1. International Business 8e
By Charles W.L. Hill
Welcome to International Business, Eighth Edition, by Charles W.L. Hill.

2. Foreign Direct Investment
Chapter 7
Foreign Direct
Investment
Chapter 7: Foreign Direct Investment
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

3. What Is FDI?
Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country
the firm becomes a multinational enterprise
FDI can be in the form of
greenfield investments - the establishment of a wholly new operation in a foreign country
acquisitions or mergers with existing firms in the foreign country
The flow of FDI refers to the amount of FDI undertaken over a given time period
Outflows of FDI are the flows of FDI out of a country
Inflows of FDI are the flows of FDI into a country
The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time
If you’ve ever traveled to Nashville or Alabama, you may have seen the manufacturing operations of some familiar companies like Nissan and Mercedes Benz.
These companies have both made investments in the United States, and now many of the cars they sell to Americans are made by Americans.
Foreign direct investment, or FDI, occurs when a firm invests directly in facilities to produce and/or market their products or services in a foreign country.
Once a firm undertakes FDI it becomes a multinational enterprise or MNE.
There are two main forms of FDI.
A greenfield investment involves establishing a wholly owned new operation in a foreign country.
This is the type of investment that both Nissan and Mercedes Benz have.
The second type of FDI is an acquisition or merger with an existing firm in the foreign country.
The flow of FDI refers to the amount of FDI undertaken over a given period of time.
Outflows of FDI are the flows of FDI out of a country, while inflows of FDI are the flows of FDI into a country.
The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time.

4. What Are The Patterns Of FDI?
Both the flow and stock of FDI have increased over the last 30 years
Most FDI is targeted towards developed nations - United States and EU
South, East, and South East Asia - China – and Latin America are emerging
FDI has grown more rapidly than world trade and world output
firms still fear the threat of protectionism
democratic political institutions and free market economies have encouraged FDI
globalization is forcing firms to maintain a presence around the world
Gross fixed capital formation - the total amount of capital invested in factories, stores, office buildings, and the like
the greater the capital investment in an economy, the more favorable its future prospects are likely to be
So, FDI is an important source of capital investment and a determinant of the future growth rate of an economy
What trends in FDI can we see over the last thirty years or so?
Well, there has been a marked increase in both the flow and stock of FDI in the world economy.
In 1975, the outflow of FDI was about $25 billion, by 2008 it was $1.4 trillion!
As you can see, there is a clear upward pattern.
Why has there been such a significant increase in FDI outflows?
There are several reasons for this pattern.
Firms are worried about protectionist measures, and see FDI as a way of getting around trade barriers.
Second, changes in the economic and political policies of many countries have opened new markets to investment.
Think, for example of the changes in Eastern Europe that have made it possible for foreign firms to expand there.
Third, many firms see the world as their market now, and so are expanding wherever they feel it makes sense.
As you’ll recall from the Opening Case for example, Spain’s Telefonica is pursuing opportunities in Latin America and in Europe.
Many manufacturers are expanding into foreign countries to take advantage of lower cost labor, or to be closer to customers, and so on.
The Country Focus in your text on China for example, points out that China has become a hot spot for firms that are attracted to the country’s low wage rates, and large market.
We can also look at FDI flows in terms of percentages of gross fixed capital formation, or the total amount of capital invested in factories, stores, office buildings, and so on.
All else being equal, the greater the capital investment in an economy, the more favorable its future prospects are likely to be.
In other words, FDI can be an important source of capital investment which can be factor in the future growth rate of an economy.

5. What Are The Patterns Of FDI?
FDI Outflows ($ billions)
As you can see from this chart, there is a clear upward trend in the pattern of FDI from 1982 to 2008.

6. What Are The Patterns Of FDI?
FDI Inflows by Region ($ billion)
As you can see, over the last decade or so, the flows of FDI have a distinct upward trend in both developed and developing countries.

