FOREIGNDIRECTINVESTMENTTHEORYANDSTRATEGY.docVIP

Foreign Direct Investment Theory and Strategy Foreign Direct Investment - The International Monetary Fund (IMF) defines foreign direct investment (FDI) as a category of international investment where a resident in one economy (the direct investor) obtains a lasting interest in an enterprise resident in another economy (the direct investment enterprise). (IMF, 1993) Two parts of this definition are important to note: The “lasting interest” implies the existence of a long-term relationship between the direct investor and the direct investment enterprise, The “direct investment” implies the acquisition of at least 10 percent of the ordinary shares or voting power of an enterprise abroad. Foreign Direct Investor - an individual, an incorporated or unincorporated public or private enterprise, a government, a group of related individuals, or a group of related incorporated and/or unincorporated enterprises which has a direct investment enterprise – that is, a subsidiary, associate or branch – operating in a country other than the country or countries of residence of the foreign direct investor or investors. (OCED, 1996) Common Misconceptions: (IMF, 2003) FDI does not necessarily imply control of the enterprise since only a 10 percent ownership is required to establish a direct investment relationship. FDI involves only one investor or a “related group” of investors. FDI is not based on the nationality or citizenship of the direct investor; it is based on the investor’s residency. Lending from unrelated parties abroad that are guaranteed by direct investors is not FDI. FDI represents a large part of the increasing and all-encompassing trend towards globalization. Q: Compared to domestic firms in what ways are MNE’s better able to exploit competitive advantages? A: Economies of scale Managerial and technological expertise Product differentiation Financial strength The Theory of Absolute Advantage (Adam Smith) The country that produces th