Foreign Direct Investment

FOREIGN DIRECT INVESTMENT

Introduction
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Cos invest in foreign countries to gain control over the market & thereby increase sales Mkt control possible by establishing control of decision making via investment in equity share capital

100% share may nt be allowed as govt smetimes dictates terms of control..

Foreign Direct Investment

Definition
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The investment made by a company in new manufacturing &/or mktg facilities in a foreign country is referred as FDI Ex: Enron in India Investment made by a company in foreign country over a given period of time Flow of FDI

Total amount of investment made by a company in a foreign country upto a given time The Stock of FDI
Foreign Direct Investment

Forms of FDI

Foreign Direct Investment

International Investment Theories

Foreign Direct Investment

Ownership Advantage Theory

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Firms having competitive advantage domestically derived from its valuable assets like technology, brand names & large economies Extend their operations to foreign markets through FDI

Foreign Direct Investment

Internationalization Theory
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Ownership adv theory fails to explain means of entering foreign mkts to exploit ownership advantages

Theory: Companies enter foreign mkts through various modes of entry

Domestic companies have to negotiate, monitor & enforce a contract which involves transaction cost
Foreign Direct Investment

Dunnings Electic Theory

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Internationalisation theory fails to explain the reason for locating manufacturing facilities in a foreign country

Companies locate mfg facilities in foreign country location advantage John Dunning incorporates location adv in addition to ownership & internationalisation adv Foreign Direct Investment

Dunnings Electic Theory

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Theory states: FDI reflects both int business activity & bus activity internal to the firm Location specific adv are derived by combining the adv of country location with specific adv Fdi will occur when 3 conditions are satisfied: Ownership adv Location adv Internationalization adv
Foreign Direct Investment

Factor Mobility Theory

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Factor endowments including capital vary among counties

Foreign Direct Investment

Product Life Cycle Theory

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Firms establish mfg facilities in foreign countries When pdt reaches maturity stage in home country They invest in low-cost countries when cost becomes a competitive advantage

Foreign Direct Investment

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Factors influencing FDI

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Reasons for FDI

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Increase sales & profits To enter fast growing markets To reduce cost To consolidate trade blocs to acquire technological & managerial knowhow

Foreign Direct Investment

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Costs & Benefits of FDI

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Benefits to Home Country

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Inflow of foreign currencies in form of dividend, interests etc Increases export of machinery, equipment, tech etc from home country to host country Increases industrial activity in home country

Foreign Direct Investment

Costs to Home Country

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Industry & employment position at stake when firms enter foreign market due to low cost labor

Current A/C position suffers as FDI is a substitute for direct exports

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Benefits to Host Country

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Resource-Transfer Effects Employment effects BOP effects

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Costs to Host Country

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Intensifies Competition Negative effects on BOP

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Implications of FDI for business

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Foreign Direct Investment