Foreign Direct Investment | International Business | From A Business Professor

Summary

In 'Business School 101', the video explores Foreign Direct Investment (FDI), a key concept in international business where firms invest in foreign countries to produce or market goods/services. It outlines four primary motives for FDI: resource-seeking, market-seeking, efficiency-seeking, and favorable government policy-seeking. The video also discusses the benefits and drawbacks of FDI for host countries, including job creation, technology transfer, and potential cultural erosion. Finally, it touches on three political ideologies influencing FDI: radical, free market, and pragmatic nationalism.

Takeaways

• 🌐 Starbucks opened 1404 new stores in 2020, with 1117 of them located outside the US, highlighting the trend of companies expanding globally.
• 🏭 Tesla expanded its Gigafactories in China and Germany, showcasing how companies invest in foreign countries for strategic growth.
• 💸 Samsung planned to invest up to $17 billion in a chip plant in the US, illustrating the significant capital investments made by companies in foreign markets.
• 🔍 The concept of Foreign Direct Investment (FDI) is introduced as a key term in international business, referring to direct investments in foreign countries to produce or market goods/services.
• 🔑 Four main motives for FDI are identified: resource-seeking, market-seeking, efficiency-seeking, and favorable government policy-seeking, explaining why companies invest abroad.
• 🌍 Resource-seeking investments aim to acquire resources more cost-effectively in foreign countries, such as physical resources, labor, or technological expertise.
• 📈 Market-seeking investments are driven by the desire to serve markets in foreign countries, often due to market size, growth, or the need to be close to suppliers and customers.
• 🏭 Efficiency-seeking investments focus on rationalizing operations across different countries to take advantage of cost differences and economies of scale.
• 🏛️ Favorable government policy-seeking investments are made to benefit from incentives like subsidies, tax breaks, and low-interest loans offered by foreign governments.
• 📊 FDI has both benefits and costs for host countries, with benefits including increased employment, human resource development, access to finance and technology, increased exports, competitive markets, and economic development.
• ⚠️ Drawbacks of FDI include potential displacement of local businesses, lack of guaranteed benefits, political corruption, environmental pollution, and cultural erosion.
• 🌟 Three political ideologies regarding FDI are discussed: radical (hostile to FDI), free market (favors FDI based on comparative advantage), and pragmatic nationalism (balances benefits and costs of FDI).

Q & A

What is Foreign Direct Investment (FDI)?

Foreign Direct Investment (FDI) is the practice of investing in businesses in foreign countries, where a firm invests directly in facilities to produce or market goods or services in a foreign country.

Why did Starbucks open 1404 new stores in 2020, with most of them outside the US?

Starbucks opened most of its new stores outside the US as part of its market-seeking strategy, aiming to serve markets in those countries or regions and to increase its global presence.

What motivated Tesla to build and expand its gigafactories in China and Germany?

Tesla's expansion in China and Germany can be attributed to a combination of market-seeking and efficiency-seeking motives, aiming to serve local markets and take advantage of local production efficiencies.

Why did Samsung announce a plan to invest up to 17 billion dollars in a chip plant in the US?

Samsung's investment in the US chip plant is likely driven by a combination of market-seeking and efficiency-seeking motives, as well as favorable government policies that could provide incentives for such investments.

What are the four types of motives for FDI?

The four types of motives for FDI are resource-seeking, market-seeking, efficiency-seeking, and favorable government policy-seeking.

How does resource-seeking motive influence a firm's decision to invest abroad?

Resource-seeking firms invest abroad to acquire specific resources at a lower cost that may not be available or as cost-effective in their home country, such as physical resources, cheap labor, or technological expertise.

What are the benefits of FDI to the host country?

Benefits of FDI to the host country include increased employment, human resource development, provision of finance and technology, increase in exports, stimulation of economic development, and the creation of a competitive market.

What are the potential drawbacks of FDI for the host country?

Drawbacks of FDI for the host country may include replacement of local businesses, lack of guaranteed benefits, encouragement of political corruption, contribution to pollution, and promotion of cultural erosion.

What is the radical view on FDI and what is its basis?

The radical view on FDI is hostile to all FDIs, based on Marxist political and economic theories, which argue that multinational corporations exploit host countries for the exclusive benefit of their home countries.