7. What Are The Patterns Of FDI?
Inward FDI as a % of Gross Fixed Capital Formation
This chart suggests that FDI has become increasingly important as a source of investment in the world’s economies.

8. What Is The Source Of FDI?
Since World War II, the U.S. has been the largest source country for FDI
the United Kingdom, the Netherlands, France, Germany, and Japan are other important source countries
together, these countries account for 56% of all FDI outflows from , and 61% of the total global stock of FDI in 2007
Where has all the FDI been coming from?
Since, World War II, the U.S. has been the largest source country for FDI.
Other important source countries include the United Kingdom, the Netherlands, France, Germany, and Japan.
Together, the six countries accounted for almost 60 percent of all FDI outflows from 1998 to 2006!

9. What Is The Source Of FDI?
Cumulative FDI Outflows ($ billions)
Here you can see the cumulative FDI outflows from 1998 to 2007.

10. Why Do Firms Choose Acquisition Versus Greenfield Investments?
Most cross-border investment is in the form of mergers and acquisitions rather than greenfield investments
Firms prefer to acquire existing assets because
mergers and acquisitions are quicker to execute than greenfield investments
it is easier and perhaps less risky for a firm to acquire desired assets than build them from the ground up
firms believe that they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills
Do most firms establish greenfield operations, or do they merge or acquire existing firms?
Most firms make their investments either through mergers with existing firms, or acquisitions.
Firms prefer this route because mergers and acquisitions tend to be quicker to execute than greenfield investments, it’s usually easier to acquire assets than build them from the ground up, and because firms believe they can increase the efficiency of acquired assets by transferring capital, technology, or management skills.
Keep in mind that when a developing country is the target for FDI flows, mergers and acquisitions are much less common, probably because there are fewer firms to acquire or merge with in developing countries.

11. Why Does FDI In Services Occur?
FDI is shifting away from extractive industries and manufacturing, and towards services
The shift to services is being driven by
the general move in many developed countries toward services
the fact that many services need to be produced where they are consumed
a liberalization of policies governing FDI in services
the rise of Internet-based global telecommunications networks
Does FDI always involve manufacturing?
No!
Over the last 20 years or so, there’s been a shift away from some of the traditional industries toward FDI in services.
In 2006, for example, about two thirds of the stock of FDI was in services!
Why is this trend occurring?
There are four main reasons for the shift.
First, there is a general trend in developed countries away from manufacturing and toward services.
Second, because services often have to be produced where they are consumed, FDI is required.
After all, you can’t ship a hot latte from Seattle to Beijing!
Third, there has been a liberalization of policies governing services.
Brazil for example, opened its telecommunications sector to foreign companies in the 1990s.
Finally, Internet-based global telecommunications now allow companies to shift activities like call centers to low cost locations like India.

