Department of Commerce regards a
foreign business as US foreign affiliate if a US single
investor owns at least 10 percent of the voting
securities.
 The distinguishing feature of FDI in comparison with
other forms of international investments is the
element of control over the management policy and
decision. Razin(1999).

5. THEORIES OF FDI
Mac Dougall-Kemp Hypothesis.
FDI moves from capital abundant economy to capital
scarce economy till the marginal production is equal in
both countries. This leads to improvement in
efficiency in utilization of resources in which leads to
ultimate increase in welfare .According to this theory,
foreing direct investment is a result of differences in
capital abundance between economies. This theory
was developed by MacDougal(1958) and was later
elaborated by Kemp(1964)

6. Cont…
Industrial Organization Theory.
According to this theory, MNC with superior technology
moves to different countries to supply innovated
products making in turn ample gains .Krugman
(1989) points out that it was technological advantage
possessed by European countries which led to massive
investment in USA .According to this
theory, technological superiority is the main driving
force for foreign direct investment rather that capital
abundance.

7. Cont…
Currency Based Approaches.
A firm moves from strong currency country to weak currency
country. Aliber(1971)postulates that firms from strong
currency countries move out to weak currency countries.
Froot and Stain(1989)holds that, depreciation in real value
of currency of a country lowers the wealth of a domestic
residents visa avis the wealth of the foreign residents ,thus
being cheaper for foreign firms to acquire assets in such
countries. Therefore, foreign direct investments will move
from countries with strong currencies to those with weak
or depreciating currencies.

8. Cont…
Location –Specific Theory.
Hood and Young(1979) stress on the location factor.
According to them, FDI moves to a countries with
abundant raw materials and cheap labor force. Since
real wage cost varies among countries, firms with low-
cost technology move to low wage countries.
Abundance of raw materials and cheap labor force are
the main factors for FDI.Countries with cheap labor
and abundant raw material will tend to attract FDI.

9. Cont…
Product Cycle Theory.
FDI takes place only when the product in question
achieve specific stage in its life cycle(Vernon
1966)introduction ,growth, maturity and decline stage.
At maturity stage, the demand for new product in
developed countries grow substantially and rival firms
begin to emerge producing similar products at lower
price.
So in order to compete with rivals, innovators decide to
set up production in the host country so as to beat up
the cost of transportation and tariffs.

10. cont…
Political –Economic Theories.
They concentrate on the political risks. Political stability
in the host country leads to FDI(Fatehi-Sedah and
Safizeha 1989).Similarly, political instability in the
home country encourages FDI in other
countries(Tallman 1988).

11. FORMS OF FDI
It takes broadly three forms:
1.Green Field Investment
2.Merger and Acquisitions(M&A)
3.Brown Field Investment.

12. Cont…
1.Green Field Investment.
IT is done through opening branches in host countries
or through making investment in the equity capital of
the host country firm.(Financial collaboration)
If the parent hosts the entire equity of the host country
firm, the late is called wholly owned subsidiary of the
of the parent.
If it is more than half, it is known as subsidiary.
otherwise, it is simply an affiliate.

13. Cont…
2.Merger and Acquisition(M&A)
They are either purchase of a running company abroad
or an Amalgamation with a running foreign company.
For the case of Merger, the acquiring company maintains
its existence and the target company looses its
existence.
For the case of Amalgamation, both loose their
existence in the favor of a new company.
Merger and Acquisition are either Horizontal or Vertical
Conglomerate.

14. Cont…
Horizontal Conglomerate is when two or more firms engaged in similar activities

combine.
Vertical is when two firms involved in different stages of production of a single final
product combine.eg Oil exploration with a refining .
Brown Field.
Is a combination of Green field and M&A and then make huge investment for
replacing plant and machinery in the target company.

15. Strategy for FDI
Firm-Specific Strategy.
It means offering new kind of product or differentiated
product. When product innovation fails to work, a firm
may adopt product differentiation strategy. This is done
through putting trade mark on the product or branding.
Sometimes a firm may adopt different brands for different
markets to make them suitable for local markets. Bata for
example, operates in 92 countries under the same trade
mark, while Uniliver’s low - leather fabric washing product
is marketed is market under five different brands in
Western Europe.
Cost –Economic Strategy.
This strategy is done through lowering cost by moving the
firm to the places where there are cheap factors of
production(eg.labour and raw materials).The cheapness of
these factors of production reduces the cost of production
and maintains an edge over other firms.

16. Strategies for Entering New
Markets.
Joint Venture With a Rival Firm.
Sometimes when a rival firm in a host country is so powerful
that it is not easy for MNC to compete, the later prefer to
join hands with the host country firm for a joint venture
agreement and the MNC is able to operate the host country
market.
Investment Mode Strategy: Merger versus GI.
This strategy depends on the move of investment favored by
the host country. It depends also on the political and
economic environment of the host country. If the host
government does not favor a particular mode, an investing
company can not adopt it even if it is the most suitable.

17. Cost and Benefits of FDI
Benefits to The Host Country.
1.Availability of scarce factors of production
2.Improvement in Balance of Payments through export
and import substitution.
3.Building of economic and social infrastructure.
4.Fostering of economic linkages.
5.Strengthening of the government budget.
6. Stimulation of national economy. Subsidiaries of
Trans-National Corporations (TNCs), which bring the
vast portion of FDI, are estimated to produce around a
third of total global exports (UNCTAD 1999).

18. Cont...
Benefits to The Home Country.
1.Availability of raw material.
2.Improvement in Balance of Payments.
3.Revenue to the government
4.Employement generation
5.Improved political relations.

19. Cont…
Cost to the Home Country.
1.Cultural and political interference.
2.Un healthy competition
3.Over utilization of local resources(both natural and
human resources)
4.Vilation of human rights(child labor eg. the case of
NIKE in Vietnam).
5.Threat to indigenous technology.
6.Threat to local products.

20. Cont..
Cost to the Home Country.
It is little compared to the host country.
1.Investment abroad takes away employment
opportunities.
2.It takes away capital.
3.Out flow of factors of production.

21. REFERENCE
 UNICTAD(2002) Foreign Direct Investment: A Lead
Driver for Sustainable Development, Economic
Briefing Series No. 1,Whitehall Court, London.
 The Location of Foreign Direct Investment
Activities: Country Characteristics and Experience
Effects(1980) Journal of International Business
Studies, Palgrave Macmillan Journals.
 Vyuptakesh(2009) International Financial
Management, Delhi, PHI Learning Private.
 How does foreign direct investment affect economic
growth?(1998) Journal of International Economics,
Volume 45, Issue 1 , 1 June 1998, Pages 115-135.