How does the free market view differ from the radical view on FDI?

The free market view supports FDI based on the theory of comparative advantage, arguing that international production should be distributed among countries according to their efficiency in producing specific goods and services.

What is pragmatic nationalism and how does it approach FDI?

Pragmatic nationalism is an approach that evaluates FDI based on its potential benefits and costs to the nation. It aims to maximize national benefits and minimize costs, allowing FDI only if the benefits outweigh the potential drawbacks.

Outlines

00:00

🌐 Understanding Foreign Direct Investment (FDI)

This paragraph introduces the concept of Foreign Direct Investment (FDI), explaining it as a strategy where companies invest in businesses in foreign countries. It provides real-world examples, such as Starbucks opening new stores and Tesla expanding its gigafactories. The paragraph outlines four primary motives for FDI: resource-seeking, market-seeking, efficiency-seeking, and favorable government policy-seeking. Resource-seeking involves acquiring resources more cost-effectively abroad. Market-seeking is about accessing new customer bases. Efficiency-seeking aims to reduce costs through accessing cheaper labor or resources. Lastly, favorable government policy-seeking is driven by incentives like subsidies and tax breaks offered by foreign governments.

05:01

📈 Benefits and Drawbacks of FDI for Host Countries

The second paragraph delves into the advantages and disadvantages of FDI for the countries that receive these investments. Benefits include increased employment, human resource development, access to finance and technology, increased exports, competitive market stimulation, and economic development. However, it also points out potential drawbacks such as the displacement of local businesses, questionable distribution of capital, political corruption, environmental pollution, and cultural erosion. The paragraph highlights how FDI can lead to a mix of positive economic outcomes and social challenges.

10:02

🏛️ Political Ideologies Shaping FDI Perspectives

The final paragraph discusses the political ideologies that influence attitudes towards FDI. It outlines three main perspectives: radical, free market, and pragmatic nationalism. The radical view, rooted in Marxist theory, sees FDI as a form of exploitation by multinational corporations. The free market view, influenced by classical economics, supports FDI based on comparative advantage. Pragmatic nationalism seeks a balance, allowing FDI only when it benefits the nation more than it costs. The paragraph illustrates these ideologies with historical context and examples, such as Japan's restrictive policies until the 1980s, and concludes by inviting viewers to reflect on the overall impact of FDI.

Keywords

💡Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI) refers to a firm investing directly in facilities to produce or market goods or services in a foreign country. This investment allows companies to establish a presence abroad, either by opening their own premises or by partnering with local firms. FDI is a major theme of the video, as it discusses the motivations behind companies like Starbucks, Tesla, and Samsung investing heavily in foreign countries even during a global pandemic.

💡Resource-Seeking

Resource-seeking is one of the key motivations behind FDI, where firms invest abroad to acquire specific resources that are cheaper or unavailable in their home country. These resources include physical resources (e.g., crude oil), cheap labor, and technological capacity. The video mentions how clothing companies move production to countries like Vietnam for lower labor costs, exemplifying resource-seeking behavior.

💡Market-Seeking

Market-seeking firms invest in a particular country or region to serve local markets, motivated by factors such as market size, growth potential, and proximity to customers or competitors. For example, BMW's creation of the X series in the United States to cater to American tastes illustrates market-seeking FDI, as discussed in the video.

💡Efficiency-Seeking

Efficiency-seeking refers to firms investing abroad to optimize their production and distribution through common governance of operations, benefiting from differences in cost factors like labor and materials across countries. The video highlights this motivation by mentioning companies building manufacturing facilities in places like China and Mexico to reduce costs.

💡Favorable Government Policy-Seeking

Favorable government policy-seeking involves firms investing in countries that offer incentives like tax breaks, subsidies, or low-interest loans to attract foreign businesses. An example from the video is Toyota's decision to build a plant in Kentucky after receiving a $147 million incentive package, showcasing how governmental policies can influence FDI decisions.

💡Human Resource Development

Human resource development is a benefit of FDI, referring to the improvement of local workforce skills and knowledge through training provided by foreign companies. The video explains how FDI boosts education and skills in host countries, creating a ripple effect as trained workers contribute to other local businesses.

