Foreign Direct Investment BY: Wendy Chang and Serene Lee

Background Information FDI: investments by a firm based in one country and establishes its presence in another country by providing long term investment  Corporation: a type of firm composed of legal entity that is separate from the individuals who own it Multinational Corporation (MNC): A firm that undertakes foreign direct investment Outflows of FDI: The flow of FDI out of a country  Inflow of FDI: The flow of FDI into a country Outflows of FDI: This would mean Canadian companies buying property and/or setting up operations in another country 

History MNCs – active since the middle of 18th century Post 1950s: grew significance 20th century: FDI originated from developed countries, also directed towards developed countries US Multinationals --> Europe 1980s: LEDCs – rise in share of total FDI inflows (almost 50% of total annual FDI inflows) Headquarters of MNCs: EU, US and Japan 1990: 10% of total MNCs had headquarters in developing countries 2009: share rose to 25%

Why MNCs expand into LEDCs Increase sales and revenues Bypass trade barriers  Lower costs of production  Use locally produced raw materials Further their activities in natural resources extraction 1. Some LEDCs have large or rapidly growing market such as China, India, and countries in Latin America, this provides large increase in sales revenues. Firms located there can more easily capture a market share and save on transportation costs 2.By producing countries with trade barriers, they can avoid these trade barriers and have free access to local markets  3.Labor costs take up a large portion of total production costs; LEDCs generally have lower labor costs than MEDC. This is why the US has multinational corporations operating in Mexico 4.Most LEDCs are rich in natural resources; when a MNC needs raw materials(natural resources)it is less costly to obtain them locally than to import them due to transportation 5. Some MNCs specialize in the extraction of natural resources; therefore, those MNCs would want to locate in resource-rich countries.

Growth of Importance of MNCs International trade  Globalization  Achieve profit maximization through EoS Growth of powerful economic blocs Advances in communications and information technology

Characteristics of LEDCs that attract MNCs Political stability and political institutions A stable macroeconomics environment An institutional environment that favors FDI Liberal (free market) trade policy Large markets Rapid economic growth and expectations of continued rapid growth Well functioning infrastructure A well-educated labor force Ensures a stable political environment Low inflation, stable currency, acceptable levels of foreign debt, absence of major balance of payments problems Freedom to repatriate profits (send profits back to home country), Freedom to engage in foreign exchange transactions (no exchange controls, they can import needed input without restrictions), favorable tax rules, well-established property rights and rules that minimize the risk of nationalism With an emphasis on exports That will help expand theirs To expect that their market will grow too Including transportation and communications that will facilitate imports and exports

Main Benefits Eliminate monopoly industries Inject money to the local economy Training and education

Issues of FDI Environmental degradation The ability to influence government policies and use government resources  Local industries  1.MNCs often pursue activities that cause serious environmental degradation. They can engage in activities that cause serious environmental hard  One of the greatest disasters caused by MNCs involved an explosion in a Union Carbide plant in India 1984 that killed more than 20,000 people and left 100,000 people with serious and permanent health problems. It's estimated that 80%of the greenhouse gases emissions are caused substances produced by MNCs 2. . to build infrastructure needed by MNCs rather than use the government resources for poverty alleviation.To attract MNCs, the LEDCs usually build infrastructure and to build those, they may need to sacrifice opportunities for merit goods such as clean water, sanitation,education and health care. Since LEDCs are large,it gives them economic and political power that they can use to influence the governments to pursue in policies that are in their own interest instead of the country's.such as weak labor protection laws(lower costs of production), weak environmental regulations. The LEDC will want to pursue in the interest of MNCs to attract them 3. The operation of MNCs sometimes forces competing firms to go out of business,and causes infant industries to fail to compete due to their large size. This will create umemployment locally 

FDI Overall Ranking (2015) - From Wikipedia

Success and Failure Stories: China

Success: KFC in China (2015) http://themarketmogul.com/yum-brands-story-success-china/  https://www.slideshare.net/cedricbrusselmans/how-can-foreign-companies-enter-china-successfully-lu-rui-co  Might help

Failure: Beijing Jeep in China (How and Why?) 1979: AMC + CNAIC. = joint venture 1983: AMC received 31% of the shares, Beijing Automobile Works (BAW) had 69%  1995, Beijing Jeep manufactured 32,000 vehicles, increased investment in Chinese market to USD 400 million Competition from another company, Volkswagen, brought an end to this early success.  Losses from 1998 to 2002 Unable to use foreign currency to purchase imported parts Quality of the manufactured Jeeps was often feeble, costs increased 

