Detailed lecture notes covering:
Defining foreign direct investment (FDI)
Nation-states’ political ideology towards (FDI)
Benefits and costs of FDI from host (i.e. recipient) country and home (source) country perspectives
Host government’s policies towards FDI
MNC-host country government ...
Lecture 6 : The relationships between MNCs and States
• Defining foreign direct investment (FDI)
• Nation-states’ political ideology towards (FDI)
• Benefits and costs of FDI from host (i.e. recipient) country and home (source) country
perspectives
• Host government’s policies towards FDI
• MNC-host country government bargaining relationship
FDI defined
🞂 FDI: a firm directly invests in foreign assets with the objective of taking (full or partial)
control of them
◦ FDI entry modes
● Mergers and acquisitions (M&As) – acquire a firm
● Greenfield investments – set an operation scratching a country
● Certain forms of strategic alliances that have equity stakes such as Joint
Ventures – licencing or non-FDI investments
🞂 Exporting and contractual entry modes (turnkey contracts, licensing, franchising) are
non-FDI entry modes
Nation states’ political ideology towards FDI
♦ The radical view (Marxist): MNE = imperialist domination which exploit host countries to
the exclusive benefit of their capitalist home countries. MNEs extract profits from host
country, giving nothing to host country
e.g countries who adopted common economies, host countries thus close policies to FDI
♦ The free market view: (Smith and Ricardo): international production distributed among
countries according to comparative advantage. Specialisation in goods they produce
most efficiently, lower prices, greater diversity of goods
♦ Pragmatic nationalism: FDI both maximise benefits 🡪 brings capital skills, tech, jobs and
minimise costs 🡪 profits from investment go abroad. FDI should occur if benefit > costs.
◦ Becomes more prevalent from the 1980s onwards, countries open theory sectors to
FDI to a much greater extend. However in recent years, the balance tilts towards
greater protectionism, Differences among countries e.g Japan less open compared to
Netherlands.
Chinese FDI in Angola
30y of civil war infrastructure destroyed. Reconstruction of railway, train stations, cities but
not enough workers. Chinese helped Angola grow economy and learn. Chinese investment
ask for access to oil and natural resources in return.
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, MN20603
Does not generate wealth for Angola everything goes to China. Apartments are too
expensive for the low levels of income, ppl live in slums and had to leave zones for
construction projects -> illness, unemployment.
Benefits and costs of FDI to the host country
Resource-transfer: supply capital, tech, resources. MNE
have access to financial resources not available in host
country
Employment: bring jobs e.g Amazon 2nd HQ home country
and Canada + Indirect effects:
Balance of payment: payments to and from to a country.
FDI is substitute to import/exports = improves current
account but capital outflow of initial FDI and importing
inputs from abroad is a debit in current account
Importing products to Japan it is additional imports = current account deficit (outflow)
e.g Japanese car manufacturer operation in UK, Europe, importing cars from Japan reducing
level of imports of the host country
Competition: increase number of players and consumer choice = increased competition =
lower prices and better welfare of consumers + stimulates capital investments + enhanced
productivity and innovation
But MNEs greater power than local competitors and monopolize by raising prices,
Acquisitions can also mean reduction of competition as MNCs very well resourced and
endowed and compete with low prices in markets driving out local competition. Cross
subsidise and take profit from different countries using it to finance other operations
Host government’s loss of national sovereignty: loss of economic independence and no real
control e.g Chinese asked Angola to provide natural resources.
Social disruption: Angola: reconstruction local population were displaced from their place
with no compensation
Benefits and costs of FDI to the home country
BOP: inflow earnings and demand for home-country
exports of goods. Foreign subsidiaries keep importing
goods from home country sustaining their activities
But initial capital outflow to finance FDI + if purpose is to
serve a low-cost production location + FDI substitute for
direct exports = reduce activity and job loss e.g relocation
of company as Texas instruments
Employment: positive effects when foreign subsidiary creates demand, maintain domestic
jobs
But FDI seen as substitute for domestic production, closure in home environment/jobs
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