《《Facts and Fallacies about Foreign Direct Investment》.pdfVIP

Facts and Fallacies about Foreign Direct Investment by Robert C. Feenstra Dept. of Economics, Univ. of California, Davis Haas School of Business, Univ. of California, Berkeley and National Bureau of Economic Research Revised, December 1998 * The author thanks Josef Merrill for excellent research assistance, and William Zeile of the Bureau of Economic Analysis for help with obtaining and interpreting the foreign investment data. 1. Introduction Foreign direct investment combines aspects of both international trade in goods and international financial flows, and is a phenomena more complex than either of these. As its name suggests, it first involves ownership of the assets of a firm: foreign direct investment (FDI) is often defined as the acquisition of 10% or more of the assets of a foreign enterprise. Second, it involves the choice of a host country for these assets. The decision of where to invest will depend on cost conditions and the extent to which investment gives preferential access to the local market, and both of these considerations depend on trade restrictions and other policies in the host country. In this respect, the decision of firms to invest abroad will be a counterpart to the international trade policies of the countries involved. Third, FDI involves the decision of which activities to keep internal to a firm, and which to contract on the market: only the activities internal to a firm will be included in FDI, while other activities can be pursued by arms-length transactions between unrelated firms. For example, a firm investing in a country might bring with it some knowledge that cannot be effectively leased or sold on the market. Instead, it will set up a plant for local production and also ex