foreign investments

Foreign InvestmentsForeign Investments

Types of InvestmentTypes of Investment

FDIFDI FPIFPI

Advantages and Disadvantages of Advantages and Disadvantages of FDIFDI

AdvantagesAdvantages ExpertiseExpertise Foreign ExchangeForeign Exchange Job Creation Job Creation Increase of Increase of

Exports/ decrease Exports/ decrease in Importsin Imports

DisadvantagesDisadvantages MonopolyMonopoly National National

SovereigntySovereignty ExploitationExploitation Transfer PricingTransfer Pricing Threat to Small Threat to Small

businessbusiness

Foreign Direct InvestmentForeign Direct Investment

The surge in flows of FDI in the last 2 decades The surge in flows of FDI in the last 2 decades has had important effects on global value has had important effects on global value chains of production, on developing countries chains of production, on developing countries (DCs), and on attitudes towards such (DCs), and on attitudes towards such investment.investment.

Attitudes towards FDI and experiences with it Attitudes towards FDI and experiences with it in DCs affect host economy policies, which in in DCs affect host economy policies, which in turn affect subsequent experiences.turn affect subsequent experiences.

Both FDI policies and experiences, as well as Both FDI policies and experiences, as well as their perceived feedback, influence attitudes their perceived feedback, influence attitudes toward negotiating a multilateral framework toward negotiating a multilateral framework for investment (MFI).for investment (MFI).

Recent Trends and EffectsRecent Trends and Effects

Very rapid growth in global FDI Very rapid growth in global FDI 1999-2007.1999-2007.

Especially rapid growth (general Especially rapid growth (general opening up) and ( Asian crisis opening up) and ( Asian crisis LatAm privatizations).LatAm privatizations).

In most years, FDI grew faster In most years, FDI grew faster than global trade and GDP.than global trade and GDP.

Index of World Exports, FDI Outflows, Index of World Exports, FDI Outflows, and Output, 1990-2002 (1990=100)and Output, 1990-2002 (1990=100)

0

100

200

300

400

500

600

FDI Outflows Exports GDP

Source: Exports & GDP – WEO Database; FDI Outflows – UNCTAD FDI database.

FDI Top 10 in FDI Top 10 in Developing AsiaDeveloping AsiaAverage Annual Total Inflows, $ billion

Rank Host economy1998-2000

Rank Host economy2000-2002

1 China, People’s Rep of 14.3 1 China, People’s Rep of 41.6

2 Malaysia 5.0 2 Hong Kong, China 33.8

3 Hong Kong, China 3.9 3 Korea, Rep. of 8.0

4 Singapore 3.9 4 Singapore 7.9

5 Thailand 2.0 5 Thailand 3.8

6 Indonesia 1.8 6 Malaysia 3.5

7 Taipei,China 1.0 7 Taipei,China 2.7

8 Philippines 0.9 8 India 2.4

9 Korea, Rep. of 0.8 9 Viet Nam 1.5

10 Kazakhstan 0.7 10 Kazakhstan 1.3

Total Asia-Pacific 36.0 Total Asia-Pacific 108.5

(% of World Total) 19.3 (% of World Total) 9.9

Domestic Policy ChangesDomestic Policy Changes

Host country policy framework plays a Host country policy framework plays a critical role in determining the effects of critical role in determining the effects of FDI on a recipient country.FDI on a recipient country.

A key argument concerns the nexus A key argument concerns the nexus between trade and FDI liberalization. between trade and FDI liberalization. Trade reform alters the incentive of Trade reform alters the incentive of production for the domestic market production for the domestic market relative to exports, resulting in a relative to exports, resulting in a fundamental shift in the behaviour of fundamental shift in the behaviour of MNEs and in the FDI cost-benefit calculus MNEs and in the FDI cost-benefit calculus from ‘rent-seeking’ to ‘efficiency-seeking’ from ‘rent-seeking’ to ‘efficiency-seeking’ FDI.FDI.

FDI RegimesFDI Regimes Dual policy regimesDual policy regimes FDI regimes have become more open but considerable selectivity FDI regimes have become more open but considerable selectivity

across sectors and firms. Typically a mix of both ‘rent-seeking’ across sectors and firms. Typically a mix of both ‘rent-seeking’ and ‘efficiency-seeking’ FDI, reflecting partial reform of trade and ‘efficiency-seeking’ FDI, reflecting partial reform of trade regimes, and the political economy of dispensing patronage, e.g.regimes, and the political economy of dispensing patronage, e.g.• FDI policy may differ between regions.FDI policy may differ between regions.• Large inter-industry differences in protection, and thus Large inter-industry differences in protection, and thus

incentives.incentives.• SOEs typically receive preferential treatment, especially in SOEs typically receive preferential treatment, especially in

PRC, India and Viet Nam, and their MNE joint venture PRC, India and Viet Nam, and their MNE joint venture partners.partners.

• Most countries offer fiscal or financial incentives. These vary Most countries offer fiscal or financial incentives. These vary by sales orientation, the technology introduced by the foreign by sales orientation, the technology introduced by the foreign investor, location of investment, and other factors.investor, location of investment, and other factors.

• The regulatory regime frequently offers more than one entry The regulatory regime frequently offers more than one entry option.option.

The Commercial The Commercial EnvironmentEnvironment

As economies open up, governments As economies open up, governments have to make the transition from have to make the transition from protectionist/regulatory regimes to an protectionist/regulatory regimes to an emphasis on promotion and efficiency. emphasis on promotion and efficiency.

The ‘three I’s’: incentives, The ‘three I’s’: incentives, infrastructure, and institutions.infrastructure, and institutions.

Note too that domestic investors are Note too that domestic investors are invariably the key players in any invariably the key players in any economy.economy.

THE RISE OF THE MULTINATIONAL CORPORATION

I. The MNCA. Definition

a company with production and distribution facilities in more than one country.


2. MNC supercedes theory:

a. mobility of factors

b. different costs/skills between nations

c. prime transmitter ofcompetitive forces


C. EVOLUTION OF THE MNC Reasons to Go Global:

1. raw materials2. more markets3. minimize costs of

production


1. RAW MATERIAL SEEKERSexploit markets in other countrieshistorically first to appearmodern-day counterpartsAnaconda CopperStandard Oil


2. MARKET SEEKERSproduce and sell in foreign marketsheavy foreign direct investorsrepresentative firms:

IBMNestleLevi Strauss


3. COST MINIMIZERSseek lower-cost production abroadmotive: to remain cost competitiverepresentative firms:

Texas InstrumentsAtariZenith


D. THE MNC: A BEHAVIORAL VIEW1. State of mind:committed to producing,undertaking investment and marketing, and financing globally.


E. THE GLOBAL MANAGER1. Understands political and economic differences;

2. Searches for most cost- effective suppliers;3. Evaluates changes on

value of the firm.

MNCs

I. THE MULTINATIONAL FINANCIAL SYSTEM

A. Main Objective of MNC: Maximize shareholder wealthB. Other Objectives Reflect Ability

to Link:Via Affiliate transfer mechanisms

C. Mode of Transfer Reflects freedom to select a

variety of financial channels.D. Timing Flexibility

Most MNC have some flexibility

in timing of fund flows.

E. Value The ability to avoid

national taxes has led to controversy.

II. FUNCTIONS OF FINANCIAL MANAGEMENT

A. Two Basic Functions:

1. Financing2. Investing

Issues

Transfer Pricing ExploitationCreates Monopoly

B. Additional Factors Facing the MNC Executive

1. Political risk2. Economic risk

foreign investments

Documents