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

Characteristics of MNCs Lots of $ Lots of power Lots to offer Transnationality= mobility Influence jobs growth potential Promote globalization Offer domestic/ global competition ¤

Where MNCs Are Product of post-WWII US hegemony Top MNC list Gross Corporate Product (GCP) Yearly total value of all goods & services revenues Top MNC list Top 500 80% GN Top GCP MNCs # 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 $317B U.S. top investor v. $128 B out of China (2014, p.6) Ex: China raised foreign ownership limit For finance, was 30% 51%; 2020- 100% For trade was 20%, now 30% Tesco buys into Star Bazaar Indian grocery chain 50% ownership 1st foreign-owned supermarket ¤

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 114/177 Bribes: 25/28 Lack infrastructure ↑ labor costs Red tape Licensing WB rank 120/189 *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 First in 1960s - Asia & Central America Light industry Set up maquilas / maquiladora as export processing zones (EPZs) in Central America Late 1970s –Africa and China In China, Special Economic Zones (SEZs) 4 in 1980; now 6 Model for others Russia, India, Vietnam EPZs = entice MNCs Over 3,000 in over 120 ¤

What do EPZs have to offer MNCs? Skilled labor Stable political environment Authoritarian regimes: Pros & cons Investment incentives, trade concessions Exemption from domestic laws Infrastructure Roads, power supplies, transport facilities, low cost or rent buildings Waive restrictions on foreign ownership Waive repatriation restrictions ¤

Africa’s FDI Challenges Maputo, Mozambique ↓Hong Kong

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 ¤