12. Why Choose FDI?
Exporting - producing goods at home and then shipping them to the receiving country for sale
exports can be limited by transportation costs and trade barriers
FDI may be a response to actual or threatened trade barriers such as import tariffs or quotas
Licensing - granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit that the foreign entity sells
Internalization theory (aka market imperfections theory) suggests that licensing has three major drawbacks compared to FDI
firm could give away valuable technological know-how to a potential foreign competitor
does not give a firm the control over manufacturing, marketing, and strategy in the foreign country
the firm’s competitive advantage may be based on its management, marketing, and manufacturing capabilities
Why do firms make investments in other countries? Why don’t firms just export or sign a licensing agreement with a foreign company if they want to sell their products in other markets?
We’ve alluded to some of the reasons already, but let’s explore some of the theories that help us understand FDI.
We’ll begin with looking more closely at some of the limitations of exporting and licensing, but first, let’s go over a couple of definitions.
Remember that exporting involves producing goods at home and then shipping to the receiving country for sale.
Licensing involves granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit that the foreign entity sells.
While exporting may seem to be an obvious way to expand into foreign markets, it’s not always possible.
Imagine trying to export cement for example! The Management Focus in your text describes how one cement company, Cemex, made its decisions to invest in foreign markets.
Even smaller things like soft drinks can be expensive to ship over long distances, and even if products are easy to ship like computer software, firms may run into trade barriers that make this strategy less attractive.
Japanese auto producers for example, found that it was easier to set up shop in the U.S. than to deal with the protectionist threats made by the U.S. government in the 1980s and 1990s.
Like exporting, licensing isn’t always attractive to companies.
Internalization theory suggests that licensing isn’t appropriate for three main reasons.
First, licensing may result in a firm’s giving away valuable technological know-how to a potential foreign competitor.
RCA found this out the hard way. RCA licensed its cutting edge color TV technology to Sony and Matsushita in the 1960s only to find that they copied the technology and used it to compete against RCA in the U.S. market.
So, instead of expanding successfully into Japan, RCA became a minor player in its own market!
A second problem with licensing is that it doesn’t give a firm the tight control over manufacturing, marketing, and strategy that may be required to be successful in a foreign market. For example, the firm doesn’t have the ability to set prices, or market aggressively, and so on. Instead, it’s at the mercy of the licensee.
Finally, if a firm’s competitive advantage is based on management, marketing, or manufacturing capabilities rather than its product, licensing is probably not attractive. Much of Toyota’s competitive advantage for example, lies in its superior process of designing, engineering, manufacturing, and selling cars.
Toyota can’t just license that know-how out to another firm because the skills are embedded in its organizational culture! This efficiency is critical to Toyota’s success.

13. What Is The Pattern Of FDI?
Why do firms in the same industry undertake FDI at about the same time and the same locations?
Knickerbocker - FDI flows are a reflection of strategic rivalry between firms in the global marketplace
multipoint competition -when two or more enterprises encounter each other in different regional markets, national markets, or industries
Vernon - firms undertake FDI at particular stages in the life cycle of a product
But, why is it profitable for firms to undertake FDI rather than continuing to export from home base, or licensing a foreign firm?
According to Dunning’s eclectic paradigm- it is important to consider
location-specific advantages - that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets
externalities - knowledge spillovers that occur when companies in the same industry locate in the same area
Why do firms in the same industry often make investments at about the same time, and tend to direct their investments toward certain locations?
One theory to explain these patterns is based on the idea that FDI flows reflect strategic rivalry between firms.
Knickerbocker explored the relationship between FDI and rivalry in oligopolistic industries, or industries that are composed of a limited number of large firms.
These industries are unique because what one company does can have an immediate effect on the other firms, forcing them to take similar actions.
Take the airline industry for example. If one airline cuts prices on certain routes, you see other airlines quickly make similar changes.
In an international context, recall that after Honda made its successful investment in the U.S., Toyota and Nissan both followed.
Knickerbocker’s theory can also be used to embrace the idea of multipoint competition which occurs when two or more companies encounter each other in different markets. Firms will try to match each others’ moves as a way of keeping each other in check.
Kodak and Fuji play this game. If Kodak enters a market, so will Fuji. By doing so, Fuji can make sure that Kodak doesn’t gain a dominant position in the market that it could then use to gain advantage elsewhere.
What Knockerbocker didn’t explain though, was why the first firm in an oligopoly decided to invest rather than export. This question was addressed by other researchers.
Vernon for example, tried to explain FDI in the context of the product life cycle. You might remember his theory from Chapter 5. It suggested that firms will change their strategy as a product moves through its life cycle.
One component of his theory was that firms would invest in other developed countries when local demand justified local production, and that later when the product was standardized and sold mainly on price, production would shift to a lesser developed location to take advantage of low cost labor.
But like Knickerbocker, Vernon could explain why investment took place, but not why investment was preferable to exporting. Why, for example, should a firm produce in another country just because demand has grown? Why not continue to export, or perhaps license a local firm to produce the product?
John Dunning tried to fill in these gaps in our understanding with his eclectic theory. Dunning suggested that in addition to the various factors we’ve already discussed, there must be location specific factors and externalities that make FDI preferable.
Location specific advantages refer to the advantages that come from using resources or assets that are tied to a specific location or that a firm finds valuable to combine with its own unique assets.
Externalities are knowledge spill-overs that occur when companies from the same industry locate in the same area.
So, firms that want to take advantage of low cost labor, have to go to where the low cost labor is located. Firms that want to take advantage of natural resources like oil have to go to where the oil is located. Firms that want to take advantage of the knowledge base in the design and manufacture of computers and semiconductors have to go to Silicon Valley.
So, Dunning’s theory is important because it explains how location specific factors affect FDI flows.

