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MGT520 - International Business - Lecture Handout 35

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FOREIGN DIRECT INVESTMENT

Pragmatic Nationalism

  • Having nor a radical neither a free trade market.
  • FDI has both benefits and disadvantages to a country.
  • Some Pragmatic nationalist are thinking in terms of resources taken out by MNE in the repatriation resulted from FDI.
  • Japan, Korea, Latin American Countries are the Examples.
  • But recent years have seen a major increase in FDI.

Growth and Employment Effects:

In contrast to the balance-of-payments effects, the effects of FDI on economic growth and employment should not be a zero-sum game because MNEs may use resources that were either underemployed or unemployed. The argument that both home and host countries can gain from FDI rests on two assumptions: (i) resources are not fully employed and (ii) capital and technology cannot be easily transferred from one activity to another.

  • Home Country Losses: As manufacturers seek lower-cost foreign production sites, home countries claim that FDI outflows create jobs abroad at the expense of jobs in the home country.
  • Host Country Gains: Host countries gain through the transfer of capital, technology, and managerial expertise, as well as the creation of new jobs.
  • Host Country Losses: Critics argue that FDI inflows often displace domestic investment and drive up local labor costs. They claim that MNEs have access to lower-cost funds than local competitors do and that MNEs can spend more on promotion activities. In addition, while it is true that MNEs often source inputs locally, critics claim that they also destroy local entrepreneurship. Further, as MNEs gain valuable knowledge in their foreign operations that can be shared across their entire organizations, critics fear that local firms subsequently suffer a
    competitive disadvantage.

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MGT520 - International Business - Lecture Handout 34

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FOREIGN DIRECT INVESTMENT

RISK MINIMIZATION OBJECTIVES:

Diversification, internationally or otherwise, is often a means firms use to reduce risks.

Following Customers:

Suppliers will often set up facilities near the firms they supply. Bridgestone decided to make automobile tires in the United States in order to continue selling to Honda and Toyota once those companies initiated U.S. production.

Preventing Competitors’ Advantages:

Firms in an oligopolistic industry often follow their competitors into other countries in order to avoid giving a competitor an advantage.

Political Motives:

For example, during the early 1980s, the U.S. government instituted various incentives to increase the profitability of U.S. investment in Caribbean countries that were unfriendly to Castro’s regime.

ADVANTAGES OF FOREIGN DIRECT INVESTMENT:

Monopoly Advantages before Direct Investment:

Companies invest directly if they think they hold some supremacy over similar companies in countries of interest. The advantage results from a foreign company’s ownership of some resource—patents, management skills—unavailable at the same price to the local company. This edge is often called a monopoly advantage.

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