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Foreign Direct Investment Exam 2022/2023 with complete solution

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Foreign Direct Investment (FDI) - ANSWER Occurs when a firm invests directly in a new facility to produce or market in a foreign country. Multinational enterprise is a firm engaged in____ . Two Forms of FDI - ANSWER -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 Flow of FDI - ANSWER The amount of FDI undertaken over a given time period Outflows of FDI - ANSWER The flows of FDI out of a country Inflows of FDI - ANSWER The flows of FDI into a country Stock of FDI - ANSWER The total accumulated value of foreign-owned asset at a given time. Trends in FDI - ANSWER -Both the flow and stock of FDI in the world economy have increased over the last 35 years -FDI has grown more rapidly than world trade and world output -Historically, most FDI has been directed at the developed nations of the world(Favorite targets: United States and European Union) -More recently, developing nations have been the recipients of FDI. Most Common form of FDI - ANSWER Most cross-border investment involves mergers and acquisitions. Acquisitions are attractive because: -They are quicker to execute than greenfield investments -It is easier and 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 Alternatives to FDI - ANSWER 1. Exporting - producing goods at home and then shipping them to the receiving country for sale 2. 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 foreign entity sells Limitations of Exporting - ANSWER -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 Limitations of Licensing - ANSWER "Internalization Theory" suggests Licensing could result in a firm's giving away valuable technological know-how to a potential foreign competitor (i.e., RCA; Matsushita and Sony) Licensing 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 Licensing may be difficult or ineffective if the firm's competitive advantage is not suited to it If it's based on management, marketing & manufacturing expertise vs technology-based. Advantages of FDI - ANSWER FDI will be favored over exporting when: -Transportation costs are high -Trade barriers are high FDI will be favored over licensing when the firm: -wants control over its technological know-how -wants control over its operations and business strategy -has key capabilities that are not amenable to licensing Host Country Benefits from FDI - ANSWER 1. Resource Transfer Effects -FDI can bring capital, technology, and management resources that would otherwise not be available 2. Employment Effects -FDI can bring jobs that would otherwise not be created there 3. Balance-of-Payments Effects -The balance-of-payments account records a country's payments to and receipts from other countries -The current account records a country's export and import of goods and services -A surplus is usually favored over a deficit -FDI can help achieve a current account surplus: -If it is a substitute for imports of goods and services -If the MNE uses a foreign subsidiary to

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