14. What Are The Theoretical Approaches To FDI?
The radical view - the MNE is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries
The free market view- international production should be distributed among countries according to the theory of comparative advantage
embraced by advanced and developing nations including the United States, Britain, Chile, and Hong Kong
Pragmatic nationalism - FDI has both benefits (inflows of capital, technology, skills and jobs) and costs (repatriation of profits to the home country and a negative balance of payments effect)
FDI should be allowed only if the benefits outweigh the costs
Recently, there has been a strong shift toward the free
market stance creating
a surge in FDI worldwide
an increase in the volume of FDI in countries with newly liberalized regimes
How does a government’s attitude affect FDI?
You can think of ideology toward FDI as being on a continuum where at one end is the radical view that’s hostile to all FDI, and at the other end is the noninterventionist principle of free market economies. In between these two extremes is pragmatic nationalism.
Let’s start with the radical view, which as you might guess, traces its roots to Marxist political and economic theory.
This perspective argues that the MNE is an instrument of imperialist domination and a means of exploiting host countries for the benefit of their capitalist-imperialist home countries.
In other words, people taking this perspective believe that the MNE will fill all important jobs with home country citizens, and so control key technology leaving the host nation dependent on the capitalist country for investment, jobs, and technology.
This perspective was very influential in the world from about 1945 until the 1980s and the collapse of communism.
Since, then the radical stance has been in retreat as people see that the countries that embraced capitalism rather than the radical ideology have been far more successful economically.
At the other end of the continuum remember, is the free market perspective which argues that international production should be distributed among countries according to the theory of comparative advantage. So, of course it traces its roots to Adam Smith and David Ricardo.
This perspective suggests that countries specialize in the production of the goods they can produce most efficiently and trade for everything else. It then follows, that FDI will actually increase the overall efficiency of the global economy.
So, if Ford moves the assembly of some of its cars to Mexico to take advantage of cheaper labor costs, Ford is not only freeing up resources in the U.S. which could then be used in activities in which the U.S. has a comparative advantage, Ford’s also transferring technology, skills, and capital to Mexico. Both countries gain!
While no country has fully adopted the pure free market stance, this ideology has been embraced by many developed and developing nations like the U.S., Hong Kong, and Chile.
In the middle of the continuum is pragmatic nationalism which argues that FDI has both benefits and costs.
Benefits include things like inflows of capital, technology, skills, and jobs, while costs include the repatriation of profits and negative balance of payments effects.
Pragmatic nationalism suggests that FDI should only be allowed if the benefits outweigh the costs.
We’ve seen a shift toward the free market stance in recent years, and you already know of course that along with that shift there’s been a surge in FDI.
Keep in mind though, that FDI is still viewed with hostility in some countries and in some situations.
As the Management Focus in your text outlines, the U.S. recently rejected an effort by DP World to invest in U.S. ports.

