2.3 Foreign direct investment and multinational corporations

Foreign direct investment (FDI) is a key driver of globalization, allowing companies to expand internationally. It involves cross-border investments in foreign businesses, taking various forms like greenfield projects, acquisitions, and joint ventures.

Multinational corporations (MNCs) use FDI strategies to access new markets, resources, and efficiencies. This impacts both home and host countries, influencing economic growth, employment, and global competitiveness.

Foreign Direct Investment: Definition and Forms

Types of FDI Investments

Top images from around the web for Types of FDI Investments

• 

  Merger mania: mergers and acquisitions in the generic drug sector from 1995 to 2016 ... View original

  Is this image relevant?

• 

  The Nexus Between Foreign Direct Investment, Economic Growth and Public Debt in the Southern ... View original

  Is this image relevant?

• 

  Factors Affecting Investment Decision of FDI Enterprises in Thanh Hoa Province, Vietnam View original

  Is this image relevant?

• 

  Merger mania: mergers and acquisitions in the generic drug sector from 1995 to 2016 ... View original

  Is this image relevant?

• 

  The Nexus Between Foreign Direct Investment, Economic Growth and Public Debt in the Southern ... View original

  Is this image relevant?

1 of 3

Top images from around the web for Types of FDI Investments

• 

  Merger mania: mergers and acquisitions in the generic drug sector from 1995 to 2016 ... View original

  Is this image relevant?

• 

  The Nexus Between Foreign Direct Investment, Economic Growth and Public Debt in the Southern ... View original

  Is this image relevant?

• 

  Factors Affecting Investment Decision of FDI Enterprises in Thanh Hoa Province, Vietnam View original

  Is this image relevant?

• 

  Merger mania: mergers and acquisitions in the generic drug sector from 1995 to 2016 ... View original

  Is this image relevant?

• 

  The Nexus Between Foreign Direct Investment, Economic Growth and Public Debt in the Southern ... View original

  Is this image relevant?

1 of 3

• Foreign direct investment (FDI) involves cross-border investments made by an entity in one country into a business or asset in another country, establishing a lasting interest and control
• Greenfield investments entail building new operational facilities from the ground up in a foreign country
• Brownfield investments involve purchasing or leasing existing facilities to launch new production
• Mergers and acquisitions (M&As) occur when a company purchases an existing foreign company or merges with it
• Joint ventures represent a collaborative form of FDI where two or more companies from different countries form a new entity

FDI Classifications and Ownership Structures

• Horizontal FDI replicates home country activities in a host country (opening a similar factory abroad)
• Vertical FDI moves different stages of production to various countries (sourcing raw materials from one country, manufacturing in another)
• Ownership in FDI ranges from minority stakes to wholly-owned subsidiaries, affecting control and risk levels
  • Minority stake (less than 50% ownership)
  • Majority stake (more than 50% but less than 100% ownership)
  • Wholly-owned subsidiary (100% ownership)

Determinants of FDI by Multinational Corporations

Market and Resource Factors

• Market-seeking FDI aims to access new markets or expand existing market share in foreign countries
  • Driven by market size (population, GDP)
  • Growth potential (emerging economies)
  • Consumer preferences (localization of products)
• Resource-seeking FDI secures access to natural resources, raw materials, or specific labor skills
  • Natural resources (oil, minerals)
  • Labor skills (tech talent, manufacturing expertise)

Efficiency and Strategic Considerations

• Efficiency-seeking FDI optimizes production processes by capitalizing on differences in factor costs, productivity, or economies of scale
  • Lower labor costs (manufacturing in developing countries)
  • Specialized industrial clusters (Silicon Valley for tech)
• Strategic asset-seeking FDI involves acquiring foreign firms to gain access to their technology, brands, distribution networks, or other strategic assets
  • Technology acquisition (purchasing innovative startups)
  • Brand acquisition (luxury goods companies buying established brands)

Theoretical Frameworks and External Factors

• OLI (Ownership, Location, Internalization) paradigm by John Dunning explains conditions for FDI over other international expansion modes
  • Ownership advantages (proprietary technology, strong brand)
  • Location advantages (market size, resources, favorable policies)
  • Internalization advantages (control over operations, protection of intellectual property)
• Institutional factors significantly influence FDI decisions
  • Political stability (consistent governance)
  • Regulatory environment (ease of doing business)
  • Intellectual property protection (patent enforcement)
• Economic factors play a crucial role in determining a country's FDI attractiveness
  • Exchange rates (currency stability)
  • Tax policies (corporate tax rates, incentives)
  • Trade barriers (tariffs, quotas)

FDI Implications for Host and Home Countries

Economic Impact on Host Countries

• Potential increases in employment, capital inflows, technology transfer, and integration into global value chains
  • Job creation in new industries
  • Increased foreign exchange reserves
• Contribution to economic growth through spillover effects
  • Knowledge transfer to local workforce
  • Productivity improvements in domestic firms through competition and collaboration
• Potential negative economic effects
  • Market dominance by foreign firms leading to reduced competition
  • Profit repatriation diminishing reinvestment in the local economy
  • Vulnerability to external economic shocks due to increased global integration

Benefits and Challenges for Home Countries

• Increased exports as foreign subsidiaries source from parent company
• Repatriated profits boosting national income
• Enhanced global competitiveness of multinational corporations
• Potential job losses if production is moved overseas
• Technology transfer risks to competing economies

Social and Political Implications

• Social changes in host countries
  • Shifts in labor standards and working conditions
  • Cultural dynamics affected by foreign business practices
• Political implications
  • Changes in economic sovereignty
  • Potential for economic diplomacy (using FDI as a foreign policy tool)
  • Altered balance of power between host governments and multinational corporations
• Ongoing debate over FDI's impact
  • Balancing economic benefits against concerns of economic dependency
  • Addressing loss of control over strategic industries

Multinational Corporation Strategies in the Global Business Environment

Global Integration and Local Responsiveness

• Global integration strategies standardize products and operations across markets
  • Achieve economies of scale
  • Maintain brand consistency worldwide
• Local responsiveness strategies adapt products and practices to specific markets
  • Tailoring products to local tastes (McDonald's menu variations)
  • Adapting marketing strategies to cultural norms
• Transnational strategies balance global integration with local responsiveness
  • Leveraging global resources while addressing local needs
  • Example: Unilever's "glocal" approach

Operational and Management Strategies

• Supply chain management involves complex networks across multiple countries
  • Coordinating suppliers, manufacturers, and distributors globally
  • Optimizing for cost, quality, and delivery time
• Knowledge management and transfer within multinational corporations
  • Sharing innovations across subsidiaries
  • Implementing best practices from different markets
• Corporate social responsibility (CSR) and sustainability initiatives
  • Addressing environmental concerns (reducing carbon footprint)
  • Engaging in community development projects

Risk Management and Strategic Considerations

• Political risk assessment evaluates stability and policy changes in host countries
• Currency hedging protects against exchange rate fluctuations
• Diversification across markets and industries mitigates country-specific risks
• Balancing short-term profitability with long-term strategic positioning in global markets