Chap007 - Chapter 07 - Foreign Direct Investment Foreign...

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Chapter 07 - Foreign Direct Investment Foreign Direct Investment INTRODUCTION A) This chapter is concerned with the phenomenon of foreign direct investment (FDI). Foreign direct investment occurs when a firm invests directly in new facilities to produce and/or market in a foreign country. Once a firm undertakes FDI it becomes a multinational enterprise . B) FDI takes on two main forms; the first is a greenfield investment, which involves the establishment of a wholly new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country. There are three types of acquisitions: minority (10 percent to 49 percent stake), majority 50 percent to 99 percent), or full (100 percent). FOREIGN DIRECT INVESTMENT IN THE WORLD ECONOMY A) When discussing foreign direct investment, it is important to distinguish between the flow and the stock of foreign direct investment. The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year). The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time. Outflows of FDI , meaning the flow of FDI out of a country, and inflows of FDI , meaning the flow of FDI into a country are also discussed. Trends in FDI B) Over the past 30 years there has been a marked increase in both the flow and stock of FDI in the world economy. The significant growth in FDI has both to do with the political economy of trade as outlined in the previous chapter and the political and economic changes that have been taking place in developing countries. C) FDI has grown more rapidly than world trade and world output for three reasons. First, firms still fear the threat of protectionism. Second, the general shift toward democratic political institutions and free market economies has encouraged FDI. Third, the globalization of the world economy is having a positive impact on the volume of FDI as firms undertake FDI to ensure they have a significant presence in many regions of the world. The Direction of FDI D) Historically, most FDI has been directed at the developed nations of the world, with the United States being a favorite target. FDI inflows have remained high during the early 2000s for the United States, with $192 billion in 2007, and also for the European Union. Inward investment into the European Union was $610 billion in 2007. E) South, East, and Southeast Asia, and particularly China, are now seeing an increase of FDI inflows. China attracted nearly $70 billion in FDI from 2005 to 2007. Latin America is also emerging as an important region for FDI. Inward investment to the region was about $126 billion in 2007. 7-1
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Chapter 07 - Foreign Direct Investment F) Gross fixed capital formation summarizes the total amount of capital invested in factories, stores, office buildings, and the like. All else being equal, the greater the capital investment in an economy, the more favorable its future prospects are likely to be. Thus, FDI can be seen as an important source of
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Chap007 - Chapter 07 - Foreign Direct Investment Foreign...

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