Chapter 6 Learning Objectives
After studying this chapter, you should be able to:
1.
understand the vocabulary associated with foreign direct investment
(FDI)
2.
use the resource- and institution-based views to explain why FDI
takes place
3.
understand how FDI results in ownership, location, and
internalization (OLI) advantages
4.
identify different political views on FDI based on an understanding of
FDI’s benefits and costs to host and home countries
5.
participate in two leading debates on FDI
6.
draw implications for action
THE FDI VOCABULARY
foreign direct investment (FDI) - Investments in
activities that control and manage value creation in other countries
multinational enterprise (MNE) - A firm that engages in
foreign direct investment
foreign portfolio investment (FPI) - Investment in a
portfolio of foreign securities such as stocks and bonds that do not
entail the active management of foreign assets
management control rights - The rights to appoint key
managers and establish control mechanisms
horizontal FDI - A type of FDI in which a firm duplicates its
home country-based activities at the same value chain stage in a
host country
vertical FDI - A type of FDI in which a firm moves upstream or
downstream in different value chain stages in a host country
THE FDI VOCABULARY
upstream vertical FDI - A type of vertical FDI in which a
firm engages in different stages of the value chain in two different
countries
downstream vertical FDI - The amount of FDI moving in
a given period (usually a year) in a certain direction
FDI flow - The amount of FDI moving in a given period
(usually a year) in a certain direction
FDI inflow - Refers to inbound FDI moving into a country in
a year
FDI outflow - Refers to outbound FDI moving
out of a country in a year
FDI stock - The total accumulation of inbound FDI in a country
or outbound FDI from a country
OLI Advantages
A firm’s quest for ownership (O) advantages, location (L)
advantages, and internalization (I) advantages:
Ownership - Refers to MNEs’ possession and leveraging
of certain valuable, rare, hard-to-imitate, and
organizationally embedded (VRIO) assets overseas in the
context of FDI
Location - Refers to advantages enjoyed by firms
operating in certain areas
Internalization - Refers to the replacement of cross-
border markets (such as exporting and importing) with one
firm (the MNE) locating in two or more countries
REALITIES OF FDI – POLITICAL VIEWS
radical view - political view that is hostile to FDI
free market view - political view that suggests that
FDI, unrestricted by government intervention, will enable
countries to tap into their absolute or comparative
advantages by specializing in the production of certain
goods and services
pragmatic nationalism - political view that
approves FDI only when its benefits outweigh its costs