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FDI by Mind Map: FDI

1. Def: Firm directly invests in facilities to produce product and service in a foreign market

2. Two forms : greenfield investment and acquisition/ merging

2.1. Greenfield: establishment of a new operation in a foreign country

2.2. Merge/ Acquisition: Minority Majority or Fulltakeover

2.3. Why Acquisition over greenfield investment?

2.3.1. 1. easier and less risky

2.3.2. 2. increase the efficiency

2.3.3. 3. quicker to execute

3. Flow of FDI : The amount of FDI undertaken over a period of time (year)

4. Stock of FDI: Total accumulated value of foreign owned assets at a given time

5. Inflows of FDI: The flow of FDI into a country

6. Outflows of FDI : flow of FDI out of a country

7. Growth of FDI

7.1. 1. To bypass trade barriers

7.2. 2. Political and economic changes: Deregulation, privatization, fewer restrictions on FDI

7.3. 3. New bilateral investment treaties: Designed to facilitate investment

7.4. 4. Globalisation of the world economy

8. Even though FDI is risky and expensive there are benefits over export and licensing

8.1. Exports :Transportation costs Trade barriers Import tariffs or quotas

8.2. Licensing:Giving away valuable technological know-how to a potential competitor Does not give a firm the control over manufacturing, marketing, and strategy in the foreign country This is where a Firm’s competitive advantage is based on

8.2.1. Market Imperfections approach

9. Knickerbocker’s theory: FDI flows are a reflection of strategic rivalry between firms in the global marketplace

9.1. Oligopoly: few companies dominate a market

9.2. Multipoint competition :when two or more enterprises encounter each other in different regional markets, national markets, or industries

9.3. limitation: fails to give a concise reason why the first firm makes a move before the others:

10. John Dunning’s eclectic paradigm

10.1. Location-specific advantages: resource endowments or assets, tied to a particular location which a firm finds valuable to combine with its own unique assets

10.2. Externalities - knowledge spillovers that occur when companies in the same industry locate in the same area

11. Theoretical approaches To FDI

11.1. 1.The radical view: MNE is an instrument of imperialist domination and a tool for exploiting host countries

11.2. 2.The free market view :international production should be distributed among countries according to the theory of comparative advantage

11.3. 3. Pragmatic nationalism: FDI has both benefits

12. Main benefits and costs of FDI to the host country

12.1. Four main benefits of inward FDI for a host country:

12.1.1. 1. Resource transfer effects

12.1.2. 2. Employment effects

12.1.3. 3. Balance of payments effects FDI can help country to achieve a current account surplus

12.1.4. 4. Effects on competition and economic growth: driving down prices and improving the welfare of consumers

12.2. FDI has three main costs

12.2.1. 1. Adverse effects of FDI on competition: MNEs may have greater economic power than indigenous competitors

12.2.2. 2. Perceived loss of national sovereignty and autonomy

12.2.3. 3. Adverse effects on the balance of payments

13. Main benefits and costs of FDI to the home country

13.1. benefits of FDI to the home country

13.1.1. 1. the inward flow of foreign earnings

13.1.2. 2. The employments effects

13.1.3. 3. The gains from learning valuable skills from foreign markets

13.2. Costs of FDI to the home country

13.2.1. 1. balance of payments can suffer

13.2.2. 2.Employment may also be negatively affected if the FDI is a substitute for domestic production

14. government influence FDI

14.1. 1. can encourage outward FDI government : backed insurance programs

14.2. 2. can restrict outward FDI: limit capital outflows, manipulate tax rules, or outright prohibit FDI

14.3. 3.can encourage inward FDI:offer incentives to foreign firms

14.4. 4.can restrict inward FDI: ownership restraints and performance requirements

15. Regional economic integration

15.1. Agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other

15.2. 1.Free Trade Area:eliminates all barriers to the trade of goods and services among members Eg: NAFTA

15.3. 2.Customs Union: eliminates trade barriers between members and adopts a common external trade policy

15.3.1. MERCOSUR,CACM,CARICOM

15.4. 3. Common Market:has no trade barriers between members, a common external trade policy, and the free movement of the factors of production

15.5. 4. Economic Union:

15.6. 5.Political Union

15.7. Economic integration

15.7.1. EU

15.7.1.1. Product of two political factors:1.Desire for lasting peace after 2 world wars 2. Hold their b world's political and economic stage

15.7.1.2. MAIN INSTITUTIONS OF THE EU

15.7.1.2.1. European Council

15.7.1.2.2. European Parliament

15.7.1.2.3. European Commission

15.7.1.2.4. Court of Justice

15.7.2. North American Free Trade Area (NAFTA)

15.7.2.1. trilateral free-trade deal between the United States, Canada, and Mexico came into force in January 1994

15.7.3. Association of Southeast Asian Nations (ASEAN)

15.7.3.1. foster freer trade between member countries and to achieve some cooperation in their industrial policies

15.7.4. Asia-Pacific Economic Cooperation (APEC)

15.7.4.1. Currently has 21 members including such economic powerhouses as the United States, Japan, and China.

15.7.5. Pros and Cons Regional economic integration

15.7.5.1. opens new markets

15.7.5.2. allows firms to realize cost economies

15.7.5.3. However, within each grouping, the business environment becomes competitive

15.7.5.4. there is a risk of being shut out of the single market by the creation of a “trade fortress”