‘Reverse FDI’ is supported by International Trade Theory

Note: This was originally posted in a discussion as part of a Boston University Metropolitan College graduate-level course in International Business with Professor Marcus Goncalves.

The combination of increasing global competition, more open markets and technological advances are leading to increased foreign direct investment (“FDI”). Domestic growth has been fueled by foreign investment for centuries, and it is standard for developing countries to invest in developing countries. However, the two examples provided in this discussion topic provide a more intriguing reversal of traditional FDI. Both are examples of FDI by developing nations into developed nations. With an increasingly international business climate and growing economies of developing nations, this will likely be more common, especially as developing and emerging nations are rapidly increasing their contributions to FDI (Geringer et al, 2021).

Theoretical models support the idea of ‘reverse FDI’ or FDI from developing nations into developed nations. Vernon’s international product life cycle theory states that many products first produced in developed countries, such as the US, are eventually produced in less developed countries and imported to the countries where production initially began (Geringer et al, 2021). The development shift from developed to developing nations, coupled with the increasing maturation of the developing nations provides the theoretical opportunity for ‘reverse FDI’. The theory supports the idea of firms from developing nations acquiring their predecessors in developed countries and leveraging these subsidiaries for firmer footing in their respective markets.

This squares with Ricardo’s comparative advantage theory, where a nation exports products where it has an advantage or where it maximizes advantage and minimizes disadvantage. It also aligns Heckscher and Ohlin's resource endowments theory, where nations export products where they have an abundance of resources (Geringer et al, 2021). It is logical that over time products will shift to developing nations that are better positioned to produce and export them based upon comparative advantage and/or resource endowments.

Since the global financial crisis of 2008, China has increased FDI worldwide, but also specifically in Europe and the United States (Wenniges & Lohman, 2019). China is a great example of a developing nation with firms that purchase businesses through FDI in developed nations, including the US. In addition to the Smithfield example provided in this discussion topic, China's Lenovo expanded into the U.S. PC market by acquiring IBM's PC division (noted in the printable lecture for Module 1). China uses FDI as diplomacy (Duanmu & Urdinez, 2018), perhaps yet another example of how cultural differences affect international business (Geringer et al, 2021). Further, China has actively promoted FDI with its “Go Global” campaign, and this national support contributes to China’s FDI versus other developing nations (Szunomar, 2020).

Looking at the Lenovo example through the lens of Dunning’s Eclectic Paradigm Theory, shows that it is consistent with this theory, which thus also supports reverse FDI. There was an ownership advantage via technology and management, a location advantage in that Lenovo was seeking new territory and acquiring IBM’s PC division provided it, and an internalization advantage in that purchase made Lenovo a global firm versus a Chinese firm.

References

Duanmu, J., Urdinez, F. (2018, March). The dissuasive effect of U.S. political influence on Chinese FDI during the “Going Global” policy era. Business and politics. Vol.20 (1), p.38-69. Retrieved March 17, 2021 from: https://search-proquest-com.ezproxy.bu.edu/docview/2002133517?accountid=9676&pq-origsite=primo

Geringer, M., McNett, J., Ball, D. (2021). International Business, 2nd ed. New York: McGraw-Hill.

Szunomar, A. (2020). Emerging-market Multinational Enterprises in East Central Europe.

Cham: Palgrave Macmillan. Retrieved March 17, 2021 from: https://link-springer-com.ezproxy.bu.edu/book/10.1007/978-3-030-55165-0#toc

Wenniges, T., Lohman, W. (2019). Chinese FDI in the EU and the US: Simple Rules for Turbulent Times. Singapore: Palgrave Macmillan. Retrieved March 16, 2021 from: https://link-springer-com.ezproxy.bu.edu/chapter/10.1007/978-981-13-6071-8_1