Professional Documents
Culture Documents
• General Definition
– Direct investments in productive assets in a
foreign country.
• Practical Definition
– Many countries differentiate between portfolio
investment and FDI using the 10% rule.
– Often, requires investment ≥ 10% of total
capital of company to be considered FDI.
1
What is FDI?
• 3 components:
1. Equity capital
2. Reinvested earnings
3. Intra-company loans
2
Defining Characteristics of MNEs
• Larger
• More productive
• Stronger
• Usually already export/import
4
Trade Barriers
• Why would these lead to FDI?
6
Intangible Assets
• Internalization theory of FDI: MNEs
conduct FDI in order to retain control of
intangibles while enjoying benefits of larger
markets.
7
Vertical Integration
• What is it?
• How does it change competitive landscape?
• Backward vs. forward
• Interesting twist: double marginalization if
and only if also have monopoly power.
8
Product Life Cycle
• Not same in all countries
– Example: land-lines vs. cell phones.
– Example: cell phones in Japan vs. US.
• Reflects high initial importance of R&D.
Later, total costs are more important.
• This leads to FDI in lower cost countries.
9
Product Life Cycle
The U.S.
Quantity
production exports
imports
m p ti on
co nsu
n
p tio
su m
con
imports
production
1,400
1,200
1,000
US$bn
800
600
400
200
0
1970 1980 1990 1995 1999 2000 2001
Inflows Outflows
11
Global Inflows of FDI 1993-2001
1,600
1,400
1,200
1,000
US$bn
800
600
400
200
0
1970 1980 1990 1995 1999 2000 2001
12
Global Outflows of FDI 1993-2001
1,600
1,400
1,200
1,000
US$bn
800
600
400
200
0
1970 1980 1990 1995 1999 2000 2001
13
Net Global Inflows of FDI 1993-2001
200
150
100
50
US$bn
0
1970 1980 1990 1995 1999 2000 2001
-50
-100
-150
14
Sectoral Allocation of FDI
• General rules – averaged over time &
countries so take cautiously:
– 35.6% to manufacturing
– 47.4% to services
– 17.0% to primary products
15
Forms of FDI
• Greenfield investment
– Build new production facilities in foreign
country.
• M&A
– Buy existing businesses in foreign countries
• WFOE vs. JV
– Some countries specify 2+ types of JVs.
16
Interpreting FDI
• Transfer ownership of productive assets to
more efficient owners.
or
• Leverage comparative advantage by
moving to more suitable locations.
17
Markets’ View of FDI
• Are there synergistic gains? (i.e. 1+1 > 2?)
• Multinationality is positively correlated
with firm’s market value because of
intangibles.
• Consistent with internalization theory of
FDI.
• Morck & Yeung (“Why Investors Value
Multinationality”, Journal of Business, 1991)
18
FDI & Exchange Rates
Empirical data indicate that exchange rates:
• may influence M&A FDI.
• have little/no influence on greenfield
investments.
• Why?
19
Consequences for Host Countries
• Positive
– Direct: Technology transfer; increased
employment; higher salaries (~20% common).
– Indirect: Enhances market competitiveness;
may lower domestic prices; improve quality of
labor force.
• Negative
– Direct: reduce market power of domestic firms;
profits shipped to MNE’s home country;
foreign firms gain domestic influence.
20
Consequences for Home Countries
• Technological innovation.
• Foreign trade expansion positively
correlated to outward FDI mixed net
impact on labor market.
• Profit remittance from overseas
investments.
– Not always a positive. Why?
21
Policy Changes that Promote FDI
• World Trade Organization (WTO)
• Bilateral Investment Treaties (BITs)
22
Political Risk
• Difficult to measure but fundamental to a
full understanding of a market’s projected
development.
• Macro risk – affects all FDI in host country.
• Micro risk – affects only certain industries
or types of firms.
23
Hedging Political Risk
• Geographic diversification
• Minimize exposure
– Form JVs with local companies.
– Form/join international consortium to make
investments.
– Use local financing.
– Insurance against political risk.
24