Strategic Foreign Direct Investment

This chapter examines foreign direct investment by multinational firms in the modern world economy, which is characterised by increasing integration across national markets. This process — often termed ‘globalisation’ — has radically altered firms’ approaches to direct foreign investment. The following section introduces a simple model of the world economy which traces the effects of different degrees of integration across various types of markets and examines the consequences for direct foreign investment, paying particular attention to cross-investment in the ‘Triad’ of North America, Europe and Japan. The next section examines strategic foreign direct investment and its crucial relationships with trade and GDP. This section introduces some key data on the role of foreign direct investment in world economic activity in both the long run and short run. It demonstrates the crucial role of foreign direct investment in achieving the firm’s strategic objectives, be they market access, control of key inputs or cost reduction. Then relationships among the Triad are examined in detail. International strategic alliances are introduced and analysed in a separate section and the conclusion brings various elements together.