Knickerbocker's theory of fdi

Global Business Today 6e

by Charles W.L. Hill

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 7

Foreign Direct Investment

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Introduction

Question: What is foreign direct investment?

Foreign direct investment (FDI) occurs when a firm invests directly in new facilities to produce and/or market in a foreign country
Once a firm undertakes FDI it becomes a multinational enterprise
There are two forms of FDI
A greenfield investment (the establishment of a wholly new operation in a foreign country)
Acquisition or merging with an existing firm in the foreign country
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Foreign Direct Investment
in the World Economy

There are two ways to look at FDI
The flow of FDI refers to the amount of FDI undertaken over a given time period
The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time
Outflows of FDI are the flows of FDI out of a country
Inflows of FDI are the flows of FDI into a country
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Lecture Script 6-*

Internet Extra: Each year, Fortune magazine publishes a list of the 500 largest global corporations in the world. Go to the magazine’s web site {http://money.cnn.com/magazines/fortune/global500/2008/index.html} and explore the list. Which country has the most companies on the list? Which region of the world is most represented? Are there any new entrants? Are certain industries better represented than others? What conclusions can you draw from your findings? Are there other meaningful trends to consider?

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Classroom Performance System

A company that establishes a new operation in a foreign country has made

An acquisition

A merger

A greenfield investment

A joint venture

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Classroom Performance System Answer: c

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Trends in FDI

Both the flow and stock of FDI in the world economy has increased over the last 20 years
FDI has grown more rapidly than world trade and world output because
firms still fear the threat of protectionism
the general shift toward democratic political institutions and free market economies has encouraged FDI
the globalization of the world economy is prompting firms to undertake FDI to ensure they have a significant presence in many regions of the world
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Trends in FDI

FDI Outflows 1982-2007

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The Direction of FDI

Historically, most FDI has been directed at the developed nations of the world, with the United States being a favorite target
FDI inflows have remained high during the early 2000s for the United States, and also for the European Union
South, East, and Southeast Asia, and particularly China, are now seeing an increase of FDI inflows
Latin America is also emerging as an important region for FDI
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Lecture Script 6-*

Country Focus: Foreign Direct Investment in China

Summary

This feature explores investment opportunities in China. In the late 1970s, China opened its doors to foreign investors. By the mid 2000s, China attracted $65-70 billion of FDI annually. China’s large population is a magnet for many companies and because high tariffs make it difficult to export to the Chinese market, firms frequently turn to foreign direct investment. However, many companies have found it difficult to conduct business in China, and in recent years investment rates have slowed. In response, the Chinese government, hoping to continue to attract foreign companies has established a number of incentives for would-be investors. The following questions can be used in a discussion.

1. Consider the challenges involved with investing in China. How does China’s political position and economic situation affect its ability to attract foreign direct investment?

Discussion Points: Students will probably recognize that while on the surface, China has tremendous market potential, it is still a poor country. Anticipated demand does not always translate into actual demand. In addition, thanks to the country’s lack of a well-developed transportation system, distribution problems continue to exist, particularly outside major urban areas. In addition, the country’s highly regulated environment makes it difficult for companies to conduct business.

2. Discuss China’s efforts to encourage investment in its underdeveloped areas. What effect will investment have on these areas? How can firms prepare for the unique challenges of operating in these areas?

Discussion Points: China is making a concerted effort to continue to attract investment, especially in the country’s less developed areas. Recognizing the problems associated with its infrastructure, the country has committed $800 billion to improvements over the next decade. In addition, China is offering preferential tax breaks to countries that invest in more remote areas.