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Explain FDI Flow and FDI Stock.
FDI Flow:
The amount of FDI moving in a given period (usually a year) in a certain direction
FDI Stock:
The total accumulation of inbound FDI in a country or outbound FDI from a country across a given period of time (usually several years)
What is the Oli Paradigm?
OLI Paradigm:
A theoretical framework positing that ownership (O), locational (L) and internationalization (I) advantages combine to induce firms to engage in FDI
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Her dog
This author wrote Harry Potter and became the first billionaire author.
It is J.K. Rowling.
OLI proposes that FDI is the most appropriate form of international business if three conditions are met:
Which conditions? Explain them.
1. Ownership Advantages:
Resources of the firm that are transferable across borders and enable the firm to attain competitive advantages abroad
2. Locational Advantages:
Advantages enjoyed by firms operating in certain locations
3. Internationalization Advantages:
Advantages of organizing activities within a multinational firm rather than using a market transaction
Restrictive Institutions come in three forms:
1. Outright bans in FDI that rule out FDI completely have become rare. Some governments in developing countries hostile to FDI have in the past nationalized MNE assets, and banned new investments
2. Case-by-case approvals of FDI substitute for outright bans of FDI and make every FDI subject to a registration and approval process. Common in emerging economies
3.Ownership Requirements are a specific form of restriction that disallow full foreign ownership, but allow foreign investors to operate in a country if they establish a joint venture with a local firm
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Five different reasons encourage firms to set up operations close to their market.
What are those? Explain.
1.Protectionism in the form of tariffs or non-tariff barriers may inhibit exports. However, MNEs can quite literally jump over such protectionist barriers by setting up local production
2.Transportation Costs continue to be a major barrier to trade in some industries, despite their drastic decline over the past century. However, products are still costly to transport over long distances if they are perishable (e.g. fresh fruit), breakable (e.g. sheet glass for windows), heavy (e.g. cement) or bulky (e.g. certain construction materials). In these industries, local production often allows serving a market at lower costs
3.Direct Interaction with the Customers is essential in industries where associated services such as just in-time delivery or after sales services are an essential part of the product offering
4.The Production and Sale of Some Services cannot be physically separated, for example in hotels, banking or consultancy. The delivery of such services thus normally requires a local presence
5.Marketing Assets may be important for a fast entry strategy. FDI enables MNEs to acquire local firms that control sought-after assets such as distribution networks and brand names
The regulation of FDI comes in three parts:
1.General Regulatory Institutions of Business:
From the perspective of a host country, an FDI establishes a new firm that is subject to the laws and regulations of the country
2.FDI Specific Regulation:
Some countries make the operation of FDI subject to specific regulations. For example, local content requirements require a certain proportion of the value of the goods made in the country to originate from that country
3.Corporate Taxation:
Companies have to pay corporate tax in each country where they operate, but some countries deliberately design their tax codes to attract foreign investors