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What is the impact of technology on foreign direct investment?

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Foreign direct investment (FDI) is the process of acquiring or establishing a controlling interest in a business or an asset in another country. FDI can have significant effects on the economic development, productivity, employment, and innovation of both the host and the home countries. Technology is a key factor that influences the decisions, strategies, and outcomes of FDI. In this article, you will learn how technology affects FDI in four main aspects: the motives, the modes, the locations, and the spillovers.

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Dr. Arnab Chakraborty

Associate Professor - Marketing & Digital Marketing | Area Chair - Digital Marketing at SLM, Manav Rachna International…

1 Motives of FDI

Technology can influence the motives of FDI, which are the reasons why firms invest abroad. There are two main types of motives: market-seeking and efficiency-seeking. Market-seeking FDI aims to access new or larger markets, increase sales, and reduce trade barriers. Technology can enable market-seeking FDI by creating new products or services, enhancing quality or differentiation, and facilitating distribution or communication. Efficiency-seeking FDI aims to reduce costs, increase productivity, and exploit comparative advantages. Technology can enable efficiency-seeking FDI by improving production processes, enabling outsourcing or offshoring, and creating economies of scale or scope.

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Dr. Arnab Chakraborty

Associate Professor - Marketing & Digital Marketing | Area Chair - Digital Marketing at SLM, Manav Rachna International Institute of Research & Studies | Certified Digital Marketer | Academic Resource Person | Trainer
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Technology helps develop the ecosystem that is conducive for businesses. It eventually attracts the global entrepreneurs and business leaders to invest in that ecosystem for reaping the benefits. Thus, an increased level of FDI in that economy will be there.

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2 Modes of FDI

Technology can influence the modes of FDI, which are the ways how firms invest abroad. There are two main modes of FDI: greenfield and merger and acquisition (M&A). Greenfield FDI involves setting up a new operation or facility in another country. M&A FDI involves buying or merging with an existing firm or asset in another country. Technology can affect the choice of mode by determining the availability, cost, and risk of acquiring or transferring knowledge, capabilities, and assets. For example, greenfield FDI may be preferred when the technology is proprietary, complex, or tacit, while M&A FDI may be preferred when the technology is standard, simple, or codified.

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Jorge Ferreira, CFA

Investimentos | Concess?o de crédito | Restrutura??o de Crédito
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O Investimento Estrangeiro Direto (IED) greenfield envolve a constru??o ou desenvolvimento de novas instala??es empresariais em um país estrangeiro. Diferentemente de fus?es e aquisi??es, o greenfield implica na cria??o de opera??es completamente novas. Esse tipo de IED oferece benefícios, como a transferência de tecnologia e a gera??o de empregos locais. No entanto, também apresenta desafios, como a necessidade de compreender e adaptar-se às práticas de negócios locais, regulamenta??es e condi??es de mercado, tornando essencial uma análise criteriosa do ambiente de investimento antes da tomada de decis?es.

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3 Locations of FDI

Technology can influence the locations of FDI, which are the countries or regions where firms invest abroad. The location choice depends on various factors, such as market size, labor cost, infrastructure, institutions, and policies. Technology can affect the location choice by changing the relative attractiveness of different factors, creating new opportunities or challenges, and altering the trade-offs or complementarities between factors. For example, technology can make market size more important by increasing demand or reducing distance, labor cost less important by automating or outsourcing tasks, or infrastructure more important by requiring reliable or fast connectivity.

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Jorge Ferreira, CFA

Investimentos | Concess?o de crédito | Restrutura??o de Crédito
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O nível de tecnologia de um país desempenha um papel crucial na atra??o de Investimento Estrangeiro Direto (IED). Na??es com infraestrutura tecnológica avan?ada e m?o de obra qualificada tendem a ser mais atrativas para investidores estrangeiros, pois oferecem vantagens competitivas e inova??es. Ambientes regulatórios que favorecem o desenvolvimento tecnológico e investimentos em pesquisa e desenvolvimento aumentam a atratividade, influenciando positivamente a decis?o de empresas estrangeiras em expandir suas opera??es. Portanto, a capacidade de um país de adotar e incorporar tecnologias de ponta é um fator determinante no estímulo ao Investimento Estrangeiro Direto.

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4 Spillovers of FDI

Technology can influence the spillovers of FDI, which are the positive or negative effects of FDI on the host or home countries beyond the direct impact on the investing firms. Spillovers can occur through various channels, such as competition, cooperation, imitation, learning, or innovation. Technology can affect the spillovers by determining the potential, direction, and magnitude of knowledge diffusion, technology transfer, and productivity improvement. For example, technology can increase the potential spillovers by creating more value or novelty, change the direction spillovers by enhancing backward or forward linkages, or alter the magnitude of spillovers by increasing or decreasing the gap or similarity between firms.

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5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What is the impact of technology on foreign direct investment?

1

2

3

4

5

1 Motives of FDI

2 Modes of FDI

3 Locations of FDI

4 Spillovers of FDI

5 Here’s what else to consider

Economics

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What is the impact of technology on foreign direct investment?

1

2

3

4

5

1 Motives of FDI

2 Modes of FDI

3 Locations of FDI

4 Spillovers of FDI

5 Here’s what else to consider

Economics

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