Dr. Zulfiqar Hasan
FDI stands for Foreign Direct Investment, a component of country’s national financial accounts. It is an investment of foreign assets into domestic structures, equipment, business and organizations.
Foreign Direct Investment (FDI), a component of country’s national financial accounts. It is an investment of foreign assets into domestic structures, equipment, business and organizations.
Components of FDI
Equity capital: It is the FD investor’s purchase of shares of an enterprise in a country other than its own.
Reinvestment Earnings: It comprise the direct investors’ share of earnings not distributed as dividends by affiliates, or earnings not remitted to the direct investor. Such retained profits by affiliates are reinvested.
Intra-Company Loans: It refers to short or long-term borrowing and lending of funds between direct investors and affiliated enterprise.
This topic also shows the advantages and disadvantages of Foreign Direct investments.
Some theories of FDI are: Theory of comparative advantage; Life Cycle Theory; OLI Paradigm etc. This lecture will attempt to discuss these theories.
The OLI Paradigm and Internalization
The OLI Paradigm is an attempt to create an overall framework to explain why MNEs choose FDI rather than serve foreign markets through alternative models such as licensing, joint ventures, strategic alliances, management contracts, and exporting.
“O” owner-specific (competitive advantage in the home market that can be transferred abroad)
Some firms have a firm specific capital known as knowledge capital: Human capital (managers), patents, technologies, brand, reputation…
This capital can be replicated in different countries without losing its value, and easily transferred within the firm without high transaction costs
“L” location-specific (specific characteristics of the foreign market allow the firm to exploit its competitive advantage)
- Producing close to final consumers or downstream customers
- Saving transport costs
- Obtaining cheap inputs
- Jumping trade barriers
- Provide services (for most services production and delivery have to be contemporaneous)
“I” internalization (maintenance of its competitive position by attempting to control the entire value chain in its industry)
A Greenfield investment is defined as establishing a production or service facility starting from the ground up
The contributor Dr. Zulfiqar Hasan is a University Teacher working as an Associate Professor in Finance.