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  1. 2. THE FDI TERMINOLOGY <ul><li>foreign direct investment (FDI) - Investments in activities that control and manage value creation in other countries </li></ul><ul><li>multinational enterprise (MNE) - A firm that engages in foreign direct investment </li></ul>
  2. 3. THE FDI VOCABULARY <ul><li>foreign portfolio investment (FPI) - Investment in a portfolio of foreign securities such as stocks and bonds that do not entail the active management of foreign assets </li></ul><ul><li>management control rights - The rights to appoint key managers and establish control mechanisms </li></ul>
  3. 4. THE FDI VOCABULARY <ul><li>FDI is direct - requires significant equity ownership and provides the combination of equity ownership rights and management control rights </li></ul><ul><li>significant ownership rights provide much needed management control rights </li></ul><ul><li>FPI represents essentially insignificant ownership rights and no management control rights </li></ul><ul><li>To compete successfully, firms need to deploy overwhelming resources and capabilities to overcome their liabilities of foreignness ; FDI provides one of the best ways to facilitate extension of firm-specific resources and capabilities abroad </li></ul>
  4. 5. THE FDI VOCABULARY <ul><li>horizontal FDI - A type of FDI in which a firm duplicates its home country-based activities at the same value chain stage in a host country </li></ul><ul><li>vertical FDI - A type of FDI in which a firm moves upstream or downstream in different value chain stages in a host country </li></ul>
  5. 10. OLI Advantages <ul><li>A firm’s quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages: </li></ul><ul><li>Ownership - Refers to MNEs’ possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI </li></ul><ul><li>Location - Refers to advantages enjoyed by firms operating in certain areas </li></ul><ul><li>Internalization - Refers to the replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating in two or more countries </li></ul>
  6. 12. OWNERSHIP ADVANTAGES <ul><li>dissemination risks - risks associated with unauthorized diffusion of firm-specific know-how </li></ul>
  7. 13. LOCATION ADVANTAGES <ul><li>agglomeration - location advantages that arise from the clustering of economic activities in certain locations </li></ul><ul><li>knowledge spillovers - Knowledge diffused from one firm to others among closely located firms that attempt to hire individuals from competitors </li></ul>
  8. 14. INTERNALIZATION ADVANTAGES <ul><li>international transaction costs - tend to be higher than domestic costs - laws and regulations are typically enforced on a nation-state basis </li></ul><ul><li>intrafirm trade - international trade between two subsidiaries in two countries controlled by the same MNE </li></ul>
  9. 17. REALITIES OF FDI – POLITICAL VIEWS <ul><li>radical view - political view that is hostile to FDI </li></ul><ul><li>free market view - political view that suggests that FDI, unrestricted by government intervention, will enable </li></ul><ul><li>countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services </li></ul><ul><li>pragmatic nationalism - political view that approves FDI only when its benefits outweigh its costs </li></ul>
  10. 19. Benefits and Costs of FDI to Host Countries <ul><li>technology spillovers - foreign technology </li></ul><ul><li>diffused domestically that benefits domestic firms and industries </li></ul><ul><li>demonstration effect ( contagion or imitation effect ) - reaction of local firms to technology spillovers </li></ul>
  11. 20. Benefits and Costs of FDI to Home Countries <ul><li>Repatriated earnings of profits from FDI </li></ul><ul><li>Increased exports of components and services to host countries </li></ul><ul><li>Learning via FDI from operations abroad </li></ul>
  12. 22. HOW MNEs AND HOST GOVERNMENTS BARGAIN <ul><li>obsolescing bargain - deal struck by MNEs and host governments, which change their requirements after initial FDI entry </li></ul><ul><li>expropriation - Government’s tactics that include removing incentives, demanding a higher share of profits and taxes, and confiscating foreign assets </li></ul><ul><li>sunk costs - point at which a firm has invested substantial sums of resources </li></ul>
  13. 24. FDI versus Outsourcing <ul><li>A strategic debate is whether FDI (captive sourcing) or outsourcing will serve firms’ purposes better? </li></ul>
  14. 25. Facilitating versus Confronting Inbound FDI <ul><li>Can foreigners and foreign firms be trusted in making decisions important to the local economy? </li></ul>