Labor services in a country might be underpriced relative to productivity because

Eun/Resnick 

201 

Eun & Resnick 4e 

CHAPTER 16 Foreign Direct Investment and Cross-Border Acquisitions

Global Trends in FDI 

Why Do Firms Invest Overseas? 

Trade Barriers 

Imperfect Labor Market 

Intangible Assets 

Vertical Integration 

Product Life Cycle 

International Finance in Practice:

 Linear Sequence in Manufacturing: Singer & Company 

Shareholder Diversification Services 

Cross-Border Mergers and Acquisitions 

Political Risk and FDI 

International Finance in Practice:

 DaimlerChrysler: The First Global Car Colossus 

International Finance in Practice:

 Stories Past and Present 

Summary 

MINI CASE:

 Enron versus Bombay Politicians 

1

Under a 1981 

Voluntary Trade Agreement

 Japanese automobile manufacturers were 

not allowed to increase their exports to the U.S. market. As a result: 

a)

They exited the market 

b)

Honda was motivated to circumvent the trade barriers. 

c)

Honda’s 

FDI 

may 

have 

been 

part 

of 

an 

overall 

corporate 

strategy 

designed 

to 

bolster their competitive position vis-à

-vis their domestic rivals such as Toyota 

d)

Both b) and c) 

Answer: d) 

2

Fol

lowing Honda’s FDI in the U.S.,

a)

The U.S. government imposed a 

Voluntary Trade Agreement

 under which 

Japanese automobile manufacturers were not allowed to increase their exports to 

the U.S. market. 

b)

Toyota and Nissan made direct investments in America 

c)

 Sales of Hondas declined 

d)

none of the above 

Answer: b) 

3

Honda’s decision to build a plan in Ohio

a)

Was welcomed by the United Auto Workers 

b)

Was encouraged by assistance from the state of Ohio, including improved 

infrastructure around the plant and abatement of property taxes. 

c)

Involved setting up a special foreign trade zone that allowed Honda to import auto 

parts from Japan at a reduced tariff rate. 

d)

All of the above 

Answer: d) 

F494 Chapter 16 Student Handout (8thedition)Chapter 16:Foreign Direct Investment and Cross-Border Acquisitions•Background•Why Firms Invest Overseas•Cross-Border Mergers and Acquisitions•Political Risk and FDI- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -Background:Firms becomemultinationalwhen they undertakeforeigndirect investments (FDI).FDI often involves the establishment of newproduction facilities in foreign countries (agreenfieldinvestment).FDI may also involve mergers with the acquisitions of existing foreignbusinesses (bordermergers and acquisitions).Both affords themultinational a measure of control.FDI thus represents an internalorganization expansion by multinational corporations (MNCs).According to a recent UN survey, the world FDI stock grew abouttwice asfastas worldwide exports of goods and services, which themselves grewfaster than the world GDP by about 50 percent.MNCs deploy theirformidable resources, tangible and intangible, irrespective of nationalboundaries, to pursue profits and bolster their competitive positions.Indeed, FDI by MNCs now plays a vital role in linking national economiesand defining the nature of the emerging global economy.Global Trends in FDI:As can be expected, several developed countriesare the dominant sources of FDI outflows.(China is the only developingcountry with significant FDI outflows.) During the six year period 2010 -2015, the United States, on average, invested about $320 billion per yearoverseas, followed byJapan, which invested about $111 billion per year.China is the third most important source of FDI outflows, investing about$98 billion per year on average during the 6-year period.Overall, the MNCsdomiciled in the involved countries appear to have certaincomparativeadvantagesin undertaking overseas investment projects.For FDIinflows, theUnited Statesreceived the largest amount of FDIinflows over the 2010 - 2015 period, $219 billion per year on average, amongall countries.The next popular investment destinations of FDI were China($125 billion) and the U.K. ($49 billion).The figures imply that thesecountries must havelocational advantagesfor FDI over other countries.Incontrast to its substantial role as an originating country of FDI outflows,Japan plays a minor role as a host of FDI inflows, receiving on average onlyabout $0.1 billion worth of FDI per year during the 2010 – 2015 period,1

What are reasons for a MNC to backward vertically integrate?

Which country is the largest recipient and initiator of FDI?

When they undertake foreign direct investments firms become?

What major aspect sets apart international finance from domestic finance?