💡Economic Development

Economic development is an advantage of FDI, where the inflow of external capital and increased business activities stimulate local economies. The video emphasizes that FDI brings jobs, infrastructure development, and additional tax revenue, which can further improve a country's economic landscape.

💡Cultural Erosion

Cultural erosion is a drawback of FDI, where the influx of foreign businesses can lead to the displacement of local customs and traditions. The video notes that FDI can cause cultural shock and changes in societal values, affecting both families and communities in host countries.

💡Free Market View

The free market view supports FDI based on classical economic theories, arguing that international production should be guided by comparative advantage. Countries embracing this view, typically developed economies, encourage FDI to promote efficiency and global competition. The video describes this perspective as favoring minimal government intervention in FDI.

💡Pragmatic Nationalism

Pragmatic nationalism is a balanced approach to FDI, where countries weigh the benefits and costs of foreign investments and regulate them to maximize national interests. The video explains that this stance is prevalent in major economies, allowing FDI when it supports local growth but imposing restrictions when it poses risks.

Highlights

Starbucks opened 1404 new stores in 2020, with 1117 of them located outside the US.

Tesla expanded its Gigafactories in China and Germany in 2020.

Samsung announced a $17 billion investment to build a chip plant in the US in early 2021.

Foreign Direct Investment (FDI) is defined and its significance in international business is discussed.

FDI occurs when a firm invests directly in facilities in a foreign country to produce or market goods and services.

Four types of motives for FDI are identified: resource-seeking, market-seeking, efficiency-seeking, and favorable government policy-seeking.

Resource-seeking firms invest abroad to acquire resources more cost-effectively.

Market-seeking firms invest to serve markets in a specific country or region.

Efficiency-seeking investors aim to rationalize product distribution and marketing activities across countries.

Firms may invest overseas to take advantage of favorable government policies, such as subsidies and tax concessions.

FDI can increase employment, develop human resources, provide finance and technology, increase exports, and stimulate economic development.

FDI can also have drawbacks, such as replacing local businesses, not guaranteeing benefits for recipient countries, encouraging political corruption, contributing to pollution, and promoting cultural erosion.

Three political ideologies behind FDI are discussed: radical, free market, and pragmatic nationalism.

The radical view sees multinational corporations as tools for imperialist exploitation.

The free market view supports FDI based on the theory of comparative advantage.

Pragmatic nationalism balances the advantages and disadvantages of FDI, allowing it only when benefits outweigh costs.

Japan is an example of a country that has adopted pragmatic nationalism in its approach to FDI.

The video concludes with a call for viewer engagement, asking for opinions on whether the benefits of FDI outweigh the costs.