15. How Does FDI Benefit The Host Country?
There are four main benefits of inward FDI for a host country
Resource transfer effects - FDI brings capital, technology, and management resources
Employment effects - FDI can bring jobs
Balance of payments effects - FDI can help a country to achieve a current account surplus
Effects on competition and economic growth - greenfield investments increase the level of competition in a market, driving down prices and improving the welfare of consumers
can lead to increased productivity growth, product and process innovation, and greater economic growth
The main benefits for a host country of inward FDI are resource transfer effects, employment effects, balance of payments effects, and effects on competition and economic growth.
Let’s look at each one.
First, resource transfer effects - we’ve actually already talked a bit about this. Remember that FDI can benefit a country by bringing in capital, technology, and management skills helping the country to increase its economic growth.
Similarly, FDI can mean jobs – the second benefit.
Many people in Middle Tennessee for example are employed at Nissan facilities there, and because the Nissan workers need houses to live in, grocery stores, and schools, a host of other jobs have been created as well.
Keep in mind of course, that some of these jobs will be canceled out by the loss of jobs in Detroit that will occur when U.S. consumers buy Nissans instead of Fords!
Third, FDI has an effect on a country’s balance of payments.
As you’ll recall from Chapter 5, the balance of payments is a record of a country’s payments to and receipts from, other countries. You might also recall from our discussion in Chapter 5 that governments often prefer to run a current account surplus, or export more than they import, otherwise, the country is paying out more for the exports than it’s bringing in on its imports.
FDI can have a positive effect on a country’s balance of payments because it limits imports.
So, instead of buying that Nissan directly from Japan, we’re now making it in Tennessee!
Finally, FDI affects competition and economic growth.
If FDI is in the form of greenfield investment, competition will increase in a market. This should drive down prices and benefit consumers.
More competition also promotes increased productivity, innovation, and then, economic growth.
We’ve seen huge improvements in world telecommunications for example, since the 1997 WTO agreement to liberalize the industry.

16. What Are The Costs Of FDI To The Host Country?
Inward FDI has three main costs:
Adverse effects of FDI on competition within the host nation
subsidiaries of foreign MNEs may have greater economic power than indigenous competitors because they may be part of a larger international organization
Adverse effects on the balance of payments
when a foreign subsidiary imports a substantial number of its inputs from abroad, there is a debit on the current account of the host country’s balance of payments
Perceived loss of national sovereignty and autonomy
decisions that affect the host country will be made by a foreign parent that has no real commitment to the host country, and over which the host country’s government has no real control
What about the costs of FDI to the host country?
There are three main costs of inward FDI.
First, the negative effects on competition within the host country.
Host governments, particularly those of developing countries, worry that the subsidiaries of foreign MNE’s might end up having greater economic power than indigenous competitors.
So, for example, if an MNE supports its subsidiary while it becomes established in the host market, it might be stronger than an indigenous company, and could drive the local company out of business.
Second, the negative effects on the balance of payments.
When it comes to the balance of payments, host countries worry that along with the capital inflows that come will the FDI, will be the capital outflows that occur when the subsidiary repatriates profits to the parent company. Some countries actually limit the amount of profits that can be repatriated to limit the negative effects of this.
Host countries are also concerned that some subsidiaries import a substantial number of their inputs. These imports will show up in the current account of the balance of payments.
Japanese automakers, for example, import from Japan, many of the components they use in their U.S. operations. The companies have responded to criticism about this by pledging to buy more inputs locally.
Third, is the loss of national sovereignty and autonomy that is often associated with FDI.
Sometimes host governments worry that they may lose some economic independence as a result of FDI. They worry that since foreign companies have no particular commitment to the host country, they won’t really worry about the consequences of their decisions on the host country.
However, Robert Reich, a former member of the Clinton cabinet, notes that this is really outdated thinking. In today’s interdependent economy, no company maintains strong loyalty to any country.

17. How Does FDI Benefit The Home Country?
The benefits of FDI for the home country include
The effect on the capital account of the home country’s balance of payments from the inward flow of foreign earnings
The employment effects that arise from outward FDI
The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country
What about the home country?
Are there any benefits from outward FDI for the home country?
Yes, FDI can help the home country in several ways.
It has a positive effect on the capital account because of the inward flow of foreign earnings, and there are positive employment effects that come from the foreign subsidiary imports.
Remember that Nissan USA imports a lot of inputs from Japan creating jobs there.
There is also the potential to learn valuable skills in the host nation that can then be transferred back to the home country.

