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International Business Chapter 7
22 INTB 380 9780390959485
44
Business
3rd Grade
08/02/2010

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Term
Foreign direct investment (FDI)
Definition

occurs when a firm invests directly in new facilities to produce and/or market in a foreign country


¡There are two forms of FDI
¡A greenfield investment (the establishment of a wholly new operation in a foreign country)
¡Acquisition or merging with an existing firm in the foreign country

Term
multinational enterprise 
Definition
Once a firm undertakes FDI it becomes a 
Term
greenfield investment
Definition
the establishment of a wholly new operation in a foreign country
Term
flow of FDI
Definition
refers to the amount of FDI undertaken over a given time period 
Term
stock of FDI
Definition
refers to the total accumulated value of foreign-owned assets at a given time 
Term
Outflows of FDI
Definition
are the flows of FDI out of a country
Term
Inflows of FDI
Definition
are the flows of FDI into a country
Term
A greenfield investment
Definition

A company that establishes a new operation in a foreign country has made

Term
gross fixed capital formation
Definition
summarizes (the total amount of capital invested in factories, stores, office buildings, and the like
Term

¡The majority of cross-border investment involves mergers and acquisitions rather than greenfield investments 

Definition
Term

¡Firms prefer to acquire existing assets because

Definition

¡mergers and acquisitions are quicker to execute than greenfield investments
¡it is easier and perhaps less risky for a firm to acquire desired assets than build them from the ground up
¡firms believe they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills

Term

¡The shift to services is being driven by

Definition

¡The shift to services is being driven by
¡the general move in many developed countries toward services
¡the fact that many services cannot be exported
¡a liberalization of policies governing FDI in services
¡the rise of Internet-based global telecommunications networks that have  allowed some service enterprises to relocate some of their value creation activities to different nations to take advantage of favorable factor costs

Term
Limitations of Exporting
Definition

¡The viability of an exporting strategy can be constrained by transportation costs and trade barriers
¡When transportation costs are high, exporting can be unprofitable
¡Foreign direct investment may be a response to actual or threatened trade barriers such as import tariffs or quotas

Term

2. Limitations of Licensing

Definition

¡Internalization theory (also known as market imperfections) suggests that licensing has three major drawbacks
1.it may result in a firm’s giving away valuable technological know-how to a potential foreign competitor
2.it does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability
3.It may be difficult if the firm’s competitive advantage is not amendable to licensing

Term

 

3. Advantages of Foreign Direct Investment

 

Definition

 

¡A firm will favor FDI over exporting as an entry strategy when
¡transportation costs are high
¡trade barriers are high
¡A firm will favor FDI over licensing when
¡it wants control over its technological know-how
¡it wants control over its operations and business strategy
¡the firm’s capabilities are not amenable to licensing

 

Term

¡It is common for firms in the same industry to

Definition

1.have similar strategic behavior and undertake foreign direct investment around the same time
2.direct their investment activities towards certain locations at certain stages in the product life cycle

Term
oligopolistic industries
Definition

industries composed of a limited number of large firms

 

Knickerbocker explored the relationship between FDI and rivalry

 

¡Knickerbocker suggested that FDI flows are a reflection of strategic rivalry between firms in the global marketplace

Term
multipoint competition
Definition
when two or more enterprises encounter each other in different regional markets, national markets, or industries)
Term

2. The Product Life Cycle

Definition

¡Vernon argues that firms undertake FDI at particular stages in the life cycle of a product they have pioneered
¡Firms invest in other advanced countries when local demand in those countries grows large enough to support local production
¡Firms then shift production to low-cost developing countries when product standardization and market saturation give rise to price competition and cost pressures

Term
John Dunning’s eclectic paradigm
Definition
argues that in addition to the various factors discussed earlier, two additional factors must be considered when explaining both the rationale for and the direction of foreign direct investment
Term
location-specific advantages
Definition
that arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets
Term
externalities
Definition
knowledge spillovers that occur when companies in the same industry locate in the same area
Term

 

¡Ideology toward FDI has ranged from a radical stance that is hostile to all FDI to the non-interventionist principle of free market economies
¡Between these two extremes is an approach that might be called pragmatic nationalism

 

Definition
Term

The radical view

 

¡The radical view has been in retreat because of
¡the collapse of communism in Eastern Europe
¡the poor economic performance of those countries that had embraced the policy
¡the strong economic performance of developing countries that had embraced capitalism
Definition

argues that the MNE is an instrument of imperialist domination and a tool for exploiting host countries to the exclusive benefit of their capitalist-imperialist home countries


 

 

 

Term

The free market view


 

¡So, the MNE increases the overall efficiency of the world economy 
¡The free market view has been embraced by advanced and developing nations, including the United States, Britain, Chile, and Hong Kong

 

Definition

argues that international production should be distributed among countries according to the theory of comparative advantage