Transcripts

hello everyone welcome to business

school 101

in 2020 starbucks opened 1404 new stores

and 1117 of them were located outside

the us

in the same year tesla built and

expanded its gigafactories

in china and germany in early 2021

samsung announced a plan to invest as

much as 17 billion dollars to build a

chip plant in the u.s

why do these industry giants invest so

heavily in foreign countries even during

a global pandemic

what are the impacts of those

investments to better understand the

answers to these questions we need to

learn about an important term in the

international business field

foreign direct investment

foreign direct investment or fdi is the

practice of investing in businesses

in foreign countries in other words

foreign direct investment occurs when a

firm

invests directly in facilities to

produce or market goods or services in a

foreign country

for example if an american multinational

firm opens up operations in vietnam or

india

either by opening up its own premises or

by partnering with a local firm

then that investment would be considered

part of fdi

the reasons that prompt firms to

undertake fdi have both inspired and

absorbed international business scholars

for more than five decades

these reasons have been part of various

theories and paradigms of international

production

generally four types of motives for fdi

can be distinguished

these motives are resource-seeking

market-seeking

efficiency-seeking and favorable

government policy-seeking

number one resource seeking resource

seeking firms are motivated to invest

abroad to acquire specific resources at

a lower cost and could be obtained in

their home country

firms generally seek three types of

resources

first physical resources such as rare

earth crude oil and agricultural

products

second cheap and diligent unskilled or

semi-skilled labor

for example many clothing companies move

their production facilities to thailand

vietnam or bangladesh for the low-cost

labor

third technological capacity management

or marketing expertise

and organizational skills for example

to access the technological and

managerial know-how

that is available in a vital market

firms may benefit from establishing a

presence in a key industrial cluster

such as engineering in germany and japan

fashion and italy

or software in the u.s and india

number two market seeking

market seekers are firms that invest in

a particular country or region in order

to serve markets in that country or

region

for example many fortune 500 companies

such as boeing

samsung ibm and volkswagen invest all

over the world because they generate

more sales abroad than in their home

countries

apart from market size and expected

market growth there are four additional

reasons why market-seeking firms may

undertake foreign investment

first if a firm's main suppliers or

customers have expanded overseas

then the firm might need to follow them

in order to retain its business

for example when toyota decides to

expand to a foreign market

its domestic suppliers might follow

toyota's move and branch out to that

foreign country as well

second a firm may need to adapt its

product to local tastes and specific

market requirements which can only be

achieved through market presence in the

form of fdi

for example realizing that american

drivers in particular have a powerful

appetite for crossovers and suvs

bmw created the entire x series in the

united states

third the production and transaction

costs of serving a local market from an

adjacent facility

may be lower than supplying that market

from a distance

lastly a firm may consider it necessary

to have a physical presence in the

leading markets served by its

competitors as part of its global

strategy

for example caterpillar entered japan in

the 1970s to hinder the ability of its

major rival

komatsu to expand its activities in the

us

number three efficiency seeking the

motivation of efficiency seeking foreign

direct investors

is to rationalize their products

distribution and marketing activities

through common governance of

and synergy building among

geographically dispersed operations

such rationalization essentially stems

from two sources

the advantages of differences in the

cost of factor endowments between

countries

and the economies of scale and scope for

example

to reduce sourcing and production costs

by accessing an expensive labor and

other cheap inputs of the production

process

many multinational corporations or mncs

build manufacturing facilities in china

mexico

eastern europe and india

number four favorable government policy

seeking

many firms invest overseas to take

advantage of foreign governments

favorable policies

in addition to restricting imports some

governments may offer subsidies

low-interest loans and tax concessions

to foreign firms to encourage them to

invest locally

these favorable policies and

governmental endorsements might

facilitate a firm's global expansion

for example in the 1990s kentucky

offered toyota an incentive package

worth 147 million dollars to persuade it

to build its u.s automobile assembly

plants there

the package included tax breaks new

state spending on infrastructure

and low-interest loans

fdi has both benefits and costs to the

host country

some key benefits of foreign direct

investment include the following

first increased employment the creation

of jobs is the most obvious advantage of

fdi

it is also one of the most important

reasons why a nation especially a

developing one

aims to attract fdi increased fdi

boosts the manufacturing and services

sectors of the host country

which creates jobs and helps reduce

unemployment

second human resource development human

capital refers to the knowledge and

competence of a workforce

skills that are required and improved

upon through foreign companies training

could boost education and human capital

quotient in the host country

once developed human capital is mobile

in other words

those skilled and experienced workers

can then train human resources

and other local companies thereby

creating a ripple effect

third provision of finance and

technology host countries can get access

to the latest financing tools

technologies and operational practices

from inward foreign direct investment

over time the introduction of newer

enhanced technologies and processes

results in their diffusion into the

local economy

consequently the efficiency of the

industry is improved

fourth an increase in exports

it is important to understand that not

all goods produced through fdi

are intended for domestic consumption

many of those products have global

markets

for example bmw's south carolina plant

exported around 200 000

suvs during 2020 with a value of more

than 8 billion dollars to china

germany south korea canada russia and

many other countries

