Lecture notes
Lecture 4
- Institution
- Royal Holloway University Of London
FOREIGN DIRECT INVESTMENT (FDI)
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11/10/2019LECTURE 4: FOREIGN DIRECT INVESTMENT (FDI)
Next Saturday there will be something called Super Saturday, it should be quite interesting in
terms of find out what is going on about Brexit.
TODAY’S TOPICS TODAY’S LEARNING OUTCOMES
• Defining FDI By the end of this session you will be able to:
• Modes of FDI entry • Describe what FDI is
• What determines FDI • Explain modes of FDI entry
• FDI trends • Recognise key trends of historical FDI flows
DEFINING FOREIGN DIRECT INVESTMENT
Foreign Investment: investment of financial and capital resources outside of the home country
1. Foreign Portfolio Investment (FPI): investment in foreign financial instruments, such as equity,
shares, and bonds.
Receive fixed and varying rates of interest, and power through voting and ownership rights.
2. Foreign Direct Investment (FDI): investment in business activities to produce and/or market a
product/ service in a foreign country.
Involves investments over time as cash, FX, or other financial instruments.
Society is based on the idea of social power, and social power is money.
There are 2 types of ways of defining FDI:
• FOREIGN PORTFOLIO INVESTMENT (FPI): You invest money in a business through stock
markets
• Equity you might invest in a small business which isn’t quoted on a stock
exchange and you will own an equity in that business. That owning gives you
power.
• Shares a lot of companies are floated on a stock exchange (eg. FTSE 100), you
can simply buy very small portions of a company. As an international business
manager these shares are important because they give you voting rights therefore
you can determinate what you want a company to do in base how many shared you
own.
• Bonds they are basically loans that can be traded in stock markets.
• FOREIGN DIRECT INVESTMENT (FDI): it’s just about directly investing money in a business
somewhere else in the world. You may buy a company by an exchange of shares, or it
might just be cash. we are really talking about cash moving across international borders.
-Need to follow stock markets-
Last year it was announced in the US that there were concerns about a trade war and the US was
thinking about increasing their interest rate. So, around the 11th of October 2018 a lot of investors
started to lose quite a lot of money quite quickly.
, But also, other companies weren’t affected as much.
WHY IS FDI IMPORTANT?
FDI is crucial to MNEs – no investment makes it very difficult to internationalise
FDI is central to growth
More FDI flows imply a higher degree of integration in the global economy
• Outwards/Inwards FDI
• Backward/Forward – Henry Ford’s supply chain
• Greenfield/Acquisition/Joint
If you have no FDI it will be really difficult to grow as an international business.
Countries with a higher level of FDI are commonly more internationalized and have also a lot of
money getting invested. More coming in = more comping put = more globally integrated
When we talk about FDI we talk about:
• Outwards/Inwards FDI
• Backward (eg. talking about investing in the extraction of raw resources) /Forward (eg.
talking about distribution network)
• Greenfield/Acquisition/Joint
MODES OF ENTRY TO FOREIGN MARKETS
CONTROL RISK COOPERATION COORDINATION
GREENFIELD High High Low Low
MERGERS AND ACQUISITIONS Medium Medium Medium Medium
JOINT VENTURES Medium Medium Medium Medium
STRATEGIC ALLIANCES Low Low High High
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