Lecture 8 - Lecture 8 Foreign Direct Investment 1 Outline...

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1 Lecture 8 Foreign Direct Investment
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2 Outline A. Introduction B. Acquisition / Merging and Green-field Investment C. Forms of FDI D. Why FDI? E. Decision Framework of FDI F. Benefits and Costs of FDI to host country and home country G. Government Incentives and Disincentives for FDI
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3 A. Introduction Foreign Direct Investment (FDI) occurs : when a firm invests directly in facilities to produce and/ or market a product in a foreign country Home country - source of FDI; Host country – destination of FDI. Examples: Production plants built by Toyota in the US. Green-field investment: A wholly new operation in a foreign country   Company acquiring or merging with a firm in a different country  
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4 A. Introduction Why is FDI important? Firms want a presence in foreign markets Firms want control over growth of these foreign markets To gain first mover advantages     To ward off competitors To determine locations, advertising and other related strategic decisions in the firm’s interest
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5 B. Acquisition / Merger Some companies acquire or merge with another firm because acquisition / merger can: facilitate quick entry. eliminate competitor and buying problems. have strategic valuable assets (e.g., brand loyalty, patents). increase the efficiency of the acquired firm (e.g., Cemex’s FDI, Global Business Today, p.258). Acquisition or merging is most prevalent in developed nations
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6 B. Green-field Investment Some companies decide to make green-field investment in a foreign country because: no competitors exist / competitors do not provide the products local financial incentives encourage FDI Green-field investment is most prevalent in developing nations
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7 C. Forms of FDI There are 2 forms of FDI. They are: horizontal direct investment vertical direct investment Horizontal Direct Investment refers to: the FDI in the same industry abroad like the company operates at home (Toyota’s investment in the US) 2 types of Vertical Direct Investment: Backward Direct Investment Forward Direct Investment
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8 C. Forms of FDI Backward Direct Investment Forward Direct Investment The investment into an industry that provides inputs into a firm’s
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Lecture 8 - Lecture 8 Foreign Direct Investment 1 Outline...

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