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What is FDI?
Foreign Direct Investment refers to investment which a firm in one country directly controls or
owns a subsidiary in another country
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 A Stock of FDI – The total accumulated value of foreign owned assets at a given time
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FDI Forms
Purchase of existing assets (Mergers and Acquisition)
For example, a British firm acquiring a firm in a foreign country
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e
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New Investment (Greenfield)
 Advantages: No local entity exists or is available, local financial incentives, no
inherited problems
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3
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In reality, most FDI is in the form of Mergers and Acquisitions
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 Knowledge from domestic firms can be valuable
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 Exporting is affected by trade barriers
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Limitations of Licensing over M & A

The main reasons here are due to Internalisation theory
 Firm may give away valuable technological know-how to a potential foreign competitor
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 Difficult for firms to transfer their competitive advantage i
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quality of product, customer
service etc
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 A firm will favour FDI over exporting if:
 Transportation costs are high
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 The firm wants control over manufacturing
 The firm cannot transfer their competitive advantage
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A firm will be successful in FDI if it has:
1
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e
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2
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i
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labour costs, regulation, market etc
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Internalisation Advantage
o There is an advantage to internalising the production as opposed to licensing i
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costs, safeguarding technical know-how etc
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Reasons for this are as follows:
 To avoid tariffs and quotas
 Improving access to that economy
 Alliance between production divisions of firms allows technical expertise to be shared

Vertical FDI

When a firm from one country owns a company in another industrial country with a particular
stage/stages of production
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Therefore:

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It contributes to Economic Growth
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Firm specific advantages are transferred to the Host country
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e
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e
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Geography i
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natural resources, close to large market
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Externalities, worker welfare, pollution
Perceived loss of national sovereignty and autonomy

GROWTH AND
DEVELOPMENT



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