Chapter 6 – Investing Abroad Directly
The resource-based view suggests that the key word of FDI is direct, which
reflects firm’s interest in directly managing, developing, and leveraging their
firm-specific resources and capabilities abroad
The institution-based view argues that recent expansion of FDI is indicative
of generally more friendly policies, norms, and values associated with FDI
(despite some setbacks)
Foreign portfolio investment (FPI) is investment in a portfolio of foreign
securities such as stocks and bonds – foreign indirect investment
Management control rights are the rights to appoint key managers and
establish control mechanisms
Horizontal FDI is a type of FDI in which a firm duplicates its home country-
based activities at the same value chain stage in a host country
Vertical FDI is a type of FDI in which a firm moves upstream or downstream
at different value chain stages in a host country
Upstream vertical FDI is a type of vertical FDI in which a firm engages in an
upstream stage of the value chain in a host country
Downstream vertical FDI is a type of vertical FDI in which a firm engages in a
downstream stage of the value chain in a host country
FDI flow is the amount of FDI moving in a given period (usually a year) in a
certain direction
FDI inflow is inbound FDI moving into a country in a year
FDI outflow is outbound FDI moving out of a country in a year
FDI stock is total accumulation of inbound FDI in a country or outbound FDI
from a country across a given period (usually several years)
Non-MNE firms can do business abroad by
o Exporting and importing
o Licensing and franchising
o Outsourcing
o Engaging in FPI
o Other
FDI sets MNEs apart from non-MNEs
An exporter has to undertake FDI in order to become an MNE
OLI advantages are a firm’s quest for the following via FDI
o Ownership advantages
An MNE’s possession and leveraging of certain valuable, rare,
hard-to-imitate, and organizationally embedded (VRIO) assets
overseas in the context of FDI
o Location advantages
Advantages enjoyed by firms operating in a certain location
o Internalization advantages
The replacement of cross-border markets (such as exporting
and importing) with one firm (the MNE) locating and operating
in two or more countries
Dissemination risk is the risk associated with unauthorized diffusion of firm-
specific know-how
The resource-based view suggests that the key word of FDI is direct, which
reflects firm’s interest in directly managing, developing, and leveraging their
firm-specific resources and capabilities abroad
The institution-based view argues that recent expansion of FDI is indicative
of generally more friendly policies, norms, and values associated with FDI
(despite some setbacks)
Foreign portfolio investment (FPI) is investment in a portfolio of foreign
securities such as stocks and bonds – foreign indirect investment
Management control rights are the rights to appoint key managers and
establish control mechanisms
Horizontal FDI is a type of FDI in which a firm duplicates its home country-
based activities at the same value chain stage in a host country
Vertical FDI is a type of FDI in which a firm moves upstream or downstream
at different value chain stages in a host country
Upstream vertical FDI is a type of vertical FDI in which a firm engages in an
upstream stage of the value chain in a host country
Downstream vertical FDI is a type of vertical FDI in which a firm engages in a
downstream stage of the value chain in a host country
FDI flow is the amount of FDI moving in a given period (usually a year) in a
certain direction
FDI inflow is inbound FDI moving into a country in a year
FDI outflow is outbound FDI moving out of a country in a year
FDI stock is total accumulation of inbound FDI in a country or outbound FDI
from a country across a given period (usually several years)
Non-MNE firms can do business abroad by
o Exporting and importing
o Licensing and franchising
o Outsourcing
o Engaging in FPI
o Other
FDI sets MNEs apart from non-MNEs
An exporter has to undertake FDI in order to become an MNE
OLI advantages are a firm’s quest for the following via FDI
o Ownership advantages
An MNE’s possession and leveraging of certain valuable, rare,
hard-to-imitate, and organizationally embedded (VRIO) assets
overseas in the context of FDI
o Location advantages
Advantages enjoyed by firms operating in a certain location
o Internalization advantages
The replacement of cross-border markets (such as exporting
and importing) with one firm (the MNE) locating and operating
in two or more countries
Dissemination risk is the risk associated with unauthorized diffusion of firm-
specific know-how
