FDI Basics
Define foreign direct investment?
A firms investment directly in new facilities to produce or market in a foreign country
There are two forms of FDI:
(1) Acquisition/Merger AND
(2) A ____________ investment.
Greenfield
SAVAGE QUESTION (-200 if you get it wrong)
Define exporting:
Producing goods at home and then shipping them to the receiving country for sale
Knickerbocker established a theory that states that a type of competition occurs when two or more enterprises encounter eachother in different regional markets, national markers, or industries.
What is the name of this theory:
Multipoint Competition
Name 1 of the five largest source countries for FDI, other than the US:
1. UK
2. Netherlands
3. France
4. Germany
5. Japan
Define greenfield investment:
The establishment of a wholly new operation in a foreign country
The stock of FDI is the total accumulated value of ________-owned assets at a given time.
foreign
DOUBLE JEOPARDY (+400 pts)
Define licensing:
Granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit that the foreign entity sells
Dunning believed that, to explain the rationale for and direction of FDI, you need location-specific advantages, and externalities.
This theory is called the what?
Eclectic Paradigm
Name 1 of the two largest, developed targets (countries/regions) of FDI:
1. US
2. EU
FDI will be favored over exporting when transportation costs are ______ and trade barriers are ______.
(Hint: Answer is same for both blanks)
High
Since WWII, which country has has been the largest source country for FDI?
USA
Define externalities:
Knowledge 'spillovers' that occur when companies in the same industry locate in the same area
According to the theory of comparative advantage, the free market view of FDI states that international production should be ____________ ___________ ______________.
distributed amongst countries
Name 1 of the two largest, developing targets (countries/regions) of FDI:
1. Southeast Asia
2. Latin America
FDI will be favored over licensing when the firm wants _________ of operations and strategy.
Control
Greenfield investments __________ the level of competition in a market, and drive down prices in the process.
Increase
Define offshore production:
The manufacturing of a product in another country for import to the home market
According to the capital-imperialist radical view of FDI, the multinational firm is an instrument of imperial domination and tool for exploiting ______ ___________ to the benefit of home countries.
host countries
Name 1 of the three main reasons why more firms haven chosen FDI over traditional world trade in the last 35 years.
1. Firms still fear protectionist policies
2. The shift toward democratic political institutions and free market economies encourages FDI
3. Globalization is prompting firms to ensure they have a significant presence in many regions of the world
In recent years, there has been a strong shift toward the free market stance, meaning and increase in volume of FDI directed at countries that have recently liberalized their regimes.
Name 2 of the five countries:
China
India
Vietnam
Venezuela
Bolovia
A firm's bargaining power with the host government is highest when the host government places _______ value on what the firm has to offer, and there are _______ comparable alternative available.
(Must get both blanks correct)
High, few
Define "Internalization Theory" (AKA Market imperfections):
Theory that focuses on the imperfections in intermediate production economies.
It suggests that licensing could result int loss of valuable technological know-how to a foreign competitor, and does not give firm control over manufacturing, marketing, and strategy in a foreign country.
The pragmatic nationalist view states that FDI has both costs and benefits. Give one of the four major benefits.
Inflows of capital
Technology
Skills
Jobs
Name one of the three main reasons why acquisitions are more attractive that greenfield investments for cross-border FDI:
1. They are quicker to execute than greenfield investments
2. It is less risky
3. It is more efficient to transfer capital, technology, or management skills