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FOREIGN DIRECT INVESTMENT

Learning Objectives:

• To explain why investors and governments view direct investments differently than portfolio investments
• To demonstrate how companies acquire foreign direct investments
• To evaluate the relationship between foreign trade and international factor mobility, especially direct investment
• To classify companies’ motivations for foreign direct investment
• To explain companies’ advantages from foreign direct investments
• To show the major global patterns of foreign direct investment

Types of International Investments:

• International investment can be divided into portfolio investment and foreign direct investment (FDI) (see Chapter 1). The former represents passive holdings of foreign stocks, bonds, or other financial assets that entail no active management or control of the issuer of the securities by the foreign investor. The latter represents acquisition of foreign assets for the purpose of control.
• FDI may take many forms including: purchases of existing assets in a foreign country; new investments in plant, property, and equipment; or participation in joint ventures with a local partner. The text provides examples of each type of investment.
• Controversy often surrounds FDI because while it may increase employment, enhance productivity, and raise wage rates, it also raises concerns that control of the national economy is being passed to foreigners.

The Growth of Foreign Direct Investment:

• The past 30 years have seen a dramatic rise in foreign direct investment. Current worldwide FDI is about $6.8 trillion (2001).



Read more: MGT520 - International Business - Lecture Handout 32

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INTERNATIONAL TRADE THEORY

THE FACTOR-PROPORTIONS THEORY:

The Heckscher-Ohlin theory of factor endowment is useful in extending the concept of comparative advantage by bringing into consideration a nation’s endowment and cost of factors of production. The theory holds that a country will tend to export products that utilize factors of production relatively abundant in that nation.

Land-Labor Relationship:

In countries with many people relative to the size of the available land, labor would be relatively (comparatively) cheap; thus those countries should concentrate on producing and exporting labor-intensive goods.

Labor-Capital Relationship:

In countries where little capital is available for investment and where the amount of investment per worker is low, then low labor rates would also be expected. Again, those countries should concentrate on producing and exporting labor-intensive goods. (The fact that labor skills tend to vary across countries has led to international task specialization with respect to national production activities.)

Technological Complexities:

Factor proportions analysis becomes complicated when the same product can be produced by different methods, such as with different mixes of labor and capital. Managers must consider the cost in each locale, based on the type of production that will minimize costs there.

Read more: MGT520 - International Business - Lecture Handout 23