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... ot occur and production factors could not move internationally, a country would have to either forgo consuming certain goods or produce them differently, which in either case would usually result in decreased worldwide output and higher prices. 9. How might FDI stimulate trade? Factor mobility via direct investment often stimulates trade because of the need for: Components Complementary products Equipment for subsidiaries 10. What are the general motivations for firms to engage in direct investment?
Expand sales Acquire resources Minimize competitive risk Governments may additionally be motivated by some desired political advantage. 11. What is the role of transportation costs in influencing FDI decisions? Transportation raises costs so much that it becomes impractical to export some products. 12. How does capacity use influence the decision to serve foreign markets through exports versus direct investment? As long as a company has excess capacity at its plant (s), it may compete effectively in limited export markets despite high transport costs. This ability might occur if domestic sales cover fixed operating expenses.
The cost per unit decreases until it reaches full capacity. When demand pushes the plant toward capacity, production should be increased by use of FDI. 13. How do economies of scale impact the FDI decision? Standardized products: Cost per unit drops significantly as output increases.
Companies can export large amounts of such products because they can spread the fixed costs over more units in output. 14. How does the need to alter products to sell them in foreign country affect the decisions to export to, versus produce within, that foreign country? Companies that need to alter their products substantially for different foreign markets benefit less by scale economies. For these types of products smaller plants to serve national rather than international markets will save transport costs. In this case companies' country-by-country production reduces costs by minimizing transportation expenses. 15.
What is the relationship between trade restrictions and FDI? If imports are highly restricted, companies often produce locally to server the local market if the market potential is high relative to scale economies. Removing trade restrictions among a regional group of countries may attract FDI, because the expanded market may justify scale economies. Or the removal of trade restrictions may result in trade diversion. 16. How do country-of origin effects influence a firm's decision to produce abroad rather than export.
Consumers sometimes prefer domestically produced goods because of - Nationalism: Promotional campaigns to buy locally - A belief these products are better - A fear that foreign-made goods may not be delivered on time. Consumers often view their quality different on basis of the country of origin. 17. How may companies use FDI as a means to reduce competitive risk? FDI enables companies to reduce competitive risk by - Diversifying of customer & supplier base - Providing low-end pricing through Production rationalization & vertical integration = stay competitive. - Taking advantage of scale economies - Increasing market share 18.
What factors affect the least-cost production location and why might this location change? Factors affection the least-cost production location: capital, raw material, productivity, labor costs, technology, assets. The least-cost production location changes because of inflation, regulations, transportation costs, and productivity. 19. What are some of the advantages of international vertical integration? The foreign direct investor will have control over the value chain; raw material, production & distribution. The supply and / or markets are more assured, the foreign direct investor may be able to carry smaller inventories and spend less on promotion.
By buying and selling within the family of companies, the foreign direct investor also has considerably grater flexibility in shifting funds, taxes, and profits among countries. 20. What are the managerial implications of vertical integration? There is a great interdependence among the different stages. A tight relationship is needed to ensure that production and marketing continue to flow. 21.
What are the advantages of rationalized productions? Rationalized production is taking advantage of low labor costs, capital and raw materials. Advantages: - Lower total production cost - Rationalized production of complete product: increase market share, gain advantage of locally produced finished goods. - Smoother earnings when exchange rates fluctuate 22. What are the problems of rationalized productions? Disadvantages: - Rationalized production of parts: risk of work stoppages in one country will have an impact on the whole production. - Difficult to determine the origin of the product 23. Discuss possible political motivations for foreign direct investment.
Reduce security risk by controlling resources. A government-owned company invests abroad in order to be less dependent on foreign companies for resources, and to hold down the prices on production it receives. Increase profitability of investments in countries that are unfriendly to certain regimes: governments institute various incentives for those who support the embargo's. 24. What are the major advantages of making an FDI via acquisition rather than via start-up operations? Immediate cash flow Easy access to resources (labor, capital) Market position in foreign country (goodwill, brand) 25.
What are the major advantages of making an FDI via start-up operations rather than via acquisition? Full control at start. Possibility to gain market-share before the competition does. 26. Why do critics claim that worker displacement due to FDI is different from worker displacement due to technological change? The workers cannot move abroad to take advantage of the new opportunities there.
The employers are responsible for the job losses. The company has an ethical obligation to give employees advance notice of the move and to provide training and help with job searches. Critics' conclusion: FDI is unethical because the process creates economic distinctions between the 'have' and 'have-not' countries. 27. How do currency values impact flows of direct investment? When a currency is very strong, converting it to other currencies the buying power increases in those foreign currency countries. This advantage is an incentive to make foreign investments.
Reviewing the history, the currency-strength scenario only partially explains direct investment flow. FDI linked to strength of economy (ROI). 28. What advantages do companies gain from FDI? Monopoly advantages before DI A company will go for FDI when it has the ownership of some resource (patents, product differentiation, management skills, access to markets) unavailable at the same price or terms to the local company A company may benefit because its currency has high buying power to go for a "cheap" FDI Advantages after DI Spreading out costs (product differentiation, R& D, advertising) results in maintaining the domestic competitiveness. 29. What factors have contributed to the dramatic increase in the amount of foreign direct investment?
The growth resulted from several factors: - the more receptive attitude of governments to investment inflows - the process of privatisation - growing interdependence of the world economy 30. Which countries are the largest foreign direct investors? The industrial countries account for over 90 percent of all direct investment outflows. Those countries do have the capital, technology and the managerial skills to invest abroad. 31.
Explain why most FDI flows to developed countries rather than to LDCs. The developed countries have the biggest markets, lowest perceived risk and are the least discrimination toward foreign companies. 32. What have been the major FDI trends in the raw materials, manufacturing, and service sectors? The portion of FDI accounted for in the raw materials sector that includes mining, smelting, and petroleum has declined.
The portion of manufacturing, especially resource-based production, grew steadily from the 1920 s to the early 1970 s but has stabilized. In the 1980 s and 1990 s, FDI in the service sector (banking, finance) grew rapidly, as did FDI in technology intensive manufacturing. 33. How do direct investments serve to enhance global economic efficiency? FDI transfers resources to where they can be used more effectively and will enable a better use of the local resources.
Eventually FDI may lead to better global use of resources. FDI will employ laborers from emerging economies who otherwise may not find work and at the same time it will create a need for more highly paid managerial personnel at the company's home country headquarters.
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Research essay sample on Foreign Direct Investment Fdi
