Foreign direct investment in the world economy

Foreign Direct Investment
In The World Economy

*The flow of FDI refers to the amount of FDI undertaken over a given time period
*The stock of FDI refers to the total accumulated value offoreign-owned assets at a given time
*Outflows of FDI are the flows of FDI out of a country
*Inflows of FDI are the flows of FDI into a country

*Gross fixed capital formation summarizes the totalamount of capital invested in factories, stores, office buildings, and the like

Firms prefer to acquire existing assets because:
* mergers and acquisitions are quicker to execute thangreenfield investments
* it is easier and perhaps less risky for a firm to acquire desired assets than build them from the ground up
* firms believe that they can increase the efficiency of anacquired unit by transferring capital, technology, or management skills
FDI: is shifting away from extractive industries and manufacturing, and towards services

The shift to services is being driven by:* the general move in many developed countries toward services
* the fact that many services need to be produced where they are consumed
*
exporting - producing goods at home and thenshipping them to the receiving country for sale

licensing - granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit that the foreignentity sells
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Internalization theory (also known as market imperfections
theory) suggests that licensing has three major drawbacks:
* licensing may result in a firm’s giving away valuabletechnological know-how to a potential foreign competitor
* licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required tomaximize its profitability
* a problem arises with licensing when the firm’s competitive advantage is based not so much on its products as on the management, marketing, and manufacturing...