FDI 1

29 flashcards · Other · by Daniel F.

1. Foreign direct investment

   Investor has significant degree of control of and influence on the foreign management

2. Foreign portfolio investment

   Foreign investment without controlling stake

3. 10 percent ownership rule

   Any flow of capital to a foreign firm in which the investor has (or gains) ownership of 10 percent or more of the foreign firm is considered FDI

4. FDI flows vs. FDI stocks

   FDI flow: the amount of FDI moving in a certain direction during a given time interval (e.g. one year). FDI inflow – The volume of FDI moving into a country FDI outflow – The volume of FDI originating from a country FDI stock: The total cumulative value of all FDI flows Inward FDI stock: A snapshot of the total cumulative value of all foreign direct investments in a economy (=cumulative value of all FDI inflows) at a given point in time (e.g. on Dec. 31, 2018). Outward FDI stock: A snapshot of…

5. Multinational enterprise (MNE)

   A firm that own and controls operations in more than one country = a firm that undertakes FDI One parent firm, one or more foreign affiliates (subsidiaries, branches)

6. MNE vs. FDI

   Parent firms transfer more than just financial capital Not all funds used for multinational financing are included in FDI data (e.g. funds borrowed in the host country) Not all FDI is used to finance real economic activity (e.g. “mailbox firms” in Bermuda Islands.)

7. Multinationals finance a substantial amount of their activities by borrowing in the host country and face 2 risks

   Exchange rate risk Risk of expropriation

8. Exchange rate risk

   Take on liabilities and assets denominated in foreign currency to reduce fluctuations in the value of net assets

9. Risk of expropriation

   Possibility to default on foreign liabilities if foreign government expropriates firm assets

10. types of multinational activity

    Horizontal (‘market-seeking’) Vertical (‘efficiency-seeking’)

11. Horizontal (‘market-seeking’) MN activity

    Serving foreign markets directly (producing and selling to customers abroad); replication of home activities in host country e.g. build store in other country

12. Vertical (‘efficiency-seeking’) MN activity

    Sourcing from abroad; locating activities from a different stage of the value chain to the host country e.g. invest in supplier backward - MNE acquires or builds an operation that fulfills the role of a supplier forward - MNE acquires or builds an operation that fulfills the role of a distributor

13. Does FDI lead to more trade or less trade

    FDI substituents trade when producing locally avoids cost of importing FDI complements trade overseas production generates exports back to the home country

14. overcoming liability of foreignness with FSAs

    Overcoming institutional, cultural, and language barriers in the foreign country. Travel and communications costs (between headquarter and subsidiary). Other costs of doing business that native firms are not facing

15. Firm-specific advantages

    valuable firm-specific tangible and intangible resources and capabilities Valuable Rare Inimitable Non-substitutable Allow the firm to overcome the inherent disadvantages of being foreign (liability of foreignness)

16. Alternative ways to leverage the firm-specific assets

    exporting licensing

17. Dissemination risk

    a firm’s specific know-how becomes widely dispersed and falls into the hands of competitors

18. FDI vs exporting

    Adv FDI Utilize local resources (e.g. cheap labor). Circumvent import restrictions in foreign country and avoid transportation costs. Get access to trade blocs. Proximity to foreign customers. Disadv FDI Production takes place in multiple locations. Hence, loss of size advantages (economies of scale).

19. FDI vs. licensing

    Adv FDI Avoid transactions costs related to licensing. Control over how firm's assets are used. Reduce dissemination risk. Disadv FDI Local firms are more familiar with the foreign business environment. High costs of establishing and managing foreign operations.

20. Dunning’s OLI model

    determine the type of market entry based on advantages the firm or location has Ownership advantages Location advantages Internalization advantages

21. Ownership advantages in OLI

    Firm-level sources of competitive advantage that help to overcome the “liability of foreignness” Scarce, tacit firm-specific assets or resources like a great brand or proprietary technology Ability of managers to identify and exploit resources and coordinate Monopoly power due to size

22. Location-advantages in OLI

    Attractive, country-specific resources available in the foreign country that are “location-bound” Resources: natural resources that you need for your business. Innovations: knowledge, technology, skills, best practices, new approaches that you wish to tap into. Efficiency: since wages and other costs are NOT equal around the globe (!), companies can exploit these differences to reduce costs.

23. Internalization-advantages in OLI

    The benefits of organizing cross-border activities "in house" instead of through the market. Incomplete contracting: where contracts fail, internal markets arise. Asset specificity: market parties cannot use your technology, or you do not want them to. Internal market for transferring tacit knowledge (knowledge intensity becomes important).

24. FDI will be favored over exporting when

    Transportation costs are high. Trade barriers are high.

25. FDI will be favored over licensing when

    The firm wants control over its technology. The firm wants strategic control over operations. The firm' s capabilities are not amenable to licensing

26. transfer pricing

    Set prices for firm-internal transaction such that profits are shifted from high-tax to low-tax countries

27. FDI effects on the home country

    Capital outflow; capital becomes more scarce -> higher returns to capital (+), lower returns to labor (-). Domestic labor is replaced with foreign labor (-). Loss of external benefits associated with domestic production (e.g. worker training) (-). Profits are shifted to abroad -> reduction in government tax revenue (-). Profit repatriation (+). Learning from operations abroad (+).

28. FDI effects on the host country

    Job creation (+). Increase in government tax revenue (+) Capital outflow through repatriated earnings (-). Local firms competing with the MNE lose (-). Positive externalities (MNE brings technology, marketing capabilities, managerial skills, etc.) (+). Thread to sovereignty (power) of host country government (-).

29. Government policy FDI

    Encouraging Outward FDI Many home countries have government-backed insurance programs to cover major types of foreign investment risk. Many home countries have eliminated double taxation of foreign income Restricting Outward FDI Virtually all investor countries exercise control over outward FDI from time to time. Countries manipulate tax rules to make it more favorable for firms to invest at home. Countries may restrict firms from investing in certain nations for political reasons Encouraging I…