Foreign Direct Investment (FDI)

Market-seeking FDI is an investment undertaken to exploit new markets or sustain existing markets (Dunning & Lundan, 2008, p.70). For instance, because of tariffs and other barriers, the company may relocate production to host country where exporting had served it previously. The key factors that encourage this kind of investment are market growth and market size of the host country because the reason for market-seeking FDI is to serve local market better through local production. The barriers in serving the local market such as transport costs and tariffs also encourage this kind of FDI. An example of market-seeking FDI is the Japanese FDI in motor vehicles in the United States in late 1980s.

Natural resource-seeking FDI is when firms aim to exploit natural resources endowments of target countries at a lower cost than in their home counties (Dunning & Lundan, 2008, p.68). For example, many developing countries have unexploited natural resources that attract relevant companies from developed countries. An example of this type of investment is American FDI in energy sector in Nigeria where the companies invest in oil extraction.

Efficiency-seeking FDI is when a company takes seeks to gain from the common control of activities that are geographically dispersed (Dunning & Lundan, 2008, p.72). Therefore, the European Union commitment to establishing a common network as well as the high communication and transport costs is great motivators to this kind of investment. A good example is the investment made by American and European sports equipment companies in countries within the European Union.

Strategic asset or capability seeking FDI is when a firm engages in FDI, generally by acquiring the assets of overseas firms in order to promote their long-term strategic goals (Dunning & Lundan, 2008, p.73). This occurs especially when companies advance their international competitiveness. An example is that of Indian pharmaceutical companies FDI in developing countries through acquisitions.

Escape investment is when a firm escapes restrictive macro-organization policies or legislation by home governments (Dunning & Lundan, 2008, p.74). When governments change the existing regulations, companies tend to use escape FDI to maintain their production and marketing margins, or exploit the emerging opportunities. For example, United Kingdom’s FDI in UAE is a result of the favorable legal reforms established by the government in late 1980s.

Supportive investment is when a firm engages in supporting the activities of the rest of the business of which they are part (Dunning & Lundan, 2008, p.75). This kind of FDI is encouraged especially when one business depends on another for success. For instance, Phillips FDI in Netherlands is a supportive investment of Senseo Company.

Passive investment is when a large corporation specializes in buying and selling of firms or when small firms invest in real estates (Dunning & Lundan, 2008, p.76). In this case, the purchases have more the feature of portfolio management. An example is Berkshire Hathaway FDI in which they specialize in purchasing underperforming companies and resells them later.

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