Chapter 7a Foreign Direct Investment

Chapter 7a Foreign Direct Investment - 7-1Click to edit...

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Unformatted text preview: 7-1Click to edit Master subtitle styleChapter 7Foreign Direct Investment7-2IntroductionQuestion: 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 countryOnce a firm undertakes FDI it becomes a multinational enterprise There are two forms of FDIA greenfield investment(the establishment of a wholly new operation in a foreign country)Acquisition or merging with an existing firm in the foreign country7-3Foreign Direct Investment in the World EconomyThere are two ways to look at FDITheflowof FDI refers to the amount of FDI undertaken over a given time period The stockof FDI refers to the total accumulated value of foreign-owned assets at a given time Outflows of FDIare the flows of FDI out of a countryInflows of FDI are the flows of FDI into a country7-4Classroom Performance SystemA company that establishes a new operation in a foreign country has made a)An acquisitionb)A mergerc)A greenfield investmentd)A joint venture7-5Trends in FDIBoth the flow and stock of FDI in the world economy has increased over the last 20 yearsFDI has grown more rapidly than world trade and world output becausefirms still fear the threat of protectionismthe general shift toward democratic political institutions and free market economies has encouraged FDIthe globalization of the world economy is prompting firms to undertake FDI to ensure they have a significant presence in many regions of the world7-6Trends in FDIFDI Outflows 1982-2007 7-7The Direction of FDIHistorically, 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 UnionSouth, East, and Southeast Asia, and particularly China, are now seeing an increase of FDI inflowsLatin America is also emerging as an important region for FDI7-8The Direction of FDIFDI Inflows by Region 1995 -20077-9The Direction of FDIFDI can also be expressed as a percentage ofgross fixed capital formationSummarizes the total amount of capital invested in factories, stores, office buildings, and the likeAll 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 economy7-10The Source of FDISince World War II, the U.S. has been the largest source country for FDIOther important source countries include the United Kingdom, the Netherlands, France, Germany, and Japan These countries also predominate in rankings of the worlds largest multinationals7-11The Source of FDICumulative FDI Outflows 1998 - 20067-12The Form of FDI: Acquisitions versus Greenfield InvestmentsThe majority of cross-border investment involves mergers and acquisitions rather than...
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This note was uploaded on 09/23/2011 for the course ECON 101 taught by Professor Smith during the Spring '11 term at North Shore.

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Chapter 7a Foreign Direct Investment - 7-1Click to edit...

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