U2-FDI - TACN3 (Kinh tế và kinh doanh quốc tế) FTU

Unit 2 Foreign Direct Investment - FDI . Definition • Foreign Direct Investment: The establishment of a plant or distribution network abroad. Investors can acquire part or all of the equity of an existing foreign corporation either to control or share control over sales, production, and research and development. The basic questions of FDI (6W+H) ⚫ Who? (is the investor) ⚫ What? (kind of FDI) ⚫ Why? (are we investing) ⚫ Where? (is the FDI going) ⚫ When? (do we invest) – timing ⚫ How? (the mode of entry) Types of FDI • Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. • Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country. • Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country. OLI theory • O – who is an FD Investor? • L - Where to invest? • I – Why to invest? O = Ownership advantages • Some firms have a firm specific capital known as knowledge capital: Capital, Human capital (managers), patents, technologies, brand, reputation… • This capital can be replicated in different countries without losing its value, and easily transferred within the firm without high transaction costs L – Localization advantages ⚫ Producing close to final consumers or downstream customers ⚫ Saving transport costs ⚫ Obtaining cheap inputs ⚫ Jumping trade barriers ⚫ Provide services (for most services production and delivery have to be contemporaneous) I – internalization advantages ⚫ Why don't a firm just sign a contract with a subcontractor (external agent) in a foreign country? ⚫ Because contracting out is risky: it implies transferring the specific capital outside the firm and revealing the proprietary information (e.g. how to use the technology or the patent). ⚫ Problem: ⚫ If the agent interrupts the contract it can use the technology to compete with the mother company ⚫ In the case of brands/reputation: if the agent damages the brand reputation