FOREIGN DIRECT

INVESTMENT

What is a FDI?
FDI occurs when a firm invests
directly in facilities to produce and
/or market a product in a foreign
country.
Once a firm undertakes an FDI it
becomes a MNC
An example is given in the opening
case.

CEMEX's FDI
Between early 1990s and 2005 the
Mexican cement maker Cemex
made FDI totaling some $ 16 billion to
establish operations in 50 countries.
By 2005 this FDI had transformed
Cemex from a Mexican operation to a
MNC in the cement industry
Annual sales in excess of $15 billion
only 15% was generated in Mexico.

Two main forms of FDI

1. Greenfield investment-involves the
establishment of a new operation in
a foreign country
2. Acquiring or merging with an
existing firm in the foreign country
( most of Cemexs expansion has
been in the form of acquisition)

What is an acquisition?
Acquisitions can be of three types
1.Minority where the foreign firm
takes a 10% to 49% interest in the
firms voting stock
2.Majority foreign interest of 50 % to
99%
3.Full outright stake foreign interest
of 100%

Central objective
To identify the economic rationale that
underlies FDI
When deciding to serve the North American
market , the Japanese car maker Toyota had
to choose between exporting and FDI in
North American production facilities
Although Toyota initially served through
exports it has increasingly turned to FDI
Toyota now has the capability to produce
1.45 million cars a year in North America.

Central objective
To find why firms like Toyota prefer FDI
to exporting
Again why prefer FDI over licensing.
Licensing occurs when a domestic
firm, the licensor, licenses to a foreign
firm, the license, the right to produce
its product , to use its production
processes, brand name or trademark.

 In return for the license, the licensor

collects royalty fees on every unit of
license sold or total license revenues.
The advantage of licensing over FDI
is that the licensor does not have to
pay for opening a foreign market-the
licensee pays.

OBJECTIVE
Look at the theories of horizontal and
vertical FDI
Horizontal FDI is FDI in the same industry
in which a firm operates at home
Vertical FDI is FDI in an industry that
provides inputs for a firms domestic
operation or
FDI in an industry abroad that sells the
output of the firms domestic operations.