Chap007 - Chapter 7 Chapter 7 Foreign Direct Investment 7-2...

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Unformatted text preview: Chapter 7 Chapter 7 Foreign Direct Investment 7-2 Introduction Question: What is foreign direct investment? Foreign direct investment (FDI) 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 There are two forms of FDI A greenfield investment (the establishment of a wholly new operation in a foreign country) Acquisition or merging with an existing firm in the foreign country 7-3 Foreign Direct Investment in the World Economy There are two ways to look at FDI The flow of FDI refers to the amount of FDI undertaken over a given time period The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time Outflows of FDI are the flows of FDI out of a country Inflows of FDI are the flows of FDI into a country 7-4 Trends in FDI Both the flow and stock of FDI in the world economy has increased over the last 20 years FDI has grown more rapidly than world trade and world output because firms still fear the threat of protectionism the general shift toward democratic political institutions and free market economies has encouraged FDI the globalization of the world economy is prompting firms to undertake FDI to ensure they have a significant presence in many regions of the world 7-5 Trends in FDI FDI Outflows 1982-2007 7-6 The Direction of FDI 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, and also for the European Union South, East, and Southeast Asia, and particularly China, are now seeing an increase of FDI inflows Latin America is also emerging as an important region for FDI 7-7 The Direction of FDI FDI Inflows by Region 1995 -2007 7-8 The Direction of FDI FDI can also be expressed as a percentage of 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 So, FDI can be seen as an important source of capital investment and a determinant of the future growth rate of an economy 7-9 The Source of FDI Since World War II, the U.S. has been the largest source country for FDI Other important source countries include the United Kingdom, the Netherlands, France, Germany, and Japan These countries also predominate in rankings of the worlds largest multinationals 7-10 The Source of FDI Cumulative FDI Outflows 1998 - 2006 7-11 The Form of FDI: Acquisitions versus Greenfield Investments The majority of cross-border investment involves mergers and acquisitions rather than greenfield investments Firms prefer to acquire existing assets because mergers and acquisitions are quicker to...
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Chap007 - Chapter 7 Chapter 7 Foreign Direct Investment 7-2...

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