E IG N

FOR T
DIR E C
M E N T
ES T Rodriguez, G
INV
ladys
Dimaculanga
n, K a
tleen
Guevarra, A
ngelica
Libera, Raym
O U P 7 ond
GR
 Foreign Direct Investment
It is a category of cross-border investment in which an investor
resident in one economy establishes a lasting interest in and a
significant degree of influence over an enterprise resident in
another economy
 Significant Degree of Influence
means that ownership must be at least 10 percent of the voting
power in an enterprise resident in another economy.
 FDI Takes on Two Main Forms:

ACQUIRING OF MERGING
GREENFIELD WITH AN EXISTING FIRM
INVESTMENT
Involves the establishment Acquisitions can be:
of a new operation in a ● Minority (10 to 49 percent)
foreign country ● Majority (50 to 99 percent)
● Full outright stake (100
percent)
Foreign Direct Investment
It occurs when when a firm invests
directly in facilities to produce or
market a product in a foreign country.
 Qualifications of the 10% criteria

Owns more than 10% but has an

Owns less than 10% but has an
ineffective voice in the
effective voice in the management
management

Some countries use these two qualifications but it is not recommended by the
Organisation for Economic Co-operation and Development (OECD) instead, they
recommend to strictly apply the 10% threshold on the ownership to ensure statistical
consistency across countries.
 Important Terms to Remember:

Flow of FDI Inflows of FDI

Amount of FDI undertaken over a given Flow of FDI into a
time period (normally a year) country

Stock of FDI Outflows of FDI

Total accumulated Flow of FDI out of
value of foreign owned assets at a given country
time
 Flat Tax Rate Bilateral Investment Treaties

The general desire of

refers to a system that taxes governments to facilitate FDI also
everyone at the same rate, has been reflected in a sharp
regardless of their income increase in the number of
bracket. bilateral investment treaties
designed to protect and promote
investment between two countries
 Three Notable developments shaped the evolution of the
BITs network in 2008

Termination of BITs Denunciation of BITs Renegotiation of BITs

process involving mutual unilateral act of withdrawal the continuation of an

agreement between the from an agreement earlier trend, though on a
signatory countries smaller scale

Until the end of 2008, six

BITs were terminated, and The denunciation of 11 In 2008, eight BITs were
others are in the process of BITs occurred in 2008. renegotiated.
termination
 The globalization of the world economy is also having a
positive impact on the volume of FDI.

Firms who the see the whole world as their market undertake FDI in attempt to make
sure they have a significant presence in many regions of the world. Many firms now
believe that it is important to have production facilities based close to their major
customers which also creates pressure for greater FDI.
Another way of looking at the importance of FDI inflows
is to express them as a percentage of gross fixed capital
formation.

Gross fixed capital formation summarizes the total amount of capital

invested in factories, stores, office buildings, and the like.

FDI can be seen as an important source of capital investment and a

determinant of the future growth
rate of an economy.
The Form of FDI: Acquisitions vs Greenfield
Investment

Greenfield Investment Acquisitions or Mergers

New Facility Existing local firm

Why do firms apparently prefer to acquire existing assets rather than
undertake greenfield investments?

1 Mergers and acquisitions are quicker to execute than

greenfield investments.

Foreign firms are acquired because those firms have valuable strategic
2 assets, such as brand loyalty, customer relationships, trademarks or
patents, distribution systems, production systems, and the like.

Firms make acquisitions because they believe they can increase the
3 efficiency of the acquired unit by transferring capital, technology, or
management skills
2
THEORIES OF
FDI
 THEORIES OF FDI

Theory 1 Theory 3
Theory 2

Why FDI? Eclectic Paradigm

The Pattern of FDI
 01
WHY
FDI?
2 ALTERNATIVES TO
ENTER MARKET

EXPORTING LICENSING
 The Pros and Cons

EXPORTING
 Establishment of new buildings and factories
Applying for insurance, license and permits
Technological Expense
Equipment and Supplies
Additional Employee Expense
Advertising and Promotion
 A firm will not
experience the
adverse impact of
unfavorable
economic problems

EXAMPLE:
USA experienced a declining
economy as an impact of
two-year health crisis.
Reduced Risk associated with
Selling Abroad by using a Native
Sales Agent
Local customer pays
attention on imported
goods rather than locally
made products
 VALUE TO WEIGHT RATIO

DEFINITION IMPLICATIONS
Measure of the Shipping the
monetary value a product
product has per
kilogram or pound Manufacturing and
storing
Trade Barriers
Government policies
and procedures
which
place restrictions on
international trades
Difficult and expensive to trade

