What Is The Source Of FDI?
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Why Do Firms Choose Acquisition Versus Greenfield Investments? - Most cross-border investment is in the form of mergers and acquisitions rather than greenfield investments
- between 40-80% of all FDI inflows per annum from 1998 to 2011 were in the form of mergers and acquisitions
- but in developing countries two-thirds of FDI is greenfield investment
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Why Do Firms Choose Acquisition Versus Greenfield Investments? - Firms prefer to acquire existing assets because
- mergers and acquisitions are quicker to execute than greenfield investments
- it is easier and perhaps less risky for a firm to acquire desired assets than build them from the ground up
- firms believe that they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills
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Why Choose FDI? - Question: Why does FDI occur instead of exporting or licensing?
- Exporting - producing goods at home and then shipping them to the receiving country for sale
- exports can be limited by transportation costs and trade barriers
- FDI may be a response to actual or threatened trade barriers such as import tariffs or quotas
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Why Choose FDI? - Licensing - granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit that the foreign entity sells
- Internalization theory (aka market imperfections theory) - compared to FDI licensing is less attractive
- firm could give away valuable technological know-how to a potential foreign competitor
- does not give a firm the control over manufacturing, marketing, and strategy in the foreign country
- the firm’s competitive advantage may be based on its management, marketing, and manufacturing capabilities
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