Questions About FDI Policies Implications of Ownership, Location, - PDF document

Questions About FDI Policies Implications of Ownership, Location, and Internalization � When does foreign direct investment (FDI) Advantages for FDI Policies occur? � What benefits can FDI provide for host countries? Amy Jocelyn Glass � What government policies increase benefits Texas A&M University from FDI? When Does FDI Occur? Ways to Serve a Foreign Market � Logistics of coordinating activities across � Export: produce in home market and ship to multiple locations can be challenging foreign market � Ownership, location and internalization � FDI: produce in foreign market using a advantages help overcome difficulties subsidiary � Operating as a multinational can be � License: produce in foreign market using a worthwhile, especially as information and foreign firm communication technologies improve Ownership Advantage Location Advantage � First need a reason why foreign market not � Next need a reason why production should served by a foreign firm be located in the foreign market � Must be something that domestic firm does � Must be something that makes production better than foreign firms – domestic firm in foreign country better than production in must be special domestic country – host must be special � Examples: technology (unique product � Examples: lower factor prices (comparative design, better product, lower cost), superior advantage), import restraints, rule of law management or organization skills 1

Internalization Advantage Internationalization Strategy � Firms often move from exporting to FDI � Finally need a reason why production and then to licensing as build experience in should be kept within one firm a country or in similar countries � Must be something that makes internal � Technology transfer increases as does transactions better than arm’s length exposure to risk of imitation and � Examples: impossible to write complete opportunistic behavior contracts for every possible event, difficult � Hardest to protect ownership advantage to enforce, risk of opportunistic behavior under licensing What Benefits Can FDI Provide Technology Transfer for Host Countries? � Benefits from FDI generally stem from the � Improvements in information and existence of ownership advantage communication technologies could increase amount of technology transfer that occurs � Any firm that engages in FDI must be without FDI special, have some dimension of superiority (often technology) that offsets the inherent � Firms could use backward engineering even difficulty of operating as a multinational if item not produced locally � Possible that local firms may be able to gain � Patents disclose some information about from similar ownership advantages inventions that could lower cost of imitation Easing Technology Transfer Creating Better Jobs � Multinationals may adapt production � Multinational firms pay higher wages, even technologies to local conditions controlling for industry, firm size, etc � Local firms may then have easier time � Could be creaming (hiring best workers) in copying adapted technologies part but also use more capital � Workers exposed to technologies may leave � Better technologies make workers more to work for local firms productive and their output more valuable � Part of inventions often kept as trade secret � Workers may be trained to use new – firms patent around innovations technologies, and some training general 2

Linkages From FDI Consumer Benefits � FDI may bring consumer benefits similar to � Forward linkages: added supply lowers cost (but beyond) the benefits of opening up to of intermediates – higher profits for local international trade producers and entry (but possibly lower � Arrival of new varieties or better qualities profit for suppliers and exit) of products to a market � Backward linkages: added demand raises � Lower prices for consumer goods than if price of intermediates – higher profits for imported, especially in the case of local suppliers and entry (but possibly lower substantial import restrictions profit for producers and exit) What Government Policies When Thinking About FDI, Increase Benefits From FDI? Remember OLI! � Policies to attract better FDI generally must � Ownership, location and internalization augment the location advantage, so host advantages important for understanding country more special when FDI occurs � Important to not tamper with ownership � Ownership advantage influences possible advantage (what makes firm special) benefits of FDI � Examples: infrastructure (highways, ports, � Location advantage determines how best to airports), education (computers and foreign attract FDI language), national treatment, transparency 3