Outward FDI Trends: Comparing the United States, Europe, China and Japan

FDI: definition and purpose
“Foreign direct investment (FDI) is defined as an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate).
FDI implies that the investor exerts a significant degree of influence on the management of the enterprise resident in the other economy. Such investment involves both the initial transaction between the two entities and all subsequent transactions between them and among foreign affiliates, both incorporated and unincorporated” (UNCTAD, 2007, p. 245). The three components of FDI are: equity capital, reinvested earnings, and intra-company loans; at the international level the 10% of equity ownership and voting power is enough to qualify a foreign direct investment.
The advantage linked to FDI comes from the possibility to locate and to co-ordinate the activity of the firm in the best way; in other words FDI allow the firm to pursue the global optimization of its business. The theory of localization mirrors the general theory of international trade: the localization of each activity is often determined by the endowments of resources, or rather by transportation costs or trade barriers. For example the mining of aluminium has to be located where you can find bauxite and the fusion where energy is available at low costs; the producers of semiconductors have localized high skilled project activities in Massachusetts and California, while low skilled activities such as assembling in Ireland or Singapore; otherwise American car producers have localized the production of car destined to the European market in Europe to avoid transportation costs (KRUGMAN-OBSTFELD, 2007). On the other hand, the advantage coming from the brilliant co-ordination of activities is well explained by the theory of internalization according to firms which decide to make transactions inside themselves rather than turning to the market: this recalls the well known issue of vertical integration. For example technology transfer could not be possible when knowledge is not formalized but lies in a group of people within the firm: a way of avoiding this problem could be to directly obtain the rent coming from the possession of the technology by exploiting it abroad through the constitution of foreign affiliates (KRUGMAN-OBSTFELD, 2007).