18. What Are The Costs Of FDI To The Home Country?
The home country’s balance of payments can suffer
from the initial capital outflow required to finance the FDI
if the purpose of the FDI is to serve the home market from a low cost labor location
if the FDI is a substitute for direct exports
Employment may also be negatively affected if the FDI is a substitute for domestic production
But, international trade theory suggests that home country concerns about the negative economic effects of offshore production (FDI undertaken to serve the home market) may not be valid
What costs does the home country experience from outward FDI?
As you’ve probably guessed, there are costs associated with balance of payments effects and also with employment.
The balance of payments is negatively affected by the initial capital outflow required to finance the FDI, if the purpose of the investment is to serve the home country from a low cost production location, and if the FDI is a substitute for direct exports.
These concerns are linked with the concerns about exports.
If FDI effectively replaces home country production, there will be a negative effect on employment.
Keep in mind though, that international trade theory suggests that the concerns about the negative effects of FDI may not be valid.
Companies that use offshore production, or FDI undertaken to serve the home market, may actually be freeing up resources that could be used more effectively elsewhere.

19. How Does Government Influence FDI?
Governments can encourage outward FDI
government-backed insurance programs to cover major types of foreign investment risk
Governments can restrict outward FDI
limit capital outflows, manipulate tax rules, or outright prohibit FDI
Governments can encourage inward FDI
offer incentives to foreign firms to invest in their countries
gain from the resource-transfer and employment effects of FDI, and capture FDI away from other potential host countries
Governments can restrict inward FDI
use ownership restraints and performance requirements
Given that there can be both positives and negatives associated with FDI, how can governments regulate it?
Well, there are various ways that home countries can encourage or discourage FDI by local firms.
We’ll begin with policies to encourage FDI.
A key reason that firms may resist FDI is because of the risk involved.
To minimize this concern, many countries have government-backed programs that cover the major forms of risk like the risk of expropriation, war losses, or the inability to repatriate profits.
Some countries have also developed special loan programs for companies investing in developing countries, created tax incentives, and encouraged host nations to relax their restrictions on inward FDI.
To discourage outward FDI, countries regulate the amount of capital that can be taken out of a country, use tax incentives to keep investments at home, and actually forbid investments in certain countries like the U.S. has done for companies trying to invest in Cuba and Iran.
Host countries can also restrict or encourage FDI.
Recall that we’ve moved away from the radical stance that discouraged FDI in general and towards a more free market approach, and pragmatic nationalism.
To encourage inward FDI, host countries usually offer incentives for investment like tax breaks, low interest loans, or subsidies.
Why would countries offer these benefits to foreign firms?
Because they want to gain the benefits of FDI that we talked about earlier! Kentucky for example, offered a $112 million package to Toyota to get it to build its U.S. plants in the state!
When a country wants to restrict FDI, it will usually implement ownership restraints or performance requirements.
In Sweden for example, foreign companies aren’t allowed to invest in the tobacco industry.
Ownership restraints accomplish two things.
First, they keep foreign firms out of certain industries on the grounds of national security or competition, allowing the local firms to develop.
Second, they help maximize the resource transfer effect and employment benefits that are associated with FDI.
In Japan for example, until the early 1980s, most FDI was prohibited unless the foreign firm had valuable technology.
Then, the foreign firm was allowed to form a joint venture with a Japanese company because the government believed this would speed up the diffusion of the technology throughout the Japanese economy.

20. How Do International Institutions Influence FDI?
Until the 1990s, there was no consistent involvement by multinational institutions in the governing of FDI
Today, the World Trade Organization is changing this by trying to establish a universal set of rules designed to promote the liberalization of FDI
Are there any international agreements on FDI that limit country policies?
Well, until recently, there hasn’t been any consistent involvement by multinational institutions on how FDI should be handled, but in 1995, the WTO got involved through its agreement on services.
Remember, that in order to sell services internationally, FDI is often required.
So, as you might expect, the WTO is pushing for the liberalization of regulations governing FDI.
Already, agreements on the liberalization of telecommunications and financial services have been reached.