as a result the united states export

sales increased

fifth the creation of competitive market

fdi helps create a competitive

environment in addition to breaking

domestic monopolies in host countries

a healthy competitive environment pushes

firms to continuously enhance their

processes and product offerings thereby

fostering innovation

consumers in the host countries also

gain access to a wider

range of competitively priced products

sixth stimulation of economic

development

this is another important advantage of

foreign direct investment

fdi is a source of external capital and

higher revenues for countries

when a factory is constructed at least

some local labor

materials and equipment are utilized

once the construction is complete

the factory will then hire some local

employees and make further use of local

materials and services

the people who are employed by such

factories thus have more money to spend

these factories will also create

additional tax revenue for the

government that can be infused into

creating and improving physical and

financial infrastructure

despite all of these benefits fdi also

has a few drawbacks

first it can replace local businesses

the entry of large foreign giants into

delicate domestic markets

can mean bad news for local small

businesses because they are put at risk

for displacement and bankruptcy

second foreign direct investment does

not always guarantee benefits for the

recipient countries

fdi enables foreign mncs to obtain

ownership of raw materials and goods

with little evidence of capital being

redistributed throughout the domestic

economy

third it can encourage political

corruption in order to seize the foreign

market

fdi's have gone to the extent of

corrupting high officials and political

bosses

in various countries in certain

countries

fdi's influenced political setup for

personal gain

for example most of the latin american

countries

have experienced problems like drug

trafficking and money laundering

fourth it can contribute to pollution

because some developing countries might

lessen their environmental regulations

to attract

mncs foreign direct investments can

contribute to pollution problems in the

house country

fifth it can promote cultural erosion in

all countries where fdi's have made

inroads

there has been a cultural shock

experienced by the local people because

they must adopt a culture that is

unfamiliar to them

as a result the domestic culture either

disappears or suffers a setback

this is felt by both families and the

community as a whole

in other words it causes erosion in the

value systems of the people

now let's discuss three major political

ideologies behind fdi

historically political ideologies

regarding fdi

have ranged from a dogmatic radical

stance that is hostile to all

fdis at one extreme to an adherence to

the non-interventionist

principle of free market economics at

the other end

between these two extremes is an

approach that's called pragmatic

nationalism

let's learn about each of these

approaches individually

the roots of the radical view can be

traced back to marxist political and

economic theories

they argue that the multinational

corporation is an instrument of

imperialist domination as well as a tool

for exploiting host countries

to the exclusive benefit of their

capitalist or imperialist home countries

this is to say that they believe

multinational corporations extract

profits from the host country and take

them to their home country

while giving nothing of value to the

host country in exchange

as you can probably tell the underlying

logic of the radical view

is very similar to the reasoning behind

mercantilism they both consider

international trade a zero-sum game

by the early 1990s the radical ideology

was in retreat almost everywhere in the

world due to rapid globalization and

economy growth

the free market view originated from

classical economics and the

international trade theories of adam

smith and david ricardo

the perspective argues that

international production should be

distributed among countries according to

the theory of comparative advantage

companies should specialize in the

production of the goods and services

that they can produce most efficiently

typically the free market view is

embraced by advanced economies

and developed countries because those

countries usually obtain the competitive

advantage in the global market by

following the free market ideology

their companies acquire legitimacy to

compete in and gain profit from foreign

countries

in reality many countries have adopted

neither a radical nor a free-market

policy toward fdi

instead they practice an approach that

can best be described as

pragmatic nationalism the pragmatic

nationalism view regarding fdi has both

advantages and disadvantages

countries that adopt a pragmatic stance

tend to pursue policies that are

designed to maximize the national

benefits

and minimize the national costs

according to this position

fdi should only be allowed if the

benefits outweigh the costs

let me explain japan is a former example

of pragmatic nationalism

until the 1980s japan's policy was

probably one of the most restrictive

among countries adopting the pragmatic

nationalist stance

this was due to japan's perception that

directed entry of foreign firms

especially american ones

with ample managerial resources into the

japanese market

could hamper the development and growth

of its own industry and technology

this belief led the japanese government

to block the majority of applications

for investing in their country

however there were always exceptions to

this rule

firms that possessed important

technology were often permitted to

engage in fdi

if they agreed to either license their

technology to a japanese firm

or enter into a joint venture with a

japanese enterprise

for example ibm and texas instruments

were able to set up wholly owned

subsidiaries in japan by participating

in this negotiation

from the viewpoint of the japanese

government the benefits of fdi

in such cases outweighed the perceived

costs in addition to japan

most countries and all of the major

economies in the world such as china

india and the us have now adopted

pragmatic nationalism to some extent

now let's do a quick review of today's

topic

in this video we discussed the

definition of foreign direct investment

as well as four major motives for

multinational corporations to invest

overseas

additionally we covered the major

benefits and costs of foreign direct

investments to the host countries

lastly we introduced three major

political ideologies behind

fdi so what do you think about foreign

direct investment

do you believe that the overall benefits

of fdi outweigh the costs

please leave your thoughts in a comment

below thanks for watching and i will see

you next time