Foreign Direct Investment

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* Occurs when a firm invest directly in a foreign country. * Becomes a multinational enterprise * FDI can be both – Greenfield (establish new ops) Acquisition/Merger (with existing firms) * Flow of FDI –refers to the amount of FDI over a time period. * Stock of FDI - total accumulated value of foreign-owned assets * Outflows – flows of FDI out of a country * Inflows – flows of FDI into a country
Gross fixed capital formation summarises the total amount of capital invested in factories, stores, buildings(fixed assets)

Source of FDI:
Since World War II, the U.S. has been the largest source country for FDI.
United Kingdom, Netherlands, France, Germany and Japan are other important source countries. China is upcoming major source.

Form of FDI
Acquisition versus greenfield: * Most are mergers and acquisitions, rather than greenfield. * Easier and less risky rather than to build from scratch. * Firms believe that they can increase the efficiency of an acquired unit by transferring capital, technology or management skills.

The shift to services is being driven by 4 factors: * general move in developed economies, away from manufacturing and toward service * Many services cannot be traded internationally. * Countries liberalised their regimes governing FDI in services. * Rise of internet-based global telecom networks allowed service enterprises to relocate their value creation activities to different nations, take advantage of cheaper factor costs.

Other forms of FDI: * Exporting: producing goods at home then shipping them to the receiving country for sale * Licensing: granting a foreign entity right to produce and sell the firm’s product in return for royalty fee on every unit sold

Flip side of FDI:
Horizontal direct investment: * FDI in the same industry abroad as company operates in at home. * Expensive, must bear costs of establishing production facilities in a foreign

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