Overall Effectiveness of the Development Strategy Employment  Balance of payments Technical skills, management skills and technology Tax revenues Local Industries  Economic Growth Most effective when home country requires advanced technologies from high-income countries ensure local industries are also competitive To support our opinion: Although they provide employment for locals in the LEDCs (host country), MNCs may not improve local technical skills. No education/training for workers. Multinational corporations are usually export oriented, country’s exports are expected to increase (helps current account deficit and the balance of payments). However, MNCs also engage in activities that result in foreign exchange outflows: repatriation of profits (profits sent back to their country) or because imports of raw material.  MNCs bring technical and managerial expertise and new production technologies that the local labor force and businesses can learn and adopt, leads to technical improvements and improvements in human capital. But Critics argue that MNCs influence on the development of local skills is very small. The link between local economy and MNCs are limited meaning local workers wouldn't’t receive a lot of learning opportunities  MNCs are also taxed by the government; contribute in increase of tax revenues but they often enjoy tax privileges and benefits. Also they pay less due to transfer pricing. This lowers their stated profits. They can claim that they are spending more on the inputs from their affiliates abroad and their profits appear lower than their true profits. The amount of tax paid is in percentage of profit. Lower profits mean lower taxes MNCs may buy local goods and services for their factors of production, this promotes growth to local industries; however, the operation of MNCs often force local firms to go out of business and since the MNCs are large corporations, the local infant industries cannot compete with them.  Increased levels of investment improved technology, increases in human capital, promotion of local industries and tax revenues lead to higher economic growth; however all of those positive effects are impacted by other factors. 

By: Wendy Chang & Serene Lee Thank you! By: Wendy Chang & Serene Lee

Works Cited Chloe Curtis. 2017. Yum! Brands: A Story of Success In China - The Market Mogul. [ONLINE] Available at:/. [Accessed 07 March 2017].   Role of FDI - introduction. 2017. Role of FDI - introduction. [ONLINE] Available at: textbook.stpauls.br/development/page_129.htm. [Accessed 07 March 2017]. Abella, Alfonso, Antonio Bellver, and Cedric Brusselmans. "How Can Foreign Companies Enter China Successfully." LinkedIn SlideShare. LinkedIn Corporation, 06 Oct. 2012. Web. 06 Mar. 2017.  Curtis, Chloe. "Yum! Brands: A Story Of Success In China." The Market Mogul. The Market Mogul. Web. 7 Mar. 2017. Foreign Direct Investment. Foreign Direct Investment. YouTube, 2015. Web. 7 Mar. 2017. FEIJTER, TYCHO DE. Spotted in China: Beijing-Jeep 2500. Digital image. Car News China. CarNewsChina.com, 9 Aug. 2012. Web. 7 Mar. 2017. Investopedia.com. "Foreign Direct Investment." Investopedia. Investopedia, 25 July 2014. Web. 06 Mar. 2017. Julie, Makinen. First KFC Branch in China. Digital image. Los Angeles Times. Los Angeles Times, 18 July 2016. Web. 7 Mar. 2017. "List of Countries by Received FDI." Wikipedia. Wikimedia Foundation, 05 Mar. 2017. Web. 06 Mar. 2017. "Positive and Negative Impact of FDI." My Essay Point. My Essay Point, 21 June 2016. Web. 06 Mar. 2017. Simone, Erin. "Multinational Corporations." Emaze Presentations. Emaze Presentations. Web. 06 Mar. 2017. Tiller, John Birchall and Henry. "Development Economics." Growth of Importance of MNCs in Recent Decades. RCB. Web. 06 Mar. 2017. How can foreign companies enter China successfully. 2017. How can foreign companies enter China successfully. [ONLINE] Available at: www.slideshare.net/cedricbrusselmans/how-can-foreign-companies-enter-china-successfully-lu-rui-co.com. [Accessed 07 March 2017] My Essay Point. 2017. Positive and negative impact of FDI | My Essay Point. [ONLINE] Available at:. [Accessed 07 March 2017] Tiller, John Birchall and Henry. "Development Economics." Growth of Importance of MNCs in Recent Decades. RCB. Web. 06 Mar. 2017. IB Study. 2017. IB Study. [ONLINE] Available at: ibstudy.wixsite.com/ibeconomics/41-economic-development. [Accessed 07 March 2017]. Tiller, John Birchall and Henry. "Development Economics." The benefits of MNCs. RCB. Web. 06 Mar. 2017.

IF THERE IS EXTRA TIME – Activity #2 Get into your groups, then grab a piece of paper/whiteboard & markers (if available). 60 seconds per question! Winner gets something from the Business Club... (we'll tell you what the prize is later... surprise :])

Question #1 List 3 advantages of MNCs.

Question #2 Why are LEDCs attractive for investment? Give 2 main reasons.

Question #3 Are MNCs usually good for LEDCs? Why or why not?

If there is a tie... Tie-Breaker Which country is leading (#1) receiving in FDI?