 


Term

The pragmatic nationalist view

 

¡According to this view, FDI should be allowed only if the benefits outweigh the costs

Definition
FDI has both benefits, such as inflows of capital, technology, skills and jobs, and costs, such as repatriation of profits to the home country and a negative balance of payments effect
Term

¡a surge in the volume of FDI worldwide
¡an increase in the volume of FDI directed at countries that have recently liberalized their regimes

Definition

¡In recent years, there has been a strong shift toward the free market stance creating

Term

1.the resource transfer effect
2.the employment effect
3.the balance of payments effect
4.effects on competition and economic growth

Definition

¡The main benefits of inward FDI for a host country are

Term

1. Resource Transfer Effects

Definition

¡FDI can make a positive contribution to a host economy by supplying capital, technology, and management resources that would otherwise not be available

Term

2. Employment Effects

Definition

¡FDI can bring jobs to a host country that would otherwise not be created there

Term
Balance-of-Payments Effects
Definition

¡A country’s balance-of-payments account is a record of a country’s payments to and receipts from other countries
¡The current account is a record of a country’s export and import of goods and services
¡A current account surplus is usually favored over a deficit
¡FDI can help achieve a current account surplus
¡if the FDI is a substitute for imports of goods and services
¡if the MNE uses a foreign subsidiary to export goods and services to other countries

Term

4. Effect on Competition and Economic Growth

Definition

¡FDI in the form of greenfield investment
¡increases the level of competition in a market
¡drives down prices
¡improves the welfare of consumers
¡Increased competition can lead to
¡increased productivity growth
¡product and process innovation
¡greater economic growth

Term

1.the possible adverse effects of FDI on competition within the host nation
2.adverse effects on the balance of payments
3.the perceived loss of national sovereignty and autonomy

Definition

¡There are three main costs of inward FDI

Term

1. Adverse Effects on Competition

Definition

¡Host governments worry that the subsidiaries of foreign MNEs operating in their country may have greater economic power than indigenous competitors because they may be part of a larger international organization
¡As part of larger organization, the MNE could draw on funds generated elsewhere to subsidize costs in the local market
¡Doing so could allow the MNE to drive indigenous competitors out of the market and create a monopoly position

Term

2. Adverse Effects on the Balance of Payments        

Definition

¡There are two possible adverse effects of FDI on a host country’s balance-of-payments
¡with the initial capital inflows that come with FDI must be the subsequent outflow of capital as the foreign subsidiary repatriates earnings to its parent country
¡when a foreign subsidiary imports a substantial number of its inputs from abroad, there is a debit on the current account of the host country’s balance of payments

Term

3. National Sovereignty and Autonomy      

Definition

¡ Many host governments worry that FDI is accompanied by some loss of economic independence
¡Key decisions that can affect the host country’s economy will be made by a foreign parent that has no real commitment to the host country, and over which the host country’s government has no real control

Term

1.the effect on the capital account of the home country’s balance of payments from the inward flow of foreign earnings
2.the employment effects that arise from outward FDI
3.the gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country

Definition

¡The benefits of FDI to the home country include

Term

1.The balance-of-payments

Definition

¡The balance of payments suffers from the initial capital outflow required to finance the FDI
¡The current account is negatively affected if the purpose of the FDI is to serve the home market from a low-cost production location
¡The current account suffers if the FDI is a substitute for direct exports

Term

2. Employment effects of outward FDI

Definition

¡If the home country is suffering from unemployment, there may be concern about the export of jobs

Term
offshore production
Definition
FDI undertaken to serve the home market
Term

1. Encouraging Outward FDI

Definition

¡Many nations now have government-backed insurance programs to cover major types of foreign investment risk
¡This type of policy can encourage firms to undertake FDI in politically unstable nations
¡Many countries have eliminated also double taxation of foreign income
¡Many host nations have relaxed restrictions on inbound FDI 

Term

2. Restricting Outward FDI           

Definition

¡ Virtually all investor countries, including the United States, have exercised some control over outward FDI from time to time
¡Some countries manipulate tax rules to make it more favorable for firms to invest at home
¡Countries may restrict firms from investing in certain nations for political reasons

Term

1. Encouraging Inward FDI         

Definition

¡Governments offer incentives to foreign firms to invest in their countries
¡Incentives are motivated by a desire to gain from the resource-transfer and employment effects of FDI, and to capture FDI away from other potential host countries

Term

2. Restricting Inward FDI

Definition

¡Ownership restraints and performance requirements (controls over the behavior of the MNE’s local subsidiary) are used to restrict FDI
¡Ownership restraints
¡exclude foreign firms from certain sectors on the grounds of national security or competition
¡are often based on a belief that local owners can help to maximize the resource transfer and employment benefits of FDI
¡Performance requirements are used to maximize the benefits and minimize the costs of FDI for the host country

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