7. Why is FDI important ? Firms want a presence in foreign markets Firms want control over growth of these foreign markets To gain first mover advantages To ward off competitors To determine locations, advertising and other related strategic decisions in the firm’s interest
8. Trends in FDI Flow and stock increased in the last 30 years In spite of decline of trade barriers, FDI has grown more rapidly than world trade because: Businesses fear protectionist pressures FDI is seen as a way of circumventing trade barriers Dramatic political and economic changes in many parts of the world Globalization of the world economy has raised the vision of firms who now see the entire world as their market
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10. FDI Flow (from all countries): from ‘92 to ‘04 up 260%, compared to trade up 100% and world output up 32%
16. FDI trends: 2001-2002 The value of FDI slumped almost 60 percent in 2001-2002 Slowdown in world economy Heightened geopolitical uncertainty since September 11, 2001 Bursting of the stock market bubble in the US
22. Horizontal FDI: Investment in the same industry abroad as a firm operates in at home Vertical FDI: Backward Vertical FDI: investment in an industry abroad that provides inputs for the firm’s domestic production processes eg: oil refining, Royal Dutch/shell, British petroleum etc.) Forward Vertical FDI: investment in which an industry abroad sells the outputs of the firm’s domestic production processes eg: Volkswagon in U.S. Types of FDI
24. Types of FDI: By Motive Resources seeking - looking for resources at a lower real cost. Market seeking - secure market share and sales growth in target foreign market. Efficiency seeking - seeks to establish efficient structure through useful factors, cultures, policies, or markets. Strategic asset seeking - seeks to acquire assets in foreign firms that promote corporate long term objectives.
37. Decision framework Low How high are transportation costs and tariffs? Export High No Is know-how amenable to licensing? FDI Yes Is tight control over foreign operation required? Yes FDI No No Can know-how be protected by licensing contract? FDI Yes Then license
38. Factors affecting investment decisions Costs Barriers Control Incentives like tax concessions, subsidies etc Location advantages Essential Criteria Access to skilled and educated workforce Proximity to world class research institutions Quality of life Access to venture capital
39. Factors affecting investment decisions Important Criteria Reasonable costs of doing business Established technology presence Available bandwidth and adequate infrastructure Favorable business climate and regulatory environment Desirable Criteria Presence of suppliers and partners Availability of community incentives
41. The Radical View Marxist view: MNE’s exploit less-developed host countries Extract profits Give nothing of value in exchange Instrument of domination, not development Keep less-developed countries relatively backward and dependent on capitalist nations for investment, jobs, and technology
42. The Radical View By the end of the 1980s radical view was in retreat Collapse of communism Bad economic performance of countries that embraced the radical view Strong economic performance of some countries that embraced capitalism rather than the radical view
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44. Pragmatic Nationalism FDI has benefits and costs Allow FDI if benefits outweigh costs Block FDI that harms indigenous industry Encourage FDI that is in national interest Tax breaks Subsidies But who can predict which FDI is in national interest? Regulations open opportunity for favoritism
45. Pragmatic Nationalism Many of the most successful developing countries – past and present – followed a pragmatic nationalistic stance Japan South Korea China Economists note that Hong Kong, which followed the free marketapproach, was even more successful
46. The Benefits of FDI to Host countries Resource transfer effects Capital Technology Management Employment effects Effect on competition & economic growth
47. The Benefits of FDI to Host countries Balance of payment effects Initial capital inflows Import substitution Export of goods & services to other countries In a free market view Many economists argue that the benefits of FDI so outweigh the costs associated with pragmatic nationalism that it is misguided The best policy would be for countries to forgo all intervention in an MNE’s investment decisions
48. Costs of FDI to the Host Country Adverse effects on competition Adverse effects on balance of payment Outflow of earnings from foreign subsidiary to its parent company Imports of raw material results into adverse effect on current account Adverse effect on national sovereignty and Autonomy
49. Benefits of FDI to Home country Positive effect on Balance of payment due to inward flow of foreign earnings & demand of home-country exports of capital-equipments Employment effects due to demand of home country products MNE’s learn valuable skills from foreign markets that can be transferred back to the home country
50. Costs of FDI to Home countries Adverse effect on BOP account: Adverse effect on capital account due to outflow of capital Adverse effect on current account due to imports from low production locations in foreign countries Adverse effect on current account due to export substitution Reduced home country employment
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53. International institutions & the liberalization of FDI WTO (world trade organization) OECD (Organization for economic cooperation & development)
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