Lecture 10 Foreign Investment and FDI

Session Outline
Reasons for FDI FDI and trade by triad members The triad and regional business strategy The worlds regional automotive industry.

Objectives
Describe the major reasons for FDI. Explain the role of triad-based MNEs in worldwide FDI and trade. Relate select examples of inter-triad MNE business activity. Discuss the economic interrelationships among triad members.

Introduction
Most FDI and trade is conducted by MNEs. MNEs from the triad continue to dominate international business. The triad is the basic unit of analysis in international business.

Table 3.1

Ten years of intra-regional FDI in the triad, 19932002

Note: EU intra-regional FDI is FDI stocks within Europe as a whole. NAFTA intra-regional FDI is US and Canada stocks within NAFTA. Asia intra regional FDI is Japan, South Korea, Australia and New Zealand stocks within Asia
Source: Authors calculations based on OECD, International Direct Investment Statistics Yearbook , 2004

Reasons for FDI

Foreign direct investment

FDI is the ownership and control of foreign assets. FDI usually involves the ownership, whole or partially, of a company in a foreign country: a foreign subsidiary. FDI is different from portfolio investment, which is the purchase of financial securities in other firms for the purpose of realizing a financial gain when these marketable assets are sold.

Some reasons for FDI

Increase sales and profits. Enter rapidly growing markets. Reduce costs. Gain a foothold in economic blocs. Protect domestic markets. Protect foreign markets. Acquire technological and managerial know-how.

FDI and trade by triad members

The triad accounts for about 80% of world FDI. Two important FDI destinations are:
Intra-regional: from one triad member to another Inter-regional: from one triad member to the geographic region that surrounds it. (e.g. from the US to the Americas).

Foreign direct investment in the United States, 2005

Note: Data are on a historical-cost basis. Numbers might not add up due to rounding Sources: Authors calculations and US Department of Commerce, Survey of Current Business, June 2007, p. D67

Table 3.3a

Ten years of triad FDI

*EU15 numbers are in outward stocks of FDI by every EU15 member and thus include intra-EU15 FDI
Sources: Authors calculations; United Nations, World Investment Report 1998, pp. 379400; United Nations, World Investment Report 2006, pp. 303306

Table 3.3b

Ten years of triad trade

*EU includes intra-EU FDI. Note: Exports are calculated by including freight and insurance while imports do not include freight and insurance
Sources: Authors calculations and International Monetary Fund, Direction of Trade Statistics Yearbook, 2006 (Washington, DC: IMF, 2006), pp. 25; International Monetary Fund, Direction of Trade Statistics Yearbook, 2002 (Washington, DC: IMF, 2002), pp. 25

Triad FDI clusters

A group of developing countries usually located in the same geographic region as a triad member and having some form of economic link to this member.
The US tends to be a dominant investor in Latin America, and countries such as Mexico and Brazil are part of its FDI cluster. The EU tends to be a dominant investor in Eastern Europe and countries like the Czech Republic and Poland are part of its FDI cluster.