Page 298 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance Dilfraz Singh, Lovely Professional University

Notes
Unit 27: FDI : Types and Issues

CONTENTS
Objectives
Introduction
27.1 Types of FDI
27.2 Issues of FDI
27.3 Summary
27.4 Key-Words
27.5 Review Questions
27.6 Further Readings

Objectives

After reading this Unit students will be able to:
• Explain the Types of FDI.
• Discuss the Issues of FDI.
Introduction

Foreign direct investment (FDI) has grown dramatically as a major form of international capital
transfer over the past decade. Between 1980 and 1990, world flows of FDI—defined as cross-border
expenditures to acquire or expand corporate control of productive assets—have approximately tripled.
FDI has become a major form of net international borrowing for Japan and the United States (the
world’s largest international lender and borrower, respectively). Direct investment has grown even
more rapidly of late within Europe.
To what extent is this sudden worldwide surge in FDI explained by traditional theories ? These
theories predict the scale and scope of multinational enterprises by looking to differences in competitive
advantage, across firms or countries, that might lead to the extension of corporate control across
borders. So, for example, better technology, management capability, and product design; stronger
consumer allegiance; and greater complementarities in production or use of technology can allow a
domestic firm to control foreign assets more productively than would a foreign firm and could therefore
predicate direct investment. In many cases, these theories also explain why an enterprise’s alternatives
to FDI—domestically based production or licensing of foreign-based production—are less efficient
than direct control of foreign-based operations.
Traditional theories are very useful for explaining basic long-term patterns of FDI. For example, they
help understand the behavior of U.S. firms during the post-World War II period (the experience on
which these theories were honed). At that time, advanced U.S. firms were superior in technology and
well established in foreign markets. U.S. firms tended to move overseas to retain competitive access
(or to preempt competitors’ access) to those markets and, in the process, met with relatively little
competition.
These theories also help us understand why the tide of U.S. FDI flows has slowly turned. The evolution
of the United States from a home for domestically based multinationals to a host for foreign-based
multinationals is probably the single most obvious sign of change in FDI today. This development
basically coincides with the waning (and even disappearance) of U.S. firms’ former competitive
advantages. It is obvious to today’s consumer that European-, Japanese, and Canadian-based firms
have developed advantages that allow them to control certain assets in the United States more
efficiently than would U.S.-based firms.

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