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Foreign Direct Investment:

Foreign Direct Investment Prof. K. Chander


FDI Purchase of physical assets for a significant amount of ownership (Stocks) of company in another country to gain a measure of management control. Portfolio Investment: Investment that doesn’t involve obtaining a degree of control in a company.

Growth of FDI:

Growth of FDI Growth rates in the worldwide flow of FDI throughout years 1990 were approximate 40% per year for both inflows and outflows. Main reason for rising tide of FDI flow is: Globalization; Mergers and acquisitions.

Explanation for FDI Reasons :

Explanation for FDI Reasons Theories for FDI International Product Life Cycle. Market imperfections (internationalizations). Electric theory. Market power. International Product Life Cycle Theory states that a company will begin by exporting its products and later undertake foreign direct investment as a product moves through its lifecycle.

Explanation for FDI Reasons…:

Explanation for FDI Reasons… Market Imperfections Theory stating that when an imperfection in the market makes a transition less efficient than it could be, a company will undertake the FDI to internalize the transaction and thereby remove the imperfection. There are two market imperfections: Trade barrier Specialized knowledge

Explanation for FDI Reasons…:

Explanation for FDI Reasons… Eclectic Theory Theory stating that firms undertake FDI when features of a particular location combine with ownership and internationalization advantages to make a location appealing for investment. Market Power Theory stating that a firm tries to establish a dominant market presence in an industry by undertaking FDI. One way company can achieve market power (dominance) is through Vertical Integration It is the extension of company activities into stages of production that provides a firms inputs (backward integration) or absorbed its output (forward integration).

Management issues in the FDI decision:

Management issues in the FDI decision Control Partnership requirement. Benefits of cooperation. Purchase or build. Production cost. Rationalized production. Cost of R & D. Customer knowledge. Following Clients. Following Rivals.

Government intervention in FDI:

Government intervention in FDI Nations often intervene in the flow of direct investment to protect their cultural heritages, domestic companies and jobs. Opinion’s vary how much FDI should be allowed. One extreme is those who favour free market and no intervention from government. Other extreme is self sufficient and no FDI.

Reasons for Host country Intervention:

Reasons for Host country Intervention BOP: Many Govts. see intervention as the only way to keep their BOP under control. From inflow of FDI, BOP gets Boosts. Country can impose local content on investors from the other country. Export from new production can have favorable impact. Host may restrict outside companies from sending profit to their home country. Obtain resources and benefits Access to Technology. Management skills & employment.

Reasons for home country Intervention:

Reasons for home country Intervention Home nations (those from witch FDI is launched) may also seek to encourage or discourage outflows of FDI. Investing in other countries send resources out of home country. Outgoing FDI may damage a nation’s BOP by taking the place of its exports. Replace jobs at home. Outward FDI can increase long run competitiveness. Nations may encourage FDI in “SUNSET” industires.

Methods of Restricting and Promoting FDI:

Methods of Restricting and Promoting FDI Methods of Restricting FDI Methods of Promoting FDI Host Country Ownership Restriction; Performance demand Tax Incentives, Low interest Rates, Loans, and Infrastructure improvements. Home country Differential Rate of Tax Sanctions Insurance; Loans; Tax Breaks, and Political Pressure

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