GLOBAL TRADE

FOREIGN DIRECT INVESTMENT

AND INTRA-FIRM TRADE
An International Business Investment
 Value Chains
Research,
development • Task 1
, and design

Is a series of value-added
process involved in the Fabrication • Task 2

production of any good or

service.
Assembly • Task 3
and Testing

Final
Incoporation
Global Production Networks
 FIRM-SPECIFIC
ASSETS

Refers to tangible and intangible

resources that the firm owns and that
 TANGIBLE
ASSETS
Such as access to silicon
and other advanced
materials.
 INTANGIBLE
ASSETS
Specialized knowledge, patented
products or processes, organizational
abilities or brand distinctiveness and
loyalty.
 MARKET
FAILURE
There has difficulty in selling
its firm-specific assets in
contractual agreements
DISSEMINATION
RISK

It refers to the extent to which a firm’s know-how

will be expropriated by a contractual partner.
FOREIGN DIRECT INVESTMENT

It is an investment from an
entity in one country into a
business or corporation in
another country with the
intention of establishing a
lasting interest.
 GLOBAL TRADE

LASTING INTEREST
A lasting interest is established when
an investor obtains at least 10% of the
voting power in the firm.
 Foreign Portfolio
Investment
es tmen
t
Companies simply put their
Inv
gn Di rec
t
money into assets in
rei
Fo
another country. Investors
Foreign Direct passively hold securities
Investment from a foreign country.

Foreign companies
are directly involved with
day-to-day operations in the
other country. The key to Fo Inv
re e s
ig tm

foreign direct investment is

n
Po en
rtf t
ol
the element of control.
io
 GLOBAL TRADE

ELEMENT OF CONTROL
Control represents the intent to
actively manage and influence a
foreign firm’s operations.
 Foreign Portfolio
Investment

ACTIVE Companies simply put their

t
men
es t
Inv
gn Di rec
t
money into assets in
rei
Fo
another country. Investors
Foreign Direct passively hold securities
Investment from a foreign country.

Foreign companies
are directly involved with
day-to-day operations in the
PASSIVE
other country. The key to Fo Inv
re e s
ig tm

foreign direct investment is

n
Po en
rtf t
ol
the element of control.
io
 FOREIGN DIRECT INVESTMENT
Foreign direct investment is
critical for developing and
emerging market countries.
Their companies need the
multinationals' funding and
expertise to expand their
international sales. Their
countries need private
investment in infrastructure,
energy, and water to
increase jobs and wages.
 TYPES OF FDI
HORIZONTAL VERTICAL
The business conducts the The business conducts
same activities but in a VE different activities abroad but
RT
foreign country. I C these activities are still related
AL
to the main business.

01
L

02
TA
N
O
IZ
R
O
PLATFORM CONGLOMERATE
H
The output from the foreign A business acquires an
operations is exported to a unrelated business in a

E
AT
ER
third country. This is also foreign country.

M
LO
referred to as export-

G
04

N
O
platform FDI. PL

C
AT

03
F O
R
M
PLATFORM
 ADVANTAGES DISADVANTAGES

1. Market diversification 1. Displacement of local

2. Development of human businesses
capital 2. Profit repatriation
3. Increase in employment
4. Access to management
expertise,
skills, and technology
INTRA-FIRM TRADE

It is a trade between parent

companies of a compiling
country with their affiliates
abroad and trade of affiliates
under foreign control in this
compiling country with their
foreign parent group.
 INTRA-FIRM TRADE
IN SIMPLEST TERM:

International trade conducted

within a firm, as when a
subsidiary of a company
exports to or imports from
another subsidiary or the
parent company in a different
country.
 INTRA-FIRM TRADE
Definition of terms:
Parent company – a Subsidiary company – is a
company that owns enough company owned and
voting stock in another firm to controlled by another
control management and company.
operation by influencing or
electing its board of directors.
COUNTRY A COUNTRY B

IMPORTS

PARENT
COMPANY
EXPORTS
SUBSIDIARY
B
SUBSIDIARY
A
IMPORTS
Industry and Firm Dimensions of Trade
Firm Dimension
Industry Inter-Firm Intra-Firm
Dimension
Inter-industry Trade that takes Trade that takes
place between two place between two
different industries different industries
and two different and within a single
firms. firm.
Intra-industry Type of trade that Trade that takes
takes place within a place within a single
single industry and industry and within
between two a single firm.
different firms.
The OLI Framework
Symbol Meaning Contribution
O Ownership Advantage Explains how a firm’s
tangible and intangible
assets help it to
overcome the extra
costs of doing business
internationally.
L Location Advantage Explains why a home-
based MNE chooses to
produce in a foreign
country rather than in its
home country.
I Internalization Explains why a home-
Advantage based MNE chooses
FDI rather than licensing
to achieve production in
a foreign country.