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Lecture Week4

This document discusses foreign direct investment (FDI). It defines FDI as an investment made by an investor in one country to acquire assets in another country with the intent to manage those assets. The document discusses different forms of FDI, including greenfield investments (establishing new operations) and acquisitions or mergers with existing foreign firms. It distinguishes FDI from foreign portfolio investment and discusses several theories of international investment, including monopolistic advantage theory, cross investment theory, and internalization theory. Finally, it notes that costs and benefits of FDI can be viewed from the perspectives of both host and home countries.

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Atiqullah sherzad
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27 views

Lecture Week4

This document discusses foreign direct investment (FDI). It defines FDI as an investment made by an investor in one country to acquire assets in another country with the intent to manage those assets. The document discusses different forms of FDI, including greenfield investments (establishing new operations) and acquisitions or mergers with existing foreign firms. It distinguishes FDI from foreign portfolio investment and discusses several theories of international investment, including monopolistic advantage theory, cross investment theory, and internalization theory. Finally, it notes that costs and benefits of FDI can be viewed from the perspectives of both host and home countries.

Uploaded by

Atiqullah sherzad
Copyright
© © All Rights Reserved
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Download as PPTX, PDF, TXT or read online on Scribd
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INTERNATIONAL

BUSINESS
Foreign Direct Investment (FDI)

BBA-6th Semester
FDI

Example:
In the early 1980’s Honda, a Japanese automobile company,
built an assembly plant in Ohio and began to produce cars
for the North American market. These cars were substitutes
for imports from Japan. Once a firm undertakes FDI, it
becomes a Multinational Enterprise (The meaning of
Multinational being “more than one country”).
Definition:
Foreign Direct Investment (FDI) is defined as an investment made by an investor of
one country to acquire an asset in another country with the intent to manage that
asset
 Through Foreign Direct Investment a firm invests directly in facilities to produce
and/or market a product in a foreign country
Forms of FDI

Green Field Investment


 Green field investment, which involves the establishment of a wholly new
operation in a foreign country

Acquisition or Merging
 Acquiring or merging with an existing firm in a foreign country. Acquisition can
be a minority (where the foreign firm takes a 10 percent to 49 percent interest in
the company’s Share Capital and voting rights), or majority (foreign interest of
10 percent to 99 percent) or full outright stake (foreign interest of 100 percent).
FDI vs FPI

There is an important distinction between FDI and Foreign Portfolio


Investment (FPI). Foreign portfolio investment is investment by
individuals, firms or public bodies (e.g. National and local Govts) in
foreign financial instruments, (e.g. Government bonds, foreign stocks).
FDI does not involve taking a significant equity stake in a foreign
business entity. FPI is determined by different facts than FDI. FPI
provides great opportunities for business and individuals to build a truly
diversified portfolio of international investments in financial assets,
which lowers risk.
International Investment Theories

Monopolistic Advantage Theory


Stefan Hymer saw the role of firm-specific advantages as a way of marrying the study
of direct foreign investment with classic models of imperfect competition in product
markets. He argued that a direct foreign investor possesses some kind of proprietary
or monopolistic advantage not available to local firms. These advantages must be
economies of scale, superior technology, or superior knowledge in marketing,
management, or finance. Foreign direct investment took place because of the product
and factor market imperfections. The direct investor is a monopolist or, more often,
an oligopolist in product markets. Humer implied that governments should be ready
to impose controls on it.
Cross Investment Theory

E. M. Graham noted a tendency for cross investment by European and


American firms in certain oligopolistic industries; that is, European firms
tended to invest in the United States when American companies had
gone to Europe. He postulated that such investments would permit the
American subsidiaries of European firms to retaliate in the home market
of U.S. companies if the European subsidiaries of these companies
initiated some aggressive tactic, such as price cutting, in the European
market.
The Internalization Theory

By investing in a foreign subsidiary rather than licensing, the company is


able to send the knowledge across borders while maintaining it within
the firm, where it presumably yields a better return on the investment
made to produce it.
NotesSelf Assessment

 State whether the following statements are true or false:


 A new software firm would prefer to set up its Application software
research centre in a developing country like India.
 China and India are likely to receive high FDI in future as they have
high purchasing power parity.
 Infrastructure of a country plays a critical role in a selection of site of
a company.
Costs and Benefits Associated with FDI

Costs and benefits associated with FDI can be discussed from two
point-of-views: host country’s point-of-view and home country’s point-
of-view.
Benefits to the Host Country

I. Recources-Tranfer effect

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