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Topic 2

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Group 2 October 20, 2023

BSA 4A Topic 02
International Business and Trade (ThF 10:30 – 12:00)

Foreign Direct Investment (FDI) - occurs when a firm invests directly in production or other

facilities in a foreign country over which it has effective control.

Two Main Types of FDI:

1. Flow of FDI - the amount of FDI undertaken over a given time period (e.g., a year).

2. Stock of FDI - the total accumulated value of foreign-owned assets at a given time (which

takes into account possible direct investment along the way).

Types of Flow of FDI:

1. Outflow of FDI - the flow of FDI out of a country—that is, firms undertaking direct

investment in foreign countries.

2. Inflow of FDI - the flow of FDI into a country—that is, foreign firms undertaking direct

investment in the host country.

Foreign Direct Investment (FDI) VS. Portfolio Investment

- Foreign portfolio investment is the investment in financial assets comprising stocks, bonds,

and other forms of debt denominated in terms of a foreign country’s national currency,

whereas FDI is the investment in real or physical assets, such as factories and distribution

facilities.

Types of FDI

1. Horizontal FDI - the company engages in the same activities but in a different country.

2. Vertical FDI - a company may do various activities abroad, but these activities must still

be tied to the main business

3. Conglomerate FDI - a company acquires an unrelated business from another country

4. Platform FDI - business expands into a foreign country but the output from the foreign

operations is exported to a third country.


Entry Mode - the strategy a company uses to enter a foreign market and establish its presence.

a. International Franchising

b. Contractual Alliances

c. Equity Joint Venture

d. Wholly Foreign Owned Subsidiaries

Strategic Logic of FDI

1. Resource Seeking FDI

2. Market Seeking FDI

3. Efficiency-seeking FDI

4. Strategic Asset-seeking FDI

How the MNE Benefits from Foreign Direct Investment

1. Enhancing efficiency from location advantages

2. Improving performance from structural discrepancies

3. Increasing return from ownership advantages

4. Ensuring growth from organizational learning

The Impact of FDI on the Host Country

1. Job shift to the host country is one of the benefits of FDI to that country.

2. MNEs are powerful competitors to local businesses.

Current Theories on FDI

1. Product Life-Cycle Theory

2. Monopolistic Advantage Theory

3. Internalization Theory

4. The Eclectic Paradigm

New Perspective on FDI

1. The dynamic capability perspective

2. The evolutionary perspective

3. Global integration and local responsiveness

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