Foreign Direct InvestmentForeign Direct InvestmentForeign Direct InvestmentWhy is FDI increasing in the world economy?Why do firms often prefer FDI to other market entry strategies?Why do firms imitate competitors with FDI strategies?Why are certain locations favored for FDI?How does political ideology affect government FDI policy? What are key FDI related costs and benefits for receiving and source countries?Foreign Direct InvestmentForeign direct investment (FDI): a firm invests directly in foreign facilities A firm that engages in FDI becomes a multinational enterprise (MNE)Multinational = “more than one country”Factors which influence FDI are related to factors that stimulate tradeForeign Direct InvestmentInvolves ownership of entity abroad forproductionMarketing/serviceR MNEs Are imperialist dominators Exploit host to the advantage of home country Extract profits from host country; give nothing back Keep LDCs backward and dependent for investment, technology and jobsThe free market view: FDI should be encouraged Adam Smith, Ricardo, et al: international production should be distributed per national comparative advantage An MNE increases the world economy efficiencylBrings to bear unique ownership advantages lAdds to local economys comparative advantagesHost Country Effects of FDIBenefits Resource -transfer Employment Balance-of-payment (BOP)lImport substitutionlSource of export increaseCosts Adverse effects on the BOPlCapital inflow followed by capital outflow + profitslProduction input importation Threat to national sovereignty and autonomylLoss of economic independence Government Policy and FDIHome countryOutward FDI encouragementlRisk reduction policies (financing, insurance, tax incentives)Outward FDI restrictionslNational security, BOPHost countryInward FDI encouragementlInvestment incentiveslJob creation incentivesInward FDI restrictionslOwnership extent restrictions (national security; local nationals can safeguard host countrys interestsDecision Framework for FDIExportFDIFDIFDILicenseYesImport Barriers?NoNoYesNoAre transportation costs high?Is know-how easy to license?Tight control over foreign ops required?Is know-how valuable and is protection possible?NoYe sYe sNoYe s