Quiz 15: Multinationals and Migration


Disagree. Industrialized countries do have large amounts of financial capital that they want to invest. Even if they want to invest part of this capital in other countries, this does not explain why they are the source of most foreign direct investment. If the goal is only to invest financial capital in other countries, then the easier way to do this is through portfolio investments in foreign stocks, bonds, and loans. Foreign direct investment also involves a transfer of technology, marketing skills, managerial capabilities, and other firm-specific assets to the foreign subsidiary, and these are often more important than the financial investment in the subsidiary. Industrialized countries are the source of most FDI because firms based in these countries have developed these intangible assets, which then serve as the base for successful FDI.

We can guess that there are two possible types of reasons. One is that Japan is not attractive as a host country, based on its economic and business characteristics. The second is that Japanese government policy artificially limits FDI into Japan. First, the low level of FDI into Japan could be the result of economic and business conditions. Foreign firms may find Japan a difficult place in which to establish a business, because Japanese practices and procedures are different and difficult to learn about. Cultural and language differences make foreign management more difficult and more prone to misunderstandings and mistakes. Foreign firms also may find that Japan is a relatively expensive place to run a business, because of the high cost of land, or the difficulty of hiring experienced skilled labor (given "lifetime employment" at established large Japanese companies). Second, the low level of FDI into Japan could be the result of Japanese government policies. Until the late 1960s to mid-1970s, Japanese government policies explicitly prevented direct investment into Japan. Since then, foreign firms may be deterred by more subtle governmental barriers, including the tendency of the Japanese government to find ways to favor its own firms. In addition, the Japanese government imposes a large amount of regulation which tends to deter entry into business by both new Japanese firms and foreign firms. Probably, both of these reasons are of some importance in explaining why Japan is host to rather little direct investment, but there is controversy over which one is more important.

a.Not FDI, assuming that the U.S. investor ends up owning less thaN10 percent of the outstanding shares of BMW. b.FDI. A flow of lending to a foreign affiliate that is more thaN10 percent owned by the U.S. firm providing the loan. c.FDI. Additional purchases of ownership of a foreign company by the U.S. investor that then owns more thaN10 percent of the foreign affiliate. d.The $100,000 is FDI, because the Brazilian affiliate is owned by the U.S. firm. The loan from the Brazilian bank is not FDI because it is not foreign, and because it is not direct (the Brazilian bank does not own equity in the Brazilian company).