Foreign Direct

Investment (FDI)
An investment made by a company or
individual from one country to another
country

In the form of
Either establishing business operations

Acquiring business assets in the other country

Main Objective of FDI

Gain control over the

market
&
Increase sales
Forms of FDI
Purchase of existing
Assets of foreign
company
New Investment in
Property, plant &
Equipment
Participation in a Joint
Venture with local
partner
Transfer of Assets (HR,
Technology)
Export of Goods for
Equity
Trading in Equity
 International
Investment Theories
International Investment
Theories
Ownership Advantage
Theory
Internationalization
Theory
Why Dunnings Eclectic
FDI? Theory

Factor Mobility Theory

Product Life Cycle

Theory
Ownership Advantage Theory

Firms having Competitive Advantage

domestically derived from its valuable

assets like technology, brand names and

large scale economies extended their

operations to foreign markets through

FDI.
A firm owning a valuable asset

that Creates A Competitive

Advantage domestically can

use that advantage to penetrate

foreign markets through FDI

Failure of Ownership Advantage
Theory
why a firm would choose to enter a

foreign market via FDI rather than

exploit its ownership advantages

through other means, such as exporting

its products, franchising, a brand name

or licensing technology to foreign firms

Internationalization
Theory Answers this
Question
Answers of the Question
is ..
A. Concept of Transaction
Costs
Costs of negotiating, monitoring and
enforcing a contract

B. Non Willingness to Share the

Competitive Advantage with
foreign firm
Internationalization
Theory
Companies with domestic
Competitive Advantage
enter foreign market to
utilize their assets
Dunnings Eclectic
Theory
also known as the
OLI-Model
OLI-Framework
Basic Question of the Theory

Why production by either the

company or contract should be
located abroad?
 According to Dunning,
FDI will occur when 3 conditions
are satisfied

1. Ownership Specific

Advantages (O)

2. Location Advantages (L)

3. Internalization Advantages (I)

 Ownership Advantages
Trademark

Production Technique

Entrepreneurial Skills

Returns To Scale
 Location Advantages
Existence Of Raw Materials

Low Wages

Special Taxes or Tariffs

 Internalization
advantages
Advantages by own production

rather than producing through a

partnership arrangement such as

licensing or a joint venture

 Eclectic Paradigm
Categories of advantages
Source: Internalizati
Dunning (1981) Ownership Location
on
advantages advantages
advantages

Export Yes No

Form of
market Licensing Yes Yes No
entry

FDI Yes Yes Yes

Greater the O and I advantages
possessed by firms and the more
the L advantages of creating,
acquiring and exploiting these
advantages from a location
outside its home country, the
more FDI will be undertaken
Factor Mobility Theory
 Factor Mobility Theory
Capital Vary among countries

Some Countries are rich in capital and

some are poor in capital

Capital normally flows from those

countries where the return on capital is
low to those countries where the return on
capital is high
Product Life Cycle
Theory
 Product Life Cycle
Theory
Proposed by Raymond Vernon

Pattern of FDI over time

Firms establish manufacturing facilities

in foreign countries when the product
reaches maturity stage in the home
country. They invest in low-cost countries
Xerox Company in Different
Countries
No Xerox Company in
USA now
Factors Influencing FDI
Supply Demand Political
Factors Factors Factors
Avoidance
Production Customer
of Trade
Costs Access
Barriers

Economic
Marketing
Developme
Logistics Advantage
nt
s
Incentives
Exploitatio
n of
Resource
Competitiv
Availability
e
Advantage

Access to
Customer
Technolog
Mobility
y
Cost and Benefits of
FDI
 Cost and Benefits to Home
Country
Benefits
Positive Balance of Payments
Increases Export
Increases Industrial Activity
Possibility of learning new skills

Costs
Domestic country employment will
decrease
Current Account position of BoP will be less
 Cost and Benefits to Host
Country
Benefits
Resources Transfer
Employment will be more
Positive Balance of Payment

Costs
Intensive Competition
Big role of MNC