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MGT520 - International Business - Lecture Handout 37

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FOREIGN DIRECT INVESTMENT

Reasons for Host Nation Intervention:

Balance of Payments:

  1. Many governments see intervention as the only way to keep their balance of payments under control.
  2. Countries get a balance-of-payments boost from initial FDI flows into their economies. Local content requirements can lower imports, providing a balance-of-payments boost. Exports generated by production resulting from FDI can help the balance-of-payments position.
  3. When companies repatriate profits, they deplete the foreign exchange reserves of their host countries; these capital outflows decrease the balance of payments. To avoid this, the host nation may prohibit or restrict the no domestic company from removing profits.
  4. Alternatively, host countries conserve their foreign exchange reserves when international companies reinvest their earnings in local manufacturing facilities. This improves the competitiveness of local producers and boosts a host nation’s exports—improving its balance-ofpayments position.

Obtain Resources and Benefits:

Access to Technology:

Nations encourage FDI in technology because it increases productivity and competitiveness.

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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.

Read more: MGT520 - International Business - Lecture Handout 34