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OUT LINE
Definitions.
Theories of FDI.
Forms of FDI.
Strategies of FDI
Cost Benefits of FDI
Conclusion.
Reference.
DEFINING FDI
Is a process where by residents of one country(source
Cont
United States Department of Commerce
THEORIES OF FDI
Mac Dougall-Kemp Hypothesis.
FDI moves from capital abundant economy to
capital scarce economy till the marginal
production is equal in both countries. This
leads to improvement in efficiency in
utilization of resources in which leads to
ultimate increase in welfare .According to this
theory, foreing direct investment is a result of
differences in capital abundance between
economies. This theory was developed by
MacDougal(1958) and was later elaborated by
Kemp(1964)
Cont
Industrial Organization Theory.
According to this theory, MNC with superior
technology moves to different countries to
supply innovated products making in turn
ample gains .Krugman (1989) points out that
it was technological advantage possessed by
European countries which led to massive
investment in USA .According to this theory,
technological superiority is the main driving
force for foreign direct investment rather that
capital abundance.
Cont
Currency Based Approaches.
A firm moves from strong currency country to weak
currency country. Aliber(1971)postulates that firms
from strong currency countries move out to weak
currency countries. Froot and Stain(1989)holds that,
depreciation in real value of currency of a country
lowers the wealth of a domestic residents visa avis
the wealth of the foreign residents ,thus being
cheaper for foreign firms to acquire assets in such
countries. Therefore, foreign direct investments will
move from countries with strong currencies to those
with weak or depreciating currencies.
Cont
Location Specific Theory.
Hood and Young(1979) stress on the location
factor. According to them, FDI moves to a
countries with abundant raw materials and
cheap labor force. Since real wage cost varies
among countries, firms with low-cost
technology move to low wage countries.
Abundance of raw materials and cheap labor
force are the main factors for FDI.Countries
with cheap labor and abundant raw material
will tend to attract FDI.
Cont
Product Cycle Theory.
FDI takes place only when the product in question
achieve specific stage in its life cycle(Vernon
1966)introduction ,growth, maturity and decline
stage.
At maturity stage, the demand for new product in
developed countries grow substantially and rival firms
begin to emerge producing similar products at lower
price.
So in order to compete with rivals, innovators decide to
set up production in the host country so as to beat up
the cost of transportation and tariffs.
cont
Political Economic Theories.
They concentrate on the political risks. Political
stability in the host country leads to
FDI(Fatehi-Sedah and Safizeha
1989).Similarly, political instability in the
home country encourages FDI in other
countries(Tallman 1988).
FORMS OF FDI
It takes broadly three forms:
1.Green Field Investment
2.Merger and Acquisitions(M&A)
3.Brown Field Investment.
Cont
1.Green Field Investment.
IT is done through opening branches in host
countries or through making investment in the
equity capital of the host country firm.
(Financial collaboration)
If the parent hosts the entire equity of the host
country firm, the late is called wholly owned
subsidiary of the of the parent.
If it is more than half, it is known as subsidiary.
otherwise, it is simply an affiliate.
Cont
2.Merger and Acquisition(M&A)
They are either purchase of a running company
abroad or an Amalgamation with a running
foreign company.
For the case of Merger, the acquiring company
maintains its existence and the target
company looses its existence.
For the case of Amalgamation, both loose their
existence in the favor of a new company.
Merger and Acquisition are either Horizontal or
Vertical Conglomerate.
Cont
Cont...
Benefits to The Home Country.
1.Availability of raw material.
2.Improvement in Balance of Payments.
3.Revenue to the government
4.Employement generation
5.Improved political relations.
Cont
Cost to the Home Country.
1.Cultural and political interference.
2.Un healthy competition
3.Over utilization of local resources(both natural
and human resources)
4.Vilation of human rights(child labor eg. the
case of NIKE in Vietnam).
5.Threat to indigenous technology.
6.Threat to local products.
Cont..
Cost to the Home Country.
It is little compared to the host country.
1.Investment abroad takes away employment
opportunities.
2.It takes away capital.
3.Out flow of factors of production.
REFERENCE
UNICTAD(2002) Foreign Direct Investment: A Lead
Driver for Sustainable Development, Economic