Foreign Direct Investment

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Foreign Direct Investment
Chapter Outline

Opening Case: Lakshmi Mittal and the Growth of Mittal Steel

INTRODUCTION

FOREIGN DIRECT INVESTMENT IN THE WORLD ECONOMY

Trends in FDI
The Direction of FDI
Country Focus: Foreign Direct Investment in China
The Source of FDI
The Form of FDI: Acquisitions versus Greenfield Investments The Shift to Services

THEORIES OF FOREIGN DIRECT INVESTMENT

Why Foreign Direct Investment
Management Focus: Foreign Direct Investment by Cemex
The Pattern of Foreign Direct Investment
The Eclectic Paradigm

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

FOCUS ON MANAGERIAL IMPLICATIONS

The Theory of FDI
Government Policy

SUMMARY

CRITICAL THINKING AND DISCUSSION QUESTIONS

CLOSING CASE: Starbuck’s Foreign Direct Investment

Learning Objectives

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

2. Understand the different theories of foreign direct investment.

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

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

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

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

Chapter Summary

This chapter focuses on the topic of foreign direct investment (FDI). FDI occurs when a firm invests directly in new facilities to produce and/or market a product in a foreign country. At the outset, the chapter discusses the growth in FDI, particularly by medium-sized and small firms. The theoretical underpinnings of FDI are discussed, which describe under what circumstances it is advantageous for a firm to invest in production facilities in a foreign country. The chapter also addresses the different policies that governments have toward foreign direct investment. Some governments are opposed to FDI and some governments encourage it. Three specific ideologies of FDI are discussed, including the radical view, the free market view, and pragmatic nationalism. The chapter also provides a discussion of the costs and benefits of FDI from the perspective of both the home country and the host country involved. The chapter concludes with a review of the policy instruments that governments use to regulate FDI activity by international firms.

Opening Case: Lakshmi Mittal and the Growth of Mittal Steel

Summary

The opening case explores the growth of Mittal Steel. Mittal Steel began as a family-run company in India 1975. By 2007, Mittal Steel was the largest steel company in the world with sales of $110 billion, and a net income of $10.2 billion. Mittal Steel’s growth strategy involved acquiring distressed companies on the cheap, modernizing them, and taking advantage of an anticipated boom in global steel demand. The following questions can be used to generate discussion of the case:

Suggested Discussion Questions

QUESTION 1: How did Mittal Steel grow from almost nothing to be the world’s largest steel company in such a short time? How important were the company’s foreign acquisitions to its success?

ANSWER 1: Mittal Steel began as a small family-run firm in India in 1975. The company acquired a Trinidadian plant in 1989 after helping, under contract, to turn the firm around. Mittal...
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