E
F
F
E
C
T
S

Prevent trade completely

IMPORT TARIFF QUOTA

Government can Government

increase the cost of increases the
exporting relative to attractiveness of FDI
FDI and licensing and licensing
The Pros and Cons
Licensee bears
costs and risk

No tight
control
LICENSING
Giving away
of valuable
technological
know-how
MARKET IMPERFECTION THEORY

Trade theory that arises

from international markets where
perfect market competition does not
exist.
Perfect Market - No barrier to entry or
exit and Both has perfect information
 PATTERN
02 OF FDI
● Strategic Behavior
● Product Life Cycle
 FDI flows reflect the
strategic rivalry between
I. STRATEGI firms in the global
C market

BEHAVIOR Frederick T.
Knickerbocker
Relationship of FDI
and Oligopolistic
Industry
MULTIPOINT
COMPETITION
Arises when two or
more enterprises
encounter each other in
different regional, and
national markets or
industries
 Each product has certain
life cycle that begins with
development and ends
II. PRODUCT with its decline.

LIFE CYCLE Raymond Vernon

Relationship of FDI
and Lifecycle of
Product
 PRODUCT LIFE CYCLE
GROWTH
INTRODUCTION
Entering into the Demand for
market product increase
of new product

MATURITY DECLINE
Product is widely Market become
known saturated
 ECLECTIC
03 PARADIGM
Ownership,
Location,
Internalization
(OLI) Model or
Framework
Three-tiered evaluation
framework that company
can follow when attempting
to determine if it is
BENEFICIAL to pursue FDI John Harry Dunning
COMPONENTS OF OLI FRAMEWORK
Ownership
Advantage

Location
Advantage

Internalization
Advantage
 Proprietary information
and various
ownership rights
OWNERSHIP
ADVANTAGE EXAMPLES:
- Branding
- Copyright
- Trademark
- Patent
 OWNERSHIP
ADVANTAGE
ADVANTAGE DISADVANTAGE
Come with foreignness
Creates competitive
since the potential
advantage against
investor is a non-native
potential competitors country
 Explains the RATIONALE
and DIRECTION of FDI
EXAMPLES:
LOCATION 1. Natural Resources
- Establish where the
ADVANTAGE resources are
2. Labor Force
- Cost and skills of local
labor are most suited to
production process
 FACTORS TO BE
CONSIDERED:
INTERNALIZATION
ADVANTAGE 1. Cost Saving
2. Pricing
3. Resources and
Technology
Perform Locally or 4. Trustworthiness
Outsource to Foreign
country
Political
Ideology and
Foreign Direct
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Investment
 FREE MARKET
RADICAL VIEW VIEW
The free market view traces its
The radical view traces its roots to classical economics and
roots to Marxist political and the international trade
economic theory. Radical theories of Adam Smith and
writers argue that the David Ricardo. The intellectual
case for this view has been
multinational enterprise
strengthened by the
(MNE) is an instrument of international explanation of
imperialist domination. FDI.
 PRAGMATIC SHIFTING
NATIONALISM IDEOLOGY
The pragmatic nationalist view
Recent years have seen a
is that FDI has both benefits
and costs. FDI can benefit a
marked decline in the
host country by bringing number of countries that
capital, skills, technology, and adhere to a radical ideology.
jobs, but those benefits come
at a cost.
BENEFITS AND COSTS OF FDI

HOST HOME
COUNTRY COUNTRY
HOST COUNTRY BENEFITS
1. Resources Transfer
Effects
2. Employment Effects
3. Balance of Payments
Effects
4. Effect on Competition and
Economic Growth
 HOST COUNTRY BENEFITS 
Resource 1
Transfer
Effects

Foreign direct investment can be positive. contribution to a

host economy by supplying capital, technology, and
management resources
 HOST COUNTRY BENEFITS 
2 Employment Effects

DIRECT INDIRECT
Hiring host-country Jobs created by local suppliers
citizens Jobs created by increased spending
by employees of the multinational
enterprise
 3 Balance of Payments Effects
FDI can help a country
achieve this goal in two ways:

FDI is a substitute for imports Potential benefit arises when

of goods and services, it the MNE uses a foreign
improves the current account subsidiary to export goods
of the host’s and services to other
countries/balance of effects
countries
 Effect on Competition
4 and Economic Growth

