4.2 Extent and significance of FDI
Once a firm undertakes foreign direct investment (FDI), it becomes a multinational enterprise (MNE). As noted in the introduction to this topic, FDI entails control of the enterprise in the host country and this concept of control is critical to FDI. Think about the other options a firm has with respect to doing business in the foreign country. It could import goods from the home country, but as we saw in Chapter 3 those goods may be subject to tariffs and other barriers. Alternatively, the firm could license a foreign firm to produce its product, to use its production process or to use its brand name or trademark, and collect royalties on sales of the product. The advantage of licensing for the licensor is that the licensee does the work of opening up the market, organising the distribution system and so on. One of the disadvantages of licensing is that the licensor loses control of the product and the production process. We will return to that point later in this chapter.
The reasons for which firms resort to FDI are summarised in Table 4.1.
Table 4.1 Motivations for FDI as an alternative or supplement to trade (Source: Daniels et al. 2004, p. 244)
To complete this introduction to FDI, read what your textbook has to say about the extent and significance of FDI in the world economy. A reading is also included that examines the attractiveness of Australia as a target for FDI.
In your text
Hill 2005, Chapter 6, pp. 213-223.
Reading 4.1
James, D. 2002, 'Foreign rating slips', Business Review Weekly ,
10-16 January, p. 38.
There are two types of FDI:
- Horizontal FDI is FDI in the same industry as that in which the firm operates at home.
- Vertical FDI is either FDI in an overseas industry which provides inputs for a firm's domestic operations, or FDI in an industry abroad which sells the outputs of a firm's domestic operations.
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