greenfield investment
establishing a new operation in a foreign country
foreign direct investment
occurs when a firm invests directly in facilities to product or market a product in a foreign country
according to the U.S Department of Commerce, whenever a U.S. citizen, organization, or affiliated group takes an interest of 10% or more in a foreign bus
multinational enterprise
once a firm undertakes foreign direct investment it becomes this
1. greenfield investment
2. acquiring or merging with an existing firm in the foreign country
the two main forms of FDI
flow of FDI
the amount of direct investment into a country in a defined time period undertaken by foreign entities (FDI inflow), or the amount of direct investment into foreign countries made by entities resident in a country in a defined period of time (FDI outflow)
stock of FDI
the cumulative value of direct investments that have been made by foreign entities in a country at a given point time
outflows of FDI
flow of foreign direct investment out of a country
inflows of FDI
flow of foreign direct investment into a country
1. despite the general decline in trade barriers over the past 30 years, firms still fear protectionist pressures
2. such of the increase in FDI has been driven by the political and economic changes that have been occurring in many of the world's developi
the FDI has grown more rapidly than world trade world trade and world output for several reasons
eclectic paradigm
argument that combining location specific assets or resource endowments and the firm's own unique assets often requires FDI; it requires the firm to establish production facilities where those foreign assets or resource endowments are located
exporting
sale of products produced in one country to residents of another country
licensing
occurs when a firm (the licensor) licenses the right to produce its product, its production processes, or its band name or trademark to another firm( the licensee);in return for giving the licensee these rights, the licensor collects a royalty fee on ever
because a firm must bear the costs of establishing production facilities in a foreign country or of acquiring a foreign enterprise
why is FDI expensive?
because of the problems associated with doing business in a different culture where the rules of the game may be very different
why is FDI risky?
internationalization theory
the argument that firms prefer FDI over licensing in order to retain control over know how manufacturing, marketing, and strategy or because some firm's capabilities are not amenable to licensing
market imperfections
imperfections in the operation of the market mechanism
1. licensing may result in a firm's giving away valuable technological know- how to a potential foreign competitor
2. licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to
the three major drawbacks of licensing as a strategy for exploiting foreign market opportunities
will favor over exporting as an entry strategy when transportation costs or trade barriers make exporting unattractive
the firm will favor over licensing when it wishes to maintain control over its technological know-how, or over its operations and busine
advantages of foreign direct investment
oligopoly
an industry composed of a limited number of large firms
multipoint competition
arises when two or more enterprises encounter each other in different regional markets, national markets, or industries
location-specific advantages
advantages that arise from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets (such as the firm's technological, marketing, or management know-how)
externalities
knowledge spillovers
radical view
traces its roots to Marxist political and economic theory
argue that the Multinational enterprise is an instrument o imperialist domination
see the MNE as a tool for exploiting host countries to ehe exclusive benefit of their capitalist-imperialist home c
free market view
traces its roots to classical economics and the international trade theories of Adam Smith and David Ricardo
argues that international production should be distributed amoung countries according to the theory of comparative advantage
countries should spec
pragmatic nationalism
the FDI has both benefits and costs
FDI can benefit a host country by bringing capital, skills, technology, and jobs but those benefits come at a cost
FDI should be allowed so long as the benefits outweigh the costs
arise from resource-transfer effects, employment effects, balance-of-payments effects, and effects on competition and economic growth
the main benefits of inward FDI for a host country
balance-of-payments accounts
national accounts that track both payments to and receipts from foreigners
current account
in the balance of payments, records transactions involving the export or import of goods and services
they arise from possible adverse effects on competition within the host nation, adverse effects on the balance of payments, and the perceived loss of national sovereignty and autonomy
costs of FDI concern host countries
1. home country's balance of payments benefits from the inward flow of foreign earnings
2. benefits to the home country from outward FDI arise from employment effects
3. benefits arise when the home-country MNE learns valuable skills from its exposure to
the benefits of FDI to the home (source) country arise from three sources
offshore production
FDI undertaken to serve the home market