Economy tells us that the efficient

functioning of markets depends
on the adequate level of
competition between procedures.
HOST COUNTRY COSTS
1. Adverse Effects on
Competition
2. Adverse Effects on the
Balance of Payment
3. National Sovereignty and
Autonomy
HOST COUNTRY COSTS

Adverse Effects on Competition

1 Host governments sometimes
worry that the subsidiaries of
foreign MNEs may have greater
economic power than indigenous
competitors.
 2 Adverse Effects an the
Balance of Payments
Set against the initial capital When a foreign
inflow that comes with FDI subsidiary imports a
must be the subsequent
substantial number of
outflow of earnings from the
foreign subsidiary to its its inputs from abroad,
parent company. Such which results in a debit
outflows show up as capital on the current account
outflow on balance of of the host country’s
payments accounts.
balance of payments.
HOST COUNTRY COSTS

National Sovereignty
3 and Autonomy

Key decisions that can affect

the host country’s economy
will be made by a foreign
parent that has no real
commitment
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country, and over which the
e imágenes de Freepik

host country’s government

has no real control.
HOME COUNTRY
BENEFITS The employment  effects that
arise  from outward FDI
The effect on the capital
account of the home The gains from learning
country’s balance of valuable skills from
payments from the foreign markets that can
inward flow of foreign subsequently be transferred
earnings back to the home country
HOME COUNTRY
COSTS Second, the current
account of the balance
First, the balance
of payments suffers if
of payments the purpose of the
suffers from the foreign investment is to
initial capital serve the home market
outflow required to from a low-cost
finance the FDI production location.
HOME COUNTRY
COSTS
Third, the current account
of the balance of payments
suffers if the FDI is a
substitute for direct exports.
Government Policy
Instrument and FDI
 Home – Country Policies
Encouraging Outward FDI
- Many investor nations now have
government-backed insurance
programs to cover major types of
foreign investment risk (include the risks
of expropriation (nationalization), war
losses, and the inability to transfer
profits back home).
 Home – Country Policies
Restricting Outward FDI
1. Limit capital outflows out of concern for the
country’s balance of payments
2. Countries have occasionally manipulated tax
rules to try to encourage their firms to invest at
home
3. Countries sometimes prohibit national firms
from investing in certain countries for political
reasons in which restrictions can be formal or
informal.
Home – Country Policies
Encouraging Inward FDI

●Governments offer incentives to foreign firms

to invest in their
countries which take in many forms, but the
most common are
tax concessions, low-interest loans,
and grants or subsidies.
 RESTRICTING
INWARD FDI

Ownership
Restraints Performance
Requirements
OWNERSHIP RESTRAINTS

Restricting someone to have

proprietary rights over the
specific items

Exclusion of Significant
foreign portion must be
companies in own by local
specific field investor
 Controls over the behavior
of MNE’s local subsidiary

Stipulations imposed on
investors, requiring them to
meet specified
goals with respect to their PERFORMANCE
operation in host country REQUIREMENTS

More common to
DEVELOPING COUNTRIES
INTERNATIONAL INSTITUTION AND
LIBERALIZATION OF FDI
1990
MNE and FDI 1998
Brokedown of
talks initiated by OECD
1995
WTO and OECD
Present
1997
Multinational
Agreement
 Two (2) extensive
multinational agreements
1997 were reached to liberalize
Multinational trade
Agreement 1. Malaysia

2. India
1998 Does not barred
Brokedown of talks discriminatory taxation of
initiated by OECD foreign owned companies
Allowed host countries to
U.S. refused to sign
the agreement restrict foreign television
programs and music
 Individual initiative to
liberalize their
Present policies governing
FDI
THE THEORY OF The implications of the
FOREIGN theories of FDI for
DIRECT business practice are
INVESTMENT straightforward.
 The location-specific advantages
argument does not explain why
THE THEORY OF firms prefer FDI to licensing or to
FOREIGN exporting. In this regard, from
DIRECT both an explanatory and a
INVESTMENT business perspective perhaps the
most useful theories are those
that focus on the limitations of
exporting and licensing; that is,
internalization theories.
 International trade theory

INTERNATIONAL Home country concerns

TRADE THEORY about the
negative economic effects
AND FDI
of offshore production
(FDI undertaken to serve
the home market) may not
be valid.
 FDI may actually stimulate
economic growth by
freeing home country
INTERNATIONAL
resources to concentrate
TRADE THEORY
on activities where the
AND FDI home country has a
comparative advantage.
Consumers may also
benefit in the form of lower
prices