6-* What is foreign direct investmentCompany acquiring or merging with a firm in a different countryA firm creating a Greenfield operation in a different countryA firm creating a subsidiary in a different countryAs a resultThe firm has significant control of its foreign operationFirm can affect managerial decisions of the foreign operation

6-*FDI - Flow versus stock

FDI occurs when a firm invests directly in facilities to produce and/or market a product in a foreign countryFlow: Amount of FDI over a period of time (one year)Stock: Total accumulated value of foreign owned assets at a given point in timeFDI is not the investment by individuals, firms or public bodies in foreign financial instruments

6-* Why is FDI important ?Firms want a presence in foreign marketsFirms want control over growth of these foreign marketsTo gain first mover advantagesTo ward off competitorsTo determine locations, advertising and other related strategic decisions in the firms interest

6-*Trends in FDIFlow and stock increased in the last 20 yearsIn spite of decline of trade barriers, FDI has grown more rapidly than world trade becauseBusinesses fear protectionist pressuresFDI is seen a a way of circumventing trade barriersDramatic political and economic changes in many parts of the worldGlobalization of the world economy has raised the vision of firms who now see the entire world as their market

6-*FDI outflows, 1982-2002 Fig 6.1

6-*FDI flows by regionFig: 6.3

6-*FDI outflows by select country1998-2001Fig: 6.5

6-*Form Of FDI: Greenfield versus acquisitions

Green field operation:Mostly in developing nationsMergers and acquisitions:Quicker to execute.Foreign firms have valuable strategic assetsBelieve they can increase the efficiency of the acquired firmMore prevalent in developed nations

6-*FDI trends: 2001-2002The value of FDI slumped almost 60 percent in 2001-2002Slowdown in world economyHeightened geopolitical uncertainty since September 11, 2001Bursting of the stock market bubble in the US

6-*Impediments to the sale of know-howImpediments to the sale of know howRisk giving away know-how to competitorsLicensing implies low control over foreign entityKnow-how not amenable to licensing

6-*Two forms of FDIHorizontal Direct InvestmentFDI in the same industry abroad as company operates at home. Vertical direct investmentBackward - investments into industry that provides inputs into a firms domestic production (typically extractive industries)Forward - investment in an industry that utilizes the outputs from a firms domestic production (typically sales and distribution)

6-*FDI when and why?Transportation costs are highMarket Imperfections (Internalization Theory)Impediments to the free flow of products between nationsImpediments to the sale of know-howFollow the lead of a competitor - strategic rivalryProduct Life Cycle - however, does not explain when it is profitable to invest abroadLocation specific advantages (natural resources)

6-*VDI, when and why?Market power create entry barrierserode entry barriersMarket imperfectionsImpediments to the sale of know-howInvestments in specialized assets

6-*Decision frameworkHow high are transportation costs and tariffs?Is know-how amenable to licensing?Is tight control over foreign operation required?Can know-how be protected by licensing contract?Then licenseExportNoYesYesLowNoYesNoHorizontal FDIHorizontal FDIHorizontal FDIHigh

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