Foreign Versus Domestic Firms in the UK - Dissertation Example

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Summary

This paper will analyze the extent to which the higher labor productivity in multinational enterprises firms might be explained by the fact that they employ more physical or more capital per unit of labor and to see whether the foreign-domestic productivity gap is as large in the manufacturing sectors…

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Subject: Macro & Microeconomics
Type: Dissertation
Level: Undergraduate
Pages: 61 (15250 words)
Downloads: 2
Author: ekonopelski

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Foreign Direct Investment (FDI) according to Moosa (2002) has many, varied definitions. In general, however, it can best be defined by its distinguishing feature compared to other types of international investing is: “the element of control over management policy and decisions” (p. 2) which further implies that “some degree of discretionary decision-making by the investor is present in management policies and strategy” (p. 2). There are three classifications of FDI: horizontal, vertical and conglomerate.

Understanding the three types becomes necessary to understand the potential benefits and liabilities from both the source and the host country’s perspectives. In order to make or offer the same service or goods overseas within a new market or territory requires the investor to partake in horizontal FDI. According to Moosa (2002), there are two types of vertical FDI. Firstly, backward vertical which is explained when the FDI opens operations in the host country to acquire the raw materials needed for manufacturing.

Forward Vertical FDI is explained when the FDI purchases in the host company to get closer to the consumer by acquiring distribution centers in the host country. The last type is conglomerate FDI which is a combination of horizontal and vertical FDI. When viewed through the eyes of the host country, not the FDI originating the objectives or types of FDI differ from this alternate perspective. According to Moosa (2002), the three types of FDI from the host country perspective include: “import-substituting FDI, export-increasing FDI and government-initiated FDI” (p. 5). In brief, import-substituting FDI equates to the manufacture of products or goods within the host country that were once imported from the FDI’s country of origin.

However, Moosa (2002) notes that whether this, in fact, occurs is highly dependent upon the market share within the host country, any trade barriers/tariffs in place and shipping and/or transportation costs.

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