Foreign Direct Investment Essay

1802 Words Apr 1st, 2011 8 Pages
Chapter 4

FOREIGN DIRECT INVESTMENT

FDI is the outcome of Mutual interest of MNC’s and host countries. The FDI refers to the investment of MNC'’ in host countries in the form of creating productive facilities and having ownership and control. On the other hand if MNC or a foreign organization or a foreign individual buys bonds issued by host country it is not FDI, as it has no attached management or controlling interest. Such investments are called Portfolio Investments.

In developing countries FDI is seen as a useful source of funds. LDC’s look upon FDI as a source to bridge their demand supply gap of funds. It represents an important source of non-debt inflow that often brings along with it new technology and management
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3) Competition:

FDI often takes place due to rivalry among the firms in global market. Assume A, B, and C are in competition and are in oligopolistic market in Home Market. If A established a subsidiary in a foreign country and is successful, B & C will follow suit. For example, Honda undertook FDI in USA and Europe in 80’s soon Toyota and Nissan followed to ensure that their relative market position remains undisturbed.

4) Product Life Cycle Theory / Seeking New Source of Demand:

Prof. Venon argued that often the same company that pioneers product in its home country undertakes to produce and market it abroad because in its home country the product reaches maturity and stagnation stage. Thus Xerox of US introduced the photocopier in USA and it was Xerox that set up Fuji-Xerox in Japan and Rank-Xerox in U.K. to serve these markets. The firm shifts production to developing countries when the product standardization and market situation give rise to price competition and cost pressures. Investment in developing countries where labour costs are lower is seen as the best way to escape from such competition and reduce costs.

5) Locational Advantages:

Certain location – specific advantages attract the FDI – e.g. Availability of natural resources (e.g. Oil deposit). Another advantage is availability of skilled human resources. Ex. BPOS in India, Hyundai, the Auto giant of Korea has chosen India and

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