© 2013 Cengage Learning. All rights reserved. CHAPTER 6 GLOBAL2  PENG © Nadine Hutton/Bloomberg via Getty Images

© 2013 Cengage Learning. All rights reserved. CHAPTER 6 LEARNING OBJECTIVES After studying this chapter, you should be able to: 1.Identify and define the key terms associated with foreign direct investment (FDI). 2.Use the resource-based and institution-based views to answer why FDI takes place. 3.Explain how FDI results in ownership advantages. 4.Identify the ways you can acquire and neutralize location advantages.

© 2013 Cengage Learning. All rights reserved. CHAPTER 6 LEARNING OBJECTIVES After studying this chapter, you should be able to: 5. List the benefits of internalization. 6. Identify different political views on FDI and understand its benefits and costs to host and home countries. 7. List three things you need to do as your firm considers FDI.

© 2013 Cengage Learning. All rights reserved. LO1: KEY TERMS ASSOCIATED WITH FDI Terms to know:  Foreign portfolio investment (FPI)  Foreign direct investment (FDI)  Management control rights  Horizontal FDI  Vertical FDI  FDI flow  FDI inflow  FDI outflow  FDI stock

© 2013 Cengage Learning. All rights reserved. LO1: HORIZONTAL FDI When a firm takes the same activity at the same value-chain stage from its home country and duplicates it in a host country.

© 2013 Cengage Learning. All rights reserved. LO1: VERTICAL FDI When a firm moves upstream or downstream in different value-chain stages in a host country through FDI.

© 2013 Cengage Learning. All rights reserved. LO2: WHY DOES FDI TAKE PLACE? FDI provides gains to a firm through OLI:

© 2013 Cengage Learning. All rights reserved. LO3: HOW DOES FDI RESULT IN OLI ADVANTAGES? OWNERSHIP ADVANTAGES  Direct is the key word in FDI.  Direct ownership provides combination of equity ownership rights and management control rights.

© 2013 Cengage Learning. All rights reserved. LO3: OWNERSHIP ADVANTAGES FDI vs. Licensing

© 2013 Cengage Learning. All rights reserved. LO4: LOCATION ADVANTAGES  Some locations possess geographical features that are difficult to match.  Location advantage can arise from agglomeration – the clustering of economic activities in certain locations.

© 2013 Cengage Learning. All rights reserved. LO4: LOCATION ADVANTAGES Results from: Knowledge spillover Industry demand for skilled workers Industry demand that facilitates a pool of specialized suppliers and buyers in a region

© 2013 Cengage Learning. All rights reserved. LO4: ACQUIRING AND NEUTRALIZING LOCATION ADVANTAGES  Location advantage does not entirely overlap with country-level advantages.  Refers to advantage that firm obtains when operating in a specific location due to firm- specific resources.  When one firm enters a foreign country through FDI, competitors are likely to increase FDI in order to acquire or neutralize location advantages.

© 2013 Cengage Learning. All rights reserved. LO5: THE BENEFITS OF INTERNALIZATION  Reduces cross-border transaction costs.  Replaces external market relationship with single organization spanning both countries.

© 2013 Cengage Learning. All rights reserved. LO5: INTERNATIONAL MARKET TRANSACTION

© 2013 Cengage Learning. All rights reserved. LO5: ONE COMPANY IN TWO COUNTRIES

© 2013 Cengage Learning. All rights reserved. LO6: DIFFERENT POLITICAL VIEWS ON FDI Radical view Pragmatic nationalism Free market view

© 2013 Cengage Learning. All rights reserved. LO6: BENEFITS AND COSTS OF FDI

© 2013 Cengage Learning. All rights reserved. LO6: BENEFITS AND COSTS OF FDI TO HOST COUNTRIES Benefits 1. Capital inflow 2. Technology spillovers 3. Advanced management know-how 4. Creates jobs Benefits 1. Capital inflow 2. Technology spillovers 3. Advanced management know-how 4. Creates jobs Costs 1. Loss of economic sovereignty 2. Loss of domestic firms 3. Capital outflow Costs 1. Loss of economic sovereignty 2. Loss of domestic firms 3. Capital outflow

© 2013 Cengage Learning. All rights reserved. LO6: BENEFITS AND COSTS OF FDI TO HOME COUNTRIES Benefits 1. Repatriated earnings from FDI profits 2. Increased exports 3. Learning via FDI from operations abroad Benefits 1. Repatriated earnings from FDI profits 2. Increased exports 3. Learning via FDI from operations abroad Costs 1.Capital outflow 2. Job loss Costs 1.Capital outflow 2. Job loss

© 2013 Cengage Learning. All rights reserved. LO7: THREE THINGS TO DO

© 2013 Cengage Learning. All rights reserved. DEBATE: WELCOMING VS. RESTRICTING SOVEREIGN WEALTH FUND INVESTMENTS  SWFs have recently provided much needed cash to struggling firms.  SWFs may be politically motivated (national security).  SWFs lack transparency. PROCON