C H A P T E R 13C H A P T E R 13

Direct Foreign InvestmentDirect Foreign Investment

Chapter OverviewChapter Overview

A. Motives for Direct Foreign Investment A. Motives for Direct Foreign Investment

B. Benefits of International DiversificationB. Benefits of International Diversification

C. Decisions Subsequent to DFIC. Decisions Subsequent to DFI

D. Host Government Views of DFID. Host Government Views of DFI

Chapter 13 ObjectivesChapter 13 Objectives

This chapter will:This chapter will:

A. Describe common motives for A. Describe common motives for initiating foreign direct investmentinitiating foreign direct investment

B. Illustrate the benefits of B. Illustrate the benefits of international diversificationinternational diversification

A. Motives for Direct Foreign A. Motives for Direct Foreign Investment Investment

1. Revenue-Related Motives1. Revenue-Related Motives

a. Attract New Sources of Demanda. Attract New Sources of Demand

b. Enter Profitable Marketsb. Enter Profitable Markets

c. Exploit Monopolistic Advantagesc. Exploit Monopolistic Advantages

d. React to Trade Restrictionsd. React to Trade Restrictions

e. Diversify Internationallye. Diversify Internationally

A. Motives for Direct Foreign A. Motives for Direct Foreign InvestmentInvestment

2. Cost-Related Motives: Reduce Costs2. Cost-Related Motives: Reduce Costs

a. Fully Benefit From Economies of a. Fully Benefit From Economies of ScaleScale

b. Use Foreign Factors of Productionb. Use Foreign Factors of Production

c. Use Foreign Raw Materialsc. Use Foreign Raw Materials

d. Use Foreign Technologyd. Use Foreign Technology

e. React to Exchange Rate e. React to Exchange Rate MovementsMovements

A. Motives for Direct Foreign A. Motives for Direct Foreign InvestmentInvestment

3. Comparing Benefits of DFI among 3. Comparing Benefits of DFI among CountriesCountries

Summary of Motives for Direct Foreign Investment

A. Motives for Direct Foreign A. Motives for Direct Foreign InvestmentInvestment

4. Comparing Benefits of DFI Over 4. Comparing Benefits of DFI Over Time CountriesTime Countries

• the choice of target countries for DFI the choice of target countries for DFI has changed over timehas changed over time

B. Benefits of International B. Benefits of International Diversification Diversification

1. Diversification Analysis of 1. Diversification Analysis of International PortfoliosInternational Portfolios

a. Comparing Portfolios along the a. Comparing Portfolios along the FrontierFrontier

b. Comparing Frontiers Among b. Comparing Frontiers Among MNCsMNCs

2. Diversification Among Countries2. Diversification Among Countries

13.313.3

Risk-Return Analysis of International Projects

13.413.4

Risk-Return Advantage of a Diversified MNC

C. Decisions Subsequent to DFIC. Decisions Subsequent to DFI

1. Need for frequent review1. Need for frequent review

2. Decision on use of Subsidiary profits 2. Decision on use of Subsidiary profits by the subsidiary or headquartersby the subsidiary or headquarters

3. Importance of economic conditions 3. Importance of economic conditions in the subsidiary’s countryin the subsidiary’s country

D. Host Government Views of DFID. Host Government Views of DFI

1. Incentives to Encourage DFI1. Incentives to Encourage DFI

2. Barriers to DFI2. Barriers to DFIa. Protectivea. Protectiveb. “Red Tape” Barriersb. “Red Tape” Barriersc. Industry Barriersc. Industry Barriersd. Environmental Barriersd. Environmental Barrierse. Regulatory Barrierse. Regulatory Barriersf. Ethical Differencesf. Ethical Differencesg. Political Instabilityg. Political Instability

D. Host Government Views of DFID. Host Government Views of DFI

3. Government-Imposed Conditions to 3. Government-Imposed Conditions to Engage in DFIEngage in DFI

a. Environmental Regulationsa. Environmental Regulations

b. Labor Policy Restrictionsb. Labor Policy Restrictions

c. Requirements to Use Local Partsc. Requirements to Use Local Parts

d. Output and Local Competition d. Output and Local Competition RestrictionsRestrictions