FOREIGN DIRECT INVESTMENT-MOTIVES-DETERMINANTS-THEORIES

FOREIGN DIRECT INVESTMENT-MOTIVES-DETERMINANTS-THEORIES

1. FOREIGN DIRECT INVESTMENT-MOTIVES-DETERMINANTS-THEORIES SUBMITTED B Y, MALAVIKA K(P221828) ADITHYA K V(P221801)

2. Foreign Direct Investment

3. WHAT IS FDI? Foreign Direct Investment (FDI) refers to when a company or individual from one country invests in a business or project located in another country. It typically involves a long-term commitment and includes activities like establishing subsidiaries, acquiring ownership stakes, or forming joint ventures. FDI plays a significant role in promoting economic growth and development by bringing in capital, technology, and expertise from abroad. It can also create job opportunities and enhance international trade.

4. BENEFITS OF FDI 1. Global Integration 2. Economic Growth 3. Technology Transfer 4. Industrial Development 5. Skill Enhancement 6. Market Access 7. Employment Opportunities 8. Infrastructure Development 9. Knowledge Spillover 10. Competitiveness Boost

5. MOTIVES FOR FDI! MNC’s commonly consider direct foreign investment because it can improve their profitability and enhance shareholder wealth . In most cases MNC’s engage in DFI because they are interested in boosting revenues ,reducing costs or both. MOTIVES FOR FDI Revenue – related motives Cost related motives Selfish managerial motives

6. REVENUE-RELATED MOTIVES Revenue-related motives drive companies to engage in FDI as a strategic approach to increase sales, reduce costs, and generate profits in both domestic and international markets. They are : Attract new source of demand Enter profitable markets Exploit monopolistic advantages React to trade restrictions Diversify internationally

7. COST – RELATED MOTIVES The cost – related motives drive companies to engage in FDI to optimize their cost structure and enhance competitiveness. Fully benefit from economies of scale Use foreign factors of production Use foreign raw materials Use foreign technology React to exchange rate movements

8. DETERMINANTS OF FDI Determinants Of FDI Include Factors such as : Stable ,predictable macro economic policy. an effective and honest economy. A large and growing market Freedom of activity in the market. Minimal government regulations. Reliable infrastructure Availability of high quality factors of production A strong local currency. The ability to remit profits, dividends and interest A favourable tax climate Freedom to operate between markets.

9. THEORIES OF FDI Theories based on market structure. International Product life cycle theory. Internalization approach theory. Eclectic theory of FDI. Appropriability theory. Location specific advantage theory.

10. THEORIES BASED ON MARKET STRUCTURE According to the theories based on market structure, firms which invest abroad must have a comparative advantage in terms of one or more of the following factors Cost of capital Economies of scale Infrastructure for research and development Funds for advertisement etc. these advantages should be sufficiently significant to offset the costs of setting up a company in a foreign country .

11. INTERNATIONAL PRODUCT LIFE CYCLE THEORY According to the Product Life Cycle Theory developed by Raymond Vernon and Lewis T Wells, the production of a product shifts to different categories of countries through the different stages of the product life cycle. According to this theory, a new product is first manufactured and marketed in a developed country like the US (because of favorable factors like large domestic market entrepreneurship and ease of organizing production). It is then exported to other developed markets. As competition increases in these markets, manufacturing facilities are established there to cater to these markets and also to export to the developing countries. As the product becomes standardized and competition further intensifies, manufacturing facilities established in developing countries to lower production costs

12. INTERNALIZATION APPROACH THEORY . According to the Internationalization Theory, which is an extension of the Market Imperfections theory, foreign investment results from the decision of a firm to internalize a superior knowledge for example, if a firm decides to externalize its know-how by licensing a foreign firm, the firm (the licensor) does not make any foreign investment in this respect but, on the other hand, if the firm decides to internalize, it may invest abroad in production facilities. Methods of internalization include formal ways like patents and copy rights informal ways like secrecy and family networks

13. ECLECTIC THEORY OF FDI John Dunning has attempted to formulate a general theory of international production by combining the postulates of some of the other theories. According to Dunning, foreign investment by MNCs results from three comparative advantages which they enjoy. viz. 1. Firm specific advantages 2. Internalization advantages 3. Location specific advantages

14. APPROPRIABILITY THEORY. According to the Appropriability Theory, a firm should be able to appropriate (to keep for its exclusive use) the benefits resulting from a technology it has generated. If this condition is not satisfied, the firm would not be able to bear the cost of technology generation and therefore, would have no incentive for research and development. It is obvious that the Appropriability Theory is similar to the internalization theory in terms of creating an internal market (internal channels) for exploiting the firm specific advantages.

15. LOCATION SPECIFIC ADVANTAGE THEORY. The Location Specific Advantage Theory suggests that foreign investment is pulled by certain location specific advantages. According to Hood and Young, there are four factors which are pertinent to the Location Specific Theory. They are: 1. Labour costs. 2. Marketing factors (like market size, market growth, stages of development and local competition). 3. Trade barriers. 4. Government policy.

16. REFERENCES INTERNATIONAL FINANCIAL MANAGEMENT – JEFF MADURA 9 TH EDITION INTERNATIONAL BUSINESS – FRANCIS CHERUNILAM 5 TH EDITION INTERNATIONAL FINANCIAL MANAGEMENT – P K JAIN, JOSETTE PEYRARD, SURENDRA S YADAV.

17. THANK YOU!