Foreign Direct Investment | International Business | From A Business Professor
Summary
TLDRIn '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
🌐 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.
📈 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.
🏛️ 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.
Mindmap
Keywords
💡Foreign Direct Investment (FDI)
💡Resource-Seeking
💡Market-Seeking
💡Efficiency-Seeking
💡Favorable Government Policy-Seeking
💡Human Resource Development
💡Economic Development
💡Cultural Erosion
💡Free Market View
💡Pragmatic Nationalism
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
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