Agenda

1. What is FDI? 2. Trends of FDI 3. Theories

○ Rational Choice ○ Behaviorist ○ Internalization○ OLI Theory ○ Product Cycle

Internation production

Nature of firm (?)

What is FDI?

FDI = Foreign Direct Investment

Defined as a company from one country making a physical investment into building a factory in another country

Extraordinary and growing role in global business

Can provide a firm with new markets

marketing channels

cheaper production facilities

access to new technology

Direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment

FDIs require an ownership of at least 10 percent of the ordinary shares or voting power of a company by the foreign investor

Types of FDI derived from OLI Theory

The different objectives of FDI defined by

Jere Behrman:

Resource seeking FDI

Market seeking FDI

Efficiency seeking (global sourcing FDI)

Strategic asset/capabilities seeking FDI

Decision process

“Continuous dynamic social process of mutual influences among various members of an organization”

Constrained by the organization’s Strategy Resources Limited capacity Goals Needs of its members

(Aharoni, 1966 :15)

Decision making

An Individual must take a choice among a number of different, specified courses of action.

Logic + system of preferences choose the alternative that has the

consequences which you prefer

Deliberation Calculation Thought

Unconscious Automatic response Results of external

condition

Decisions are not necessarily result of an intellectual process

(Aharoni, 1966 :14)

Not everything is a decision...

Genuine decision Habitual behavior

Goal (Own Illustration))

Rational choice

Inquiry

Alternatives

Verification

Doubt

Rational choice

Defining Goal ActionPlanning

Scientific Management, Taylor:

„Logic and Rational System of Organization“

(Aharoni, 1966 :28)

Operation of Line and Stuff

Span and Control

Equalization of Authority

Responsibility

Herbert A. Simon (1981)

Mental capacity is limited Information is restricted Information must be

searched for Ability to digest is bounded

No given set of alternatives No maximizing

Economic man Behavioral man

Behavioral science

Influence decision making process

Personality Environment

„The human being striving for rationality and

restricted within the limits of his knowledge has

developed some working procedures that partially

overcome these difficulties. These procedures

consist in assuming that he can isolate from the

rest of the world a closed system containing a

limited number of variables and a limited range of

consequences.“ (Herbert A. Simon, 1970: 82)

Elements in the Decision Process

Organization and

Environment

Time Dimension

UncertaintyConstraints

Goals

Decision process FDI

Organizational decision

Different organizational levels -often considered as top management problem

Number of different combinations of alternatives are staggering to contemplate

Takes place under uncertainty

Limited capacity of human mind

Lack of information

What does that mean for FDI?

InvestStep in a long sequence of decisions            made during the process

InvestigationIndividual investment opportunities are considered if the risk is too high, investigation is stopped

When decisions are made, it has to be checked how it affects

other commitments in the past.

Internalization (Buckley and Casson)

Solution for market imperfections: Creating own Markets (Internalization)

Multinational competence

FDI is qualified for markets with high transaction costs

Maximal profit

FDI – Yes or No?

industry-specific region-specific nation-specific firm-specific factor

Advantages

Outsoursing abroad

Global coordination

Goverment (coordination/ intervention)

Taxes

Financial markets

Disadvantages

Communication Cultural Differences Administrative cost Political dissimilarities

OLI Model

O wnership advantages

L ocalization advantages

I nternalization advantages

Resource seeking

Market seeking

Efficiency seeking

Capabilities seeking / strategic asset

Excursion

New Trade Theory

Economic critique of international free trade

From the perspective of increasing returns to scale and the network effect

Economists have asked whether it might be effective for a nation to shelter infant industries until they had grown to compete internationally

Discussion

Can trade theory be compatible with FDI?

Can trade theory keep up with the chain of events which have happened in the world economy over the last years?

Sources

• Foreign Direct Investment Statistics: How Countries Measure FDI 2001Von International Monetary Fund, Organisation for Economic Co-operation and DevelopmentVeröffentlicht von International Monetary Fund, 2003

• Foreign Direct Investment and the Regional EconomyVon Jonathan Jones, Colin WrenEdition: illustratedVeröffentlicht von Ashgate Publishing, Ltd., 2006

• This article was written by Jeffrey P. Graham and R. Barry Spaulding and originally appeared on the now defunct Citibank international business portal. Copyright © Citibank. All Rights Reserved.

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