Foreign Direct Investment

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Foreign Direct Investment

Learning objectives

• Be familiar with current trends regarding FDI in the world economy.

• Understand the different theories of foreign direct investment.

• Appreciate how political ideology shapes a government’s attitudes towards FDI.

• Understand the benefits and costs of FDI to home and host countries.

• Be able to discuss the range of policy instruments that governments use to influence FDI.

• Articulate the implications for management practice of the theory and government policies associated with FDI.

The focus of this chapter is foreign direct investment (FDI). The growth of foreign direct investment in the last 25 years has been phenomenal. FDI can take the form of a foreign firm buying a firm in a different country, or deciding to invest in a different country by building operations there.

With FDI, a firm has a significant ownership in a foreign operation and the potential to affect managerial decisions of the operation.

The goal of our coverage of FDI is to understand the pattern of FDI that occurs between countries, and why firms undertake FDI and become multinational in their operations as well as why firms undertake FDI rather than simply exporting products or licensing their know-how.

The opening case describes the international growth of Spain’s Telefonica. Until the 1990s, Telefonica was a typical state-owned firm. Today, it has expanded into Latin America and Europe. The closing case explores Mittal Steel’s expansion from a small, family-run operation in India, to being the world’s largest steel company headquartered in Rotterdam.

OUTLINE OF CHAPTER 7: FOREIGN DIRECT INVESTMENT

Opening Case: Spain’s Telefonica

Introduction

Foreign Direct Investment in the World Economy
Trends in FDI
The Direction of FDI
The Source of FDI
The Form of FDI: Acquisitions versus Greenfield Investments The Shift to Services

Country Focus: Foreign Direct Investment in China

Theories of Foreign Direct Investment
Why Foreign Direct Investment?
The Pattern of Foreign Direct Investment
The Eclectic Paradigm

Management Focus: Foreign Direct Investment by Cemex

Political Ideology and Foreign Direct Investment
The Radical View
The Free Market View
Pragmatic Nationalism
Shifting Ideology

Management Focus: DP World and the United States

Benefits and Costs of FDI
Host Country Benefits
Host Country Costs
Home Country Benefits
Home Country Costs
International Trade Theory and FDI

Government Policy Instruments and FDI
Home Country Policies
Host Country Policies
International Institutions and the Liberalization of FDI

Implications for Managers
The Theory of FDI
Government Policy

Chapter Summary

Critical Thinking and Discussion Questions

Closing Case: Cemex’s Foreign Direct Investment

CLASSROOM DISCUSSION POINT

Ask students for examples of foreign firms that have invested in the U.S. Jot them down on the board.

Then, discuss why these companies invested in the U.S. Try to follow the framework presented in the text, and refer back to the board during the presentation of the material.

Next, explore what the investment means for the U.S.

OPENING CASE: Spain’s Telefonica

The opening case explores the international growth of Telefonica, a Spanish telecommunications firm. For decades, Telefonica had operated as a typical state-owned enterprise, but privatization and deregulation changes that path in the 1990s. Telefonica began to aggressively pursue expansion opportunities in Latin America where it quickly became the number 1 or 2 player in nearly every country. Later, Telefonica turned its sights on Europe where its acquisitions helped transform the company into the second biggest mobile...
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