21. What Does FDI Mean For Managers?
Managers need to consider what trade theory implies about FDI, and the link between government policy and FDI
The direction of FDI can be explained through the location-specific advantages argument associated with John Dunning
However, it does not explain why FDI is preferable to exporting or licensing, must consider internalization theory
A host government’s attitude toward FDI is an important variable in decisions about where to locate foreign production facilities and where to make a foreign direct investment
What does all of this mean for international businesses?
There are several implications for managers. Let’s talk about some of them.
We know from Dunning’s eclectic theory that FDI may make sense for location reasons, but the theories can also help firms identify the trade-offs between exporting, licensing, and foreign direct investment.
For example, we know that exporting will be preferable to licensing as long as transportation costs and trade barriers are low.
We also know that licensing isn’t attractive when the firm has know-how that can’t be properly protected by a licensing agreement, when the firm need control over a foreign entity in order to maximize profits, and when the firm’s skills and capabilities aren’t amenable to licensing.
In fact, licensing is going to be most likely in fragmented, low-tech industries where globally dispersed manufacturing isn’t an alternative.
So, for companies like McDonald’s, which use the service-industry version of licensing, franchising, licensing or franchising makes sense.
Finally, we also know that a government’s policy toward FDI can be an important factor in decisions about where to locate foreign production facilities.
Clearly, firms will prefer to establish operations in countries with permissive attitudes toward FDI, like the U.S.
We also know that firms may be able to negotiate with foreign governments and receive favorable terms for their investments like Toyota did when it invested in Kentucky.

22. What Does FDI Mean For Managers?
A Decision Framework
This Figure shows a decision tree that managers can use as they consider the various alternatives to conduct business in another country.

23. Review Question The establishment of a wholly new operation
in a foreign country is called
A) an acquisition
B) a merger
C) a greenfield investment
D) a multinational venture
Now, let’s see how well you understand the material in this chapter. I’ll ask you a few questions. See if you can get them right. Ready?
The establishment of a wholly new operation in a foreign country is called
a) an acquisition
b) a merger
c) a greenfield investment
d) a multinational venture
The answer is c.

24. Review Question The amount of FDI undertaken over a given
time period is known as
A) the flow of FDI
B) the stock of FDI
C) FDI outflow
D) FDI inflow
The amount of FDI undertaken over a given time period is known as
a) the flow of FDI
b) the stock of FDI
c) FDI outflow
d) FDI inflow
The answer is a.

25. Review Question Most FDI is direct toward a) developed countries
b) emerging economies
c) the United States
d) China
Most FDI is direct toward
a) developed countries
b) emerging economies
c) the United States
d) China
The answer is a.

26. Review Question Advantages that arise from using resource
endowments or assets that are tied to a particular
location and that a firm finds valuable to combine
with its own unique assets are
a) First mover advantages
b) Location advantages
c) Externalities
d) Proprietary advantages
Advantages that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets are
a) First mover advantages
b) Location advantages
c) Externalities
d) Proprietary advantages
The answer is b.

27. Review Question Benefits of FDI include all of the following except
a) The resource transfer effect
b) The employment effect
c) The balance of payments effect
d) National sovereignty and autonomy
Benefits of FDI include all of the following except
a) The resource transfer effect
b) The employment effect
c) The balance of payments effect
d) National sovereignty and autonomy
The answer is d.

28. Review Question Which of the following is not a cost of outward FDI
for host countries?
a) the initial capital outflow required to finance the FDI
b) when FDI is a substitute for direct exports
c) gains from learning valuable skills from foreign markets
d) the effect on employment is FDI is a substitute for domestic production
Which of the following is not a cost of outward FDI for host countries?
a) the initial capital outflow required to finance the FDI
b) when FDI is a substitute for direct exports
c) gains from learning valuable skills from foreign markets
d) the effect on employment is FDI is a substitute for domestic production
The answer is c.