1. Investing Abroad Directly
Chapter 6
Investing Abroad Directly

2. LEARNING OBJECTIVES
After studying this chapter, you should be able to:
understand the vocabulary associated with foreign direct investment (FDI)
use the resource- and institution-based views to explain why FDI takes place
understand how FDI results in ownership, location, and internalization (OLI) advantages
identify different political views on FDI based on an understanding of FDI’s benefits and costs to host and home countries
participate in two leading debates on FDI
draw implications for action

3. THE FDI VOCABULARY
foreign direct investment (FDI) - Investments in activities that control and manage value creation in other countries
multinational enterprise (MNE) - A firm that engages in foreign direct investment

4. THE FDI VOCABULARY
foreign portfolio investment (FPI) - Investment in a portfolio of foreign securities such as stocks and bonds that do not entail the active management of foreign assets
management control rights - The rights to appoint key managers and establish control mechanisms

5. THE FDI VOCABULARY
FDI is direct - requires significant equity ownership and provides the combination of equity ownership rights and management control rights
significant ownership rights provide much needed management control rights
FPI represents essentially insignificant ownership rights and no management control rights
To compete successfully, firms need to deploy overwhelming resources and capabilities to overcome their liabilities of foreignness; FDI provides one of the best ways to facilitate extension of firm-specific resources and capabilities abroad

6. THE FDI VOCABULARY
horizontal FDI - A type of FDI in which a firm duplicates its home country-based activities at the same value chain stage in a host country
vertical FDI - A type of FDI in which a firm moves upstream or downstream in different value chain stages in a host country

9. THE FDI VOCABULARY
upstream vertical FDI - A type of vertical FDI in which a firm engages in different stages of the value chain in two different countries
downstream vertical FDI - The amount of FDI moving in a given period (usually a year) in a certain direction

10. THE FDI VOCABULARY
FDI flow - The amount of FDI moving in a given period (usually a year) in a certain direction
FDI inflow - Refers to inbound FDI moving into a country in a year
FDI outflow - Refers to outbound FDI moving
out of a country in a year
FDI stock - The total accumulation of inbound FDI in a country or outbound FDI from a country

13. OLI Advantages
A firm’s quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages:
Ownership - Refers to MNEs’ possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI
Location - Refers to advantages enjoyed by firms operating in certain areas
Internalization - Refers to the replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating in two or more countries

15. OWNERSHIP ADVANTAGES
dissemination risks - risks associated with unauthorized diffusion of firm-specific know-how

16. LOCATION ADVANTAGES
agglomeration - location advantages that arise from the clustering of economic activities in certain locations
knowledge spillovers - Knowledge diffused from one firm to others among closely located firms that attempt to hire individuals from competitors

17. INTERNALIZATION ADVANTAGES
international transaction costs - tend to be higher than domestic costs - laws and regulations are typically enforced on a nation-state basis
intrafirm trade - international trade between two subsidiaries in two countries controlled by the same MNE

20. REALITIES OF FDI – POLITICAL VIEWS
radical view - political view that is hostile to FDI
free market view - political view that suggests that FDI, unrestricted by government intervention, will enable
countries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services
pragmatic nationalism - political view that approves FDI only when its benefits outweigh its costs

22. Benefits and Costs of FDI to Host Countries
technology spillovers - foreign technology
diffused domestically that benefits domestic firms and industries
demonstration effect (contagion or imitation effect) - reaction of local firms to technology spillovers

23. Benefits and Costs of FDI to Home Countries
Repatriated earnings of profits from FDI
Increased exports of components and services to host countries
Learning via FDI from operations abroad

25. HOW MNEs AND HOST GOVERNMENTS BARGAIN
obsolescing bargain - deal struck by MNEs and host governments, which change their requirements after initial FDI entry
expropriation - Government’s tactics that include removing incentives, demanding a higher share of profits and taxes, and confiscating foreign assets
sunk costs - point at which a firm has invested substantial sums of resources

27. FDI versus Outsourcing
A strategic debate is whether FDI (captive sourcing) or outsourcing will serve firms’ purposes better?

28. Facilitating versus Confronting Inbound FDI
Can foreigners and foreign firms be trusted in making decisions important to the local economy?