Presented By:

Nishtha Sharma(059)
Rishika Goyal(086)
Tanika Nangia(107)
• FDI stands for Foreign Direct Investment.

Foreign direct investment (FDI) is the movement

of capital across national frontiers in a manner
that grants the investor control over the acquired
asset. Thus it is distinct from portfolio investment
which may cross borders, but does not offer such
control

Consistent economic growth, de-regulation,

liberal investment rules, and operational
flexibility are all the factors that help increase
the inflow of Foreign Direct Investment or FDI
1.Outward FDI’s :
 backed by the government against all types of
associated risks.
 subject to tax incentives

2. Inward FDI’s :
 Influenced by different economic factors

3. Vertical Foreign Direct Investment :

 a multinational corporation owns some shares
of a foreign enterprise, which supplies input for
it or uses the output produced by the MNC.
4. Horizontal foreign direct investments : 
 a multinational company carries out a similar
business operation in different nations. 

5. Market-seeking FDI’s :
undertaken to strengthen the existing market
structure or explore the opportunities of new
markets

6. Resource-seeking FDI’s
 aimed at factors of production which have more
operational efficiency than those available in
the home country of the investor. 
• Theory of Comparative Advantage
provides a basis for explaining and justifying
international trade in a model world assumed
to enjoy free trade, perfect competition, no
uncertainty, costless information, and no
govt. interference.
• Govt. interference because of political and
economic reasons
• Easy and Direct flow of Capital and
Technology
• Numerous factors of production today
• Comparative Advantage Shifts
• Issues not addressed
Competitive advantage must be firm-specific,
transferable and powerful enough to
compensate for the potential disadvantages
of operating abroad.

• Economies of Scale and Scope

• Managerial and Marketing Expertise
• Advanced Technology
• Differentiated Products
• Competitiveness of the Home Market
O: owner specific advantages

L: Location specific advantages

I: Internationalization
Oil which lubricates engine of enterprises.
No proper market and no price
Hence, enterprises are driven to create an
internal market
Internationalization – assigns property rights
Transformation from intangible piece to
valuable property
 Proactive Financial O L I
Strategies

1.Gaining & maintaining a global

cost & availability of capital

•Sourcing of capital globally x

•Accounting & disclosure x

transparency

2. Reducing financial agency x

cost through FDI

3.Reducing transaction x
&operating exposure through
FDI
Reactive Financial Strategies O L I

1. Exploiting undervalued or x
overvalued exchange rates

2. Exploiting undervalued or x
overvalued stock prices

3. React to capital control that x

prevents the free movement of
funds
4. Minimizing taxation x x
 Internationalization Process

 Behavioral Approach
THE FDI SEQUENCE : FOREIGN PRESENCE AND FOREIGN INVESTMENT

Greater Foreign Presence

Greater
Foreign
Investment
 Advantages of exports:
 No unique risks
 Political risks minimal
 Agency costs avoided
 Front end investment lower
 Diadvantages:
 R&D capabilities not used effectively
 Risk of losing markets to competitors
 Lose the opportunity to export back to the
domestic market
 Disadvantages of Licensing:
 License fees likely to be lower than FDI profits
 Possible loss of quality control
 Establishment of potential competitor
 Risk that technology will be stolen
 High agency costs
 Management contracts:
 Involves less foreign exposure
 Less political risk as repatriation of managers is
easy
 Joint Venture:
 Shared ownership in a foreign business
 Can be a foreign affiliate but not a foreign
subsidiary
 Right local partner is necessary to make it a
viable venture
 Advantages of a compatible local partner:
 Local partner knows about the customs and
institutions
 It can provide competent management
 Easy access to host country’s capital markets
 It may have technology appropriate for local
environment
 Public image of the firm(owned) improves
Potential conflicts or difficulties:
 Political risks increases due to wrong partner
 Divergent views on various issues
 Transfer pricing creates conflict of interest
 Control of financing
 Rationalization of production
 Disclosure of financial results by the foreign
firm
 Greenfield investment :
 Establishing a production or service facility
starting from the ground up
 Advantages of acquisition:
 Quicker
 Cost effective way of gaining competitive
advantages
 Undervaluation of target firms
 Disadvantages:
 Method of financing
 Different corporate cultures
 Post acquisition process
Exchange a share of ownership with one
another
Establishment of a separate joint venture to
develop and manufacture a product or service
Joint marketing and servicing agreements
Suited to high-tech industries where cost of
R&D is high and timely improvements
important