1. Foreign Direct Investment Introduction
Ivar Bredesen
Associate Professor, Oslo University College

2. Direct Foreign Investment and the Multinationals
What do we mean by Foreign Direct Investment, FDI
Who are the major sources and recipients of FDI
How is FDI financed?
What are the entry modes of FDI?

3. Definitions
Multinational Enterprises (MNEs) are firms which own a significant equity share (typically 50 % or more) of another company operating in a foreign country
The most common definition of FDI is related to the compilation Balance on Payment accounts and has been originally provided by IMF (1993) and subsequently endorsed by the OECD (1996). It is based on the ideas of lasting interest and influence on management

4. OECD – IMF Definition
“Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (‘‘direct investor’’) in an entity resident in an economy other than that of the investor (‘‘direct investment enterprise’’). The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated."  

5. UNSNA Definition
The United Nations System of National Accounts focuses on the concept of control.
Foreign Controlled enterprises include subsidiaries with more than 50% owned by a foreign parent. Associates of which foreign ownership is 10-50% [...] may be included or excluded by individual countries according to their qualitative assessment of foreign control."

6. FDI vs. Portfolio Investment
FDI is different from portfolio investment, which can de divested easily and do not have a significant influence on the management of the firm
Thus, to create, acquire or expand a foreign subsidiary, MNCs undertake FDI

7. FDI - preliminaries
Home country (outward FDI) vs. Host country (inward FDI) – both flows are registered in the balance of payments
Flows are measured every given time interval, stocks are the sum of flows
Horizontal FDI – same sector, arises to access the markets for example due to some restrictions on exporting to the same market
Vertical FDI – upstream/downstream integration of suppliers or customers in order to take advantage of international factor price differentials

8. Macro vs. Micro We get information on FDI from
Macroeconomic data (GDP, Balance of Payments etc)
Microeconomic data at the firm level (employment, sales for every firm etc)
Models of FDI should be consistent with some of these facts

9. Are MNCs important?
In 2004, there are about MNCs with foreign affiliates
The most “multinationalised” countries in the world are Belgium, Luxembourg and Hong Kong, and India is among the lowest

10. MNE activity How do we measure MNE activity? FDI flows per year
FDI stock
Foreign sales of FDI
FDI as a share of capital formation

11. FDi Inflows

12. FDI share of gross fixed capital formation

13. FDI/Exports ratio

14. Indicators of FDI

15. FDI flows by regions (2003 and 2004)

16. FDI in Poland

17. FDI as a share of GFCF

18. Main entry modes Main modes of entry
Merger and Acquisitions ( M & A) is the most common modality in developed economies
Greenfield Investments (GF) dominate in developing nations, partly due to restrictions on M&A activities

19. FDI - preliminaries
It is sometimes of interest to split flows into components
Equity capital
Reinvested earnings
Intra-company loans

20. FDI components

21. FDI inflows – top 20 economies

22. What does micro data tell us?
There are large differences across industries in the degree to which production and sales are accounted for by MNCs
In particular, MNCs tend to be of greater importance in technology intensive industries, with indicators such as
High level of R&D/sales ratios
Large share of professional and technical workers in their work force
Products which are new or technically complex
High level of product differentiation or advertising