Chapter 6 Learning Objectives

After studying this chapter, you should be able to:

1. understand the vocabulary associated with foreign direct investment (FDI)

2. use the resource- and institution-based views to explain why FDI takes place

3. understand how FDI results in ownership, location, and internalization (OLI) advantages

4. identify different political views on FDI based on an understanding of FDI’s benefits and costs to host and home countries

5. participate in two leading debates on FDI

6. draw implications for action

THE FDI VOCABULARY

foreign direct investment (FDI) - Investments in activities that control and manage value creation in other countriesmultinational enterprise (MNE) - A firm that engages in foreign direct investmentforeign portfolio investment (FPI) - Investment in a portfolio of foreign securities such as stocks and bonds that do not entail the active management of foreign assetsmanagement control rights - The rights to appoint key managers and establish control mechanismshorizontal FDI - A type of FDI in which a firm duplicates its home country-based activities at the same value chain stage in a host countryvertical FDI - A type of FDI in which a firm moves upstream or downstream in different value chain stages in a host country

THE FDI VOCABULARY

upstream vertical FDI - A type of vertical FDI in which a firm engages in different stages of the value chain in two different countriesdownstream vertical FDI - The amount of FDI moving in a given period (usually a year) in a certain direction

FDI flow - The amount of FDI moving in a given period (usually a year) in a certain direction

FDI inflow - Refers to inbound FDI moving into a country in a yearFDI outflow - Refers to outbound FDI movingout of a country in a yearFDI stock - The total accumulation of inbound FDI in a country or outbound FDI from a country

OLI Advantages

A firm’s quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages:

Ownership - Refers to MNEs’ possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas in the context of FDI

Location - Refers to advantages enjoyed by firms operating in certain areas

Internalization - Refers to the replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating in two or more countries

REALITIES OF FDI – POLITICAL VIEWS

radical view - political view that is hostile to FDI

free market view - political view that suggests that FDI, unrestricted by government intervention, will enablecountries to tap into their absolute or comparative advantages by specializing in the production of certain goods and services

pragmatic nationalism - political view that approves FDI only when its benefits outweigh its costs