Foreign Direct Investment

(FDI)

Occurs when a firm invests directly in new facilities to produce and/or market in a foreign country.

• Once a firm undertakes FDI it becomes a multinational enteprise.
• There are two forms of FDI.

1. A greenfield investment - the establishemnt of a wholly new operation in a foreign country: long run profits, technology, flexability
2. Acquisition or merging with an existing firm in the foreign country: lower costs; brand recognitions; immediate profits; lower risk

1. The flow of FDI - the amont of FID undertaken over a given time period: flowing into the bathtub ($1 million)
2. The stock of FDI - the total accumulation value of foreign-owned asssets at a given time: water that is already in the bathtub ($10 million)

1. The resource transfer effect
2. The employment effect
3. The balance of payments effect
4. Effects on competition and economic growth

1. The possible adverse effects of FDI on competition within the host nation
2. Adverse effects on the balance of payments
3. The percieved loss of national sovereignty and autonomy

1. The effect on the capital account o th ehome country's balance of payments from teh inward flow of foreign earnings
2. The employment effects that arise from outward FDI
3. The gains from learning valuable skills from foreign markets that can subsequently be transferred back to the home country

1. The balance of payments
2. Employment effects of outward FDI

Arise from using resource endowments or assets that are tied to a particular location and that a firm finds valuable to combine with its own unique assets.

Associated with dunning and helps explain the direction of FDI