Chapter 16

Growing portion of foreign direct investment hast taken this form, accounting for over half of foreign direct investment flows in terms of dollar amount. Offer two key advantages: speed and access to proprietary assets. Popular mode of investment for firms wishing to protect, consolidate, and advance their global competitive positions.

Represents new additions to the existing stocks of FDI.

The accumulation of previous FDI flows. Overall cross-border production activities of MNCs are best captured by these.

Investment in a foreign country that gives the MNC a measure of control.

Building brand-new production facilities.

Examples include technological, managerial, and marketing know-how; superior R&D capabilities, and brand power. These are hard to package and sell to foreigners. The property rights in these are difficult to establish and protect, especially in foreign countries where legal recourse may not be readily available.

Firms that have intangible assets with a public good property tend to invest directly in foreign countries in order to use these assets on a larger scale and, at the same time, avoid the mis-appropriations of intangible assets that may occur while transacting in foreign markets through a market mechanism.

A federally owned organization, offers insurance against (i) the inconvertibility of foreign currencies, (ii) expropriation of US-owned assets overseas, (iii) destruction of US-owned physical properties due to war, revolution, and other violent political events in foreign countries, and (iv) loss of business income due to political violence. Their primary goal is to encourage US private investments in te economies of developing countries.

Potential losses to the parent firm resulting from adverse political developments in the host country.

According to Raymond Vernon (1966), when US firms first introduce new products, they choose to keep production facilities at home, close to customers. In the early stage of the cycle, the demand for the new product is relatively insensitive to the price and thus the pioneering firm can charge a relatively high price. At the same time, the firm can continuously improve the product based on feedback from its customers at home.

These are obtained when the value of the combined firm is greater than the stand-alone valuations of the individual (acquiring and target) firms. If cross-border acquisitions generate this and both the acquiring and target shareholders gain wealth at the same time, one can argue that cross-border acquisitions are mutually beneficial and thus should not be thwarted both from a national and global perspective.