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.