IBUS1101 Chap.8 Foreign Direct Investment
Foreign Direct Investment
This chapter distinguishes direct investment from portfolio investment, flow from stock, greenfield from acquisition, and shared from full ownership. It explains market, resource, cost and diversification motives and connects them to ownership, location and internalisation reasoning.
Strong analysis also counts coordination, monitoring, supply-chain and institutional costs rather than assuming that foreign ownership automatically creates efficiency. Foreign direct investment combines a cross-border productive presence with managerial participation, making it different from a portfolio purchase.
Measurement must distinguish flows over a period from accumulated stock at a date; a large stock can coexist with weak current inflow. Strategy must also separate motive, investment form and ownership. Firms may seek markets, resources, efficiency, knowledge or diversification. They may build a greenfield facility or acquire an existing operation, and either form may be wholly or jointly owned.
The ownership-location-internalisation logic explains why the focal firm has an advantage, why the host offers a relevant location condition and why control inside the firm is preferable to a contract. Internalisation is not costless: affiliates add coordination, monitoring, inventory and organisational-change burdens.
Data interpretation also needs scale, time and transaction context because one acquisition can dominate an annual flow. A complete FDI argument connects motive, proprietary resource, location advantage, transaction hazard, governance cost and a review condition rather than treating foreign ownership as inherently superior. The analysis should also distinguish control from complete autonomy.
A wholly owned affiliate still depends on regulators, suppliers, workers and customers, while a joint venture can grant strong operational rights through governance. Formal equity is one source of control, not the entire operating relationship. Review triggers should include strategic performance and the continuing need for ownership, not only short-term financial returns from the affiliate.
What this chapter covers
- 01
FDI definition
- 02
Flow and stock
- 03
Greenfield investment
- 04
Mergers and acquisitions
- 05
Joint ventures and subsidiaries
- 06
Strategic motives
- 07
Monopolistic advantage
- 08
Internalisation and OLI logic
Worked example · free
Explain a battery producer's investment
- +1State the market and knowledge motives.
- +1Identify the proprietary ownership advantage.
- +1Identify the host cluster advantage.
- +1Explain the internalisation need.
- +1Recommend staged greenfield investment with review points.
Key terms
- FDI flow
- The amount of direct investment entering or leaving during a defined period.
- FDI stock
- The accumulated value of foreign-owned productive assets at a point in time.
- Greenfield investment
- Direct investment that creates a new host-country facility rather than buying an existing operation.
Foreign Direct Investment FAQ
How is direct investment different from portfolio investment?
Direct investment establishes productive or marketing facilities and managerial participation in another country. Portfolio investment purchases foreign financial instruments primarily for return without the same operating presence and control, so it creates different strategic decisions.
Can stock be large when inflow is small?
Yes. Inflow measures new investment during a period, while stock accumulates earlier investments and changes through new flows, divestment and valuation. A country may therefore retain a large foreign-owned asset base after a weak year for new projects.
Why do firms internalise foreign activities?
They internalise when contracts with external partners would create quality, monitoring, coordination or proprietary-knowledge hazards. Ownership can reduce those hazards, but it also raises commitment and organisational cost, so the transaction problem must be named.
Assessment move
Use four columns for every example: productive control, facility form, ownership form and strategic motive. Then add ownership advantage, host-location advantage and the reason to internalise. Finish with one coordination cost and one condition that would make the firm change its investment design. Study FDI with a four-part classification card.
Record whether productive control exists, whether the asset is built or bought, whether equity is shared and which strategic motive dominates. Add a fifth line for the governance reason that makes ownership preferable to exporting or contracting. Use the card on ambiguous cases, including a joint-venture greenfield plant and an acquired research subsidiary.
For flow and stock questions, write the time basis before interpreting direction, and compare announced with completed investment where relevant. Build an OLI argument by identifying a firm-specific resource, a host condition that matters to that resource and a contracting hazard. Then challenge internalisation with the strongest feasible licence or alliance and state why it fails or succeeds.
Include organisational costs, country exposure and one trigger for expanding, divesting or changing governance. This routine prevents motive, form and ownership from collapsing into one label and produces a balanced recommendation that explains both the value and the burden of direct investment.
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