Summary of Foreign Direct Investment
Summary of Foreign Direct Investment
■ Direct investment is the control of a company in one country by an organi-
zation based in another country. Because control is difficult to define, arbitrary minimum ownership of the voting stock is used to define direct investment.
■ Governments are concerned about who controls enterprises within their confines for fear that decisions will be made contrary to the national interest.
? Firms often prefer to control foreign production facilities because (1) the transfer of certain assets to a noncontrolled entity might undermine their competitive position, and (2) there are economies of buying and selling with a controlled entity.
? Although a direct investment usually is acquired by transferring capital from one country to another, capital is not usually the only contribution made by the investor or the only means of gaining equity. The investing firm may supply technology, personnel, and markets in exchange for an interest in a firm located abroad.
? The factors of production and finished goods are only partially mobile internationally. Moving either of them is one means of compensating for differences in factor endowments among countries. The cost and feasibility of transferring production factors internationally rather than finished goods will determine which alternative results in cheaper costs.
? Although a direcUnvestment may be a substitute for trade, it also may stimulate trade through sales of components, equipment, and complementary
^products. Foreign direct investment may be~tjn7IeTta¥e^ foreig"n"
markets or to gain access to supplies of resources or finished products. In addition, governments may encourage direct investments for political purposes.
? The price of some products increases too substantially if they are transported internationally;^therefore, foreign production is necessary to tap foreign markets. _
? Companies usually try to delay establishing foreign production as long as they have excess domestic capacity.
? The degree to which scale economies lower production costs influences whether production is centralized in one or a few countries or dispersed among many countries.
? Since most direct investments are intended for selling the output in the country where the investments are located, governmental restrictions that prevent the effective importation of goods are probably the most compelling force causing firms to establish their direct investments.
? Consumers may feel compelled to buy domestically made products even though these products are more expensive. They also may demand that products be altered to fit their needs. Both of these considerations may dictate the need to establish foreign operations to serve foreign markets.
? Direct investment sometimes has chain effects: When one company makes an investment, some of its suppliers follow with investments of their own, followed by investments by their suppliers, and so on.
? In oligopoly industries, companies from the same industry often invest in a foreign country at about the same time. This occurs sometimes because they are responding to similar market conditions and sometimes because they wish to negate competitors' advantages in the markets.
? Vertical integration is needed to control the flow of goods across borders from basic production to final consumption in an increasingly interdependent and complex world distribution system. It may result in lower operating costs and enable firms to transfer funds among countries.
? Rationalized production involves the production of different components or different products in different countries to take advantage of different factor costs.
? The least-cost location of production may change over time, especially in relation to stages of the life cycle of a product. It also may change because of governmental incentives that effectively subsidize production.
? Governments may encourage their firms to invest abroad in order to gain advantages over other countries.
? Most investments are made because of interrelated multiple motives.
? There are possible advantages and disadvantages to the alternatives of direct investment by buy-in as opposed to start-up operations.
? Monopolistic advantages help to explain why firms are willing to take what they perceive to be higher risks of operating abroad. Certain countries and currencies have had such advantages, which helps to explain the dominance of firms from certain countries at a given time.
Foreign investment may enable firms to spread certain fixed costs vis-a-vis domestic firms. It also may enable firms to gain access to needed resources, to prevent competitors from gaining control of needed resources, and to smooth sales and earnings on a year-to-year basis.
■ Direct investment is the control of a company in one country by an organi-
zation based in another country. Because control is difficult to define, arbitrary minimum ownership of the voting stock is used to define direct investment.
■ Governments are concerned about who controls enterprises within their confines for fear that decisions will be made contrary to the national interest.
? Firms often prefer to control foreign production facilities because (1) the transfer of certain assets to a noncontrolled entity might undermine their competitive position, and (2) there are economies of buying and selling with a controlled entity.
? Although a direct investment usually is acquired by transferring capital from one country to another, capital is not usually the only contribution made by the investor or the only means of gaining equity. The investing firm may supply technology, personnel, and markets in exchange for an interest in a firm located abroad.
? The factors of production and finished goods are only partially mobile internationally. Moving either of them is one means of compensating for differences in factor endowments among countries. The cost and feasibility of transferring production factors internationally rather than finished goods will determine which alternative results in cheaper costs.
? Although a direcUnvestment may be a substitute for trade, it also may stimulate trade through sales of components, equipment, and complementary
^products. Foreign direct investment may be~tjn7IeTta¥e^ foreig"n"
markets or to gain access to supplies of resources or finished products. In addition, governments may encourage direct investments for political purposes.
? The price of some products increases too substantially if they are transported internationally;^therefore, foreign production is necessary to tap foreign markets. _
? Companies usually try to delay establishing foreign production as long as they have excess domestic capacity.
? The degree to which scale economies lower production costs influences whether production is centralized in one or a few countries or dispersed among many countries.
? Since most direct investments are intended for selling the output in the country where the investments are located, governmental restrictions that prevent the effective importation of goods are probably the most compelling force causing firms to establish their direct investments.
? Consumers may feel compelled to buy domestically made products even though these products are more expensive. They also may demand that products be altered to fit their needs. Both of these considerations may dictate the need to establish foreign operations to serve foreign markets.
? Direct investment sometimes has chain effects: When one company makes an investment, some of its suppliers follow with investments of their own, followed by investments by their suppliers, and so on.
? In oligopoly industries, companies from the same industry often invest in a foreign country at about the same time. This occurs sometimes because they are responding to similar market conditions and sometimes because they wish to negate competitors' advantages in the markets.
? Vertical integration is needed to control the flow of goods across borders from basic production to final consumption in an increasingly interdependent and complex world distribution system. It may result in lower operating costs and enable firms to transfer funds among countries.
? Rationalized production involves the production of different components or different products in different countries to take advantage of different factor costs.
? The least-cost location of production may change over time, especially in relation to stages of the life cycle of a product. It also may change because of governmental incentives that effectively subsidize production.
? Governments may encourage their firms to invest abroad in order to gain advantages over other countries.
? Most investments are made because of interrelated multiple motives.
? There are possible advantages and disadvantages to the alternatives of direct investment by buy-in as opposed to start-up operations.
? Monopolistic advantages help to explain why firms are willing to take what they perceive to be higher risks of operating abroad. Certain countries and currencies have had such advantages, which helps to explain the dominance of firms from certain countries at a given time.
Foreign investment may enable firms to spread certain fixed costs vis-a-vis domestic firms. It also may enable firms to gain access to needed resources, to prevent competitors from gaining control of needed resources, and to smooth sales and earnings on a year-to-year basis.
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