International Investment & Financial Flows

Investment & Financial Flows How $ is invested MNCs Where $ is invested Evolution of MNCs

How Money is Invested 2 ways 1) Foreign Portfolio Investment (FPI) Stocks, bonds, etc. Earn dividends Short-term commitment 2) Foreign Direct Investment (FDI) MNCs Control assets $$$ Policies, locations, products, product volume, personnel, etc. Subsidiary branches and/or joint ventures Long-term commitment Higher yield than FPI ¤

MNCs

About MNCs Characteristics Product of post-WWII US hegemony Gross Corporate Product (GCP) Yearly total value of all goods & services revenues Top MNC list Top 500 80% GN Top GCP MNCs Top brands # of MNCs outside GN, EEs= 0 ¤ Rank Country # of top 500 MNCs 1 US 128 2 China 95 3 Japan 68 4 (tie) France 32 Germany http://money.cnn.com/magazines/fortune/global500/2012/countries/Australia.html?iid=top3

Where the Money Flows

Where FDI Goes? http://worldinvestmentreport.unctad.org/ 2017

Where FDI Goes? FDI inflow FDI outflow China at $243 B -$114 to HK U.S. with $107 B (#2) All of Africa = $55 B (2015) FDI outflow China $317B - U.S. top investor v. $128 B out of China (2014, p.6) China raised foreign ownership limit For finance, was 30% 51%; 2020- 100% For trade was 20%, now 30% India Tesco buys into Star Bazaar Indian grocery chain 50% ownership 1st foreign-owned supermarket Walmart’s majority stake in Flipkart, largest online retailer ¤

http://www.ritholtz.com/blog/2012/08/stratfor-chinese-investments-in-africa/

MNCs in Indonesia What is the investment appeal of Indonesia? Surging domestic market Auto sales Indonesia = biggest SE Asia market Large population Sales in India, China on decline 2008 global recession Investment-grade credit rating Young labor force = new consumers New interest from US, EU ¤

MNCs in Indonesia What issues do MNCs encounter? Regulatory issues Corruption Ranked 114 (2016); 76 (2017) Lack infrastructure ↑ labor costs Red tape Licensing WB rank 120 (2016); 72 (2017) *These factors slow growth 6 % v. potential 10% ¤

MNCs in Cambodia Why is Cambodia attracting MNCs? Limit reliance on China Increased wages ↓ demand for factory jobs in China Shrinking labor force Aging population Low-tech labor Textiles ¤

MNCs in Cambodia What challenges do MNCs face in Cambodia? < of all that China can Work force Consumer potential Electricity access Limitations  ↓ pop. higher wages ¤

MNCs in Cambodia How do Cambodians benefit from FDI? Wages Benefits Medical, accident insurance, education allowances, free lunches Greater leverage Strikes in Taiwanese v. Japanese-owned factories Housing ¤

Evolution of MNC Production

Historical Advantages of GN Dutch East India Company Precursor of MNCs Others followed (British, French) US pushed FDI after WWII Needed ally growth GS resisted If you’re a GS leader, why would you resist? ¤

GS Resistance to MNCs Initial resistance by GS Newly independent Little leverage Unable to collectively act Feared exploitation Lacked skilled workers Repatriation of earnings Tried unilateral development ¤

GS Embraces MNCs Set up export processing zones (EPZs) to entice MNCs First in 1960s - Asia & Central America Light industry Late 1970s –Africa and China In China, Special Economic Zones (SEZs) 4 in 1980; now 6 Model for others Russia, India, Vietnam 3,000+ in over 120 Benefits ¤

GS Embraces MNCs: Consequences Aldi & Banana Producers Leverage Over GS v. Irish milk producers Defies sustainability reputation Onus put on producers Pay to labor, food production Walmart in India Growing market Deep pockets India lacking competition Regulations Protect domestic companies ¤

Africa’s FDI Challenges Maputo, Mozambique ↓ Red Sea port, Jordan

Africa’s FDI Challenges Issues Inadequate infrastructure Intra-Africa trade- 11% Asia- 50% Europe- 70% Corruption Political instability Lack of competition Poor management ¤

MNC Production Strategies Outsourcing and offshoring Foreign party New int’l division of labor Issues Suppliers become competitors Intra-firm trading Race to the bottom Diffuses responsibility Reshoring Return to home country GE in U.S. ¤ Rana Plaza disaster, April 2013

Recap How $ is invested What impacts FDI decisions GN early advanced = advantage EPZs/SEZ Outsourcing/offshoring issues Reshoring ¤

Soybeans

Increasing Demand Increasing population Demand for meat, esp. in EEs Analog products Biofuel Uses in industrial production ¤ http://www.themorningsun.com/article/MS/20161007/NEWS/161009730

Brazil as Good FDI Destination Natural resources Arable land, labor supply, consumer mkt Tropical climate Multiple crops/yr= higher yield Demand for ag inputs Room for growth in food sector ¤ http://www.cherrycrestfarm.com/The-Amazing-Fun-Time-Blog/8-Fun-Facts-About- Soybeans/

Brazil as Good FDI Destination (cont.) Stable democracy < fear of nationalization Transparency Ease of doing business Financial incentives Fiscal policies, tax incentives, low-risk US, China access to EU mkt Lax sewage laws ¤ http://www.cherrycrestfarm.com/The-Amazing-Fun-Time-Blog/8-Fun- Facts-About-Soybeans/

Brazil v. US Infrastructure Streamlined v. scattered ¤ https://qz.com/124693/which-country-will-be-crowned-this-years-soybean-king-ask-mother-nature-and-china/

Subsidies Interfere with trade Give GN advantage MNCs benefit most US, EU, Japan Crop insurance MNCs benefit most Overproduction in U.S. ↑ value-added foods  changed diets ¤

Concerns re: Brazil’s ↑ Soy Production Environmental Amazon v. cerrados BR’s changes in 1990s MNCs play to consumers GMOs Land ownership issues Leasing Outright sale Land rights/reform ¤ https://www.extension.iastate.edu/agdm/articles/leibold/LeibSept01.htm

Recap: Soy and II ¤ What FDI involves What MNCs look for as good destinations Incentives states offer Why EEs draw more FDI Brazil Big economy Big population, esp. young ↑ consumer class Resource rich ¤