Lesson 2: International Investment

Foreign Investment What is foreign investment? “Flows of capital from one nation to another in exchange for significant ownership stakes in domestic companies or other domestic assets.” (Investopia.com) Foreign investment is both a cause and effect of financial globalization! Finances more globally integrated More international investment choices

Four Categories of Foreign Investment 1) Commercial loans: bank loans issued to foreign businesses or governments 2) Official loans: development assistance that developed nations give to developing ones 3) Foreign Direct Investment: international investment in which the investor obtains a lasting interest in an enterprise in another country 4) Foreign Portfolio Investment: investments that are more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise

Why Companies Invest Overseas Market-seeking: new market, more people to buy the goods/services Resource-seeking: wants access to natural resources, such as oil or minerals Strategic Asset-seeking: wants access to foreign brainpower (knowledge) Efficiency-seeking: wants access to cheaper labor (for example) Call Center

Where Does Foreign Investment Take Place? Foreign investments mainly originate in developed countries and end up in developed countries. China, U.S. and India are top recipient countries of foreign direct investment U.S., Canada and Spain are top countries of origin for foreign direct investment

Foreign Direct Investment Net Flow

Why has Foreign Investment Increased Dramatically? Technology Lure of higher profit The end of the Cold War Financial liberalization Governments can actively promote inward foreign investment through economic policies such as favorable tax rates. It can restrict foreign investments through policies such as banning foreign investment in strategically important sectors.

Positive and Negative Effects of Foreign Investment Positive Negative Capital inflows Employment generations Production advantage (including technology transfer) Financial volatility Contagion effect Loss of national sovereignty Job loss due to off-shoring Honda Plant in Ohio Abandoned factory in Tennessee

Foreign Investment and International Trade Trade helps economies grow and facilitates the most efficient production of goods and services across the globe. Free trade involves decreasing the barriers to trade (such as tariffs). Roughly one-third of the world’s volume of trade occurs within the same company’s affiliates across borders. A company that wishes to sell its goods and services in a foreign market often ask itself whether its goals are best achieved by manufacturing in its home country and exporting its products, or by relocating production to the foreign market. Is it better for your economy to produce goods at home, or is it preferable to move production overseas so that consumers may pay lower prices? What is the effect on developing countries of these shifts in production? Is it better for to create jobs in these areas? How should concerns about labor and environmental standards be taken into account?