1. Foreign Direct Investment

2. What is foreign direct investment?
According to the United Nations Conference on Trade and Development, foreign direct investment is an investment involving management control of a resident entity in one economy by an enterprise resident in another country.

3. Foreign Direct Investment
The establishment or purchase by residents of one country of a substantial ownership and management share-usually measured by a minimum equity stake of 10 percent- of a business in another country.

4. Foreign Direct Investment
The foreign investor can be either by an individual or a corporation, and investment can be wholly owned by foreigners or a joint venture between foreign and local interests.

5. Foreign Direct Investment through MNCs
FDI by MNCs is a major force driving globalization of the world economy. According to a UN Report, there are about 60,000 MNCs in the world with over 500,000 affiliates. MNCs are growing at a rate of about 10% and MNCs’ world wide sales surpassed by a few trillions compared to world exports.

6. Multinational Corporations or MNCs
A MNC is a business firm incorporated in one country that has production and sales operations in several other countries. The term suggests a firm obtaining raw materials from one national market and financial capital from another, producing goods with labor and capital equipment in a third country, and selling the finished product in yet other national market.

7. Two forms of FDI Horizontal Direct Investment
FDI in the same industry abroad as company operates at home.
Vertical direct investment
Backward - investments into industry that provides inputs into a firm’s domestic production (typically extractive industries)
Forward - investment in an industry that utilizes the outputs from a firm’s domestic production (typically sales and distribution)

8. FDI when and why? Transportation costs are high
Market Imperfections (Internalization Theory)
Impediments to the free flow of products between nations
Impediments to the sale of know-how
Follow the lead of a competitor - strategic rivalry
Product Life Cycle - however, does not explain when it is profitable to invest abroad
Location specific advantages (natural resources)

9. VDI, when and why? Market power Market imperfections
create entry barriers
erode entry barriers
Market imperfections
Impediments to the sale of know-how
Investments in specialized assets

10. Decision framework Low No High Horizontal FDI Yes Yes Horizontal FDI
How high are transportation costs and tariffs?
Export No
High
Horizontal FDI
Is know-how amenable to licensing?
Yes
Yes
Horizontal FDI
Is tight control over foreign operation required? No No
Horizontal FDI
Can know-how be protected by licensing contract?
Yes
Then license

11. Impediments to the sale of know-how
Risk giving away know-how to competitors
Licensing implies low control over foreign entity
Impediments to the sale of know how
Know-how not amenable to licensing

12. Aims of FDI by the Investors
Technological assets seeking
Efficiency-seeking for third markets
Market-seeking (national or regional)
Natural resource seeking
Corporate strategy

13. What do we mean by success in foreign direct investment?
Skill development/technology transfer to the nationals
Reduction in wastage of natural resources
Employment into key positions in the industries funded by FDI
Linkages and spill over into higher value added industries

14. 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

15. FDI’s Benefits varies
FDI’s benefits are not automatic and are primarily reflected in variables having to do with productive development such as:
• Technology transfer and assimilation (TTA)
• Training of human resources (HR)
• Production linkages (PL)
• Local enterprise development (ED), etc.
Impacts may be positive or negative and vary depending on the type of corporate strategy

16. Possible determinants of FDI
Natural resource
Economic factors
Political factors,
Policies: the policy framework for foreign direct investment into the countries
Social factor

17. How is foreign direct investment made
Company acquiring or merging with a firm in a different country
A firm creating a ‘Greenfield’ operation in a different country
A firm creating a subsidiary in a different country
As a result
The firm has significant control of its foreign operation
Firm can affect managerial decisions of the foreign operation

18. FDI - Flow versus stock
FDI occurs when a firm invests directly in facilities to produce and/or market a product in a foreign country
Flow: Amount of FDI over a period of time (one year)
Stock: Total accumulated value of foreign owned assets at a given point in time
FDI is not the investment by individuals, firms or public bodies in foreign financial instruments

19. Trends in FDI Flow and stock increased in the last 20 years
In spite of decline of trade barriers, FDI has grown more rapidly than world trade because
Businesses fear protectionist pressures
FDI is seen a 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

20. Form Of FDI: Greenfield versus acquisitions
Green field operation:
Mostly in developing nations
Mergers and acquisitions:
Quicker to execute.
Foreign firms have valuable strategic assets
Believe they can increase the efficiency of the acquired firm
More prevalent in developed nations

21. Why should a country market itself?
To increase the quantity of foreign investment directly;
To increase the quantity of foreign investment indirectly by improving the country’s investment image;
To increase the quality of foreign investment directly or indirectly by targeting specific types of investors;
To increase the number of firms competing to invest in a specific project;

22. Variables that are crucial for marketing a country
The product or the intrinsic advantages and disadvantages of the investment site;
The price or the cost to the investor of locating and operating within the investment site. This usually means tax incentive, grants, tariff protection, and similar price mechanisms;
Promotion, or activities that disseminate information about, or attempt to create an image of the investment site and provide investment services for the prospective investor.

23. Promotional techniques for attracting FDI
Advertising in general financial media;
Participating in investment exhibition;
Advertising in industry- or sector specific media;
Conducting general investment missions from source country to host country or from host country to source country;
Conducting general information seminars on investment opportunities;
Engaging in direct mail or telemarketing campaigns

24. Promotional techniques for attracting FDI
Conducting industry- or sector specific investment missions from source country to host country or vice versa;
Conducting industry or sector specific information seminars;
Engaging in firm specific research followed by “sales” presentations;
Expediting the processing of applications and permits;
Providing post investment services.

25. Efficiency-seeking strategy for winning over new markets
Increased exports of manufactures
Increased international competitiveness of
manufactures
Technology transfer and assimilation
Training of human resources
Creation and deepening of production linkages
Local enterprise development
Shift from an assembly platform towards a
manufacturing centre

26. Potential benefits Efficiency-seeking strategy for winning over new markets
Concentration on static comparative advantages rather than
dynamic ones
Few production linkages: reliance on imported components
in assembly operations. Worst-case scenario: stagnation in
the low value-added trap.
Crowding out of local firms
Lowering of standards in production costs (wages, social
benefits and exchange rate)
Unsustainable incentives (taxes and infrastructure)
Limited industrial and technological upgrading and limited
creation of clusters

27. Drawbacks of FDI: Technical Reasons
The production-sharing mechanism minimizes local benefits owing to the obligation to use (more expensive) inputs from that country.
Lowering of standards in production costs (wages, social benefits
via competitive devaluations) in combination with increased
incentives.
EPZ mentality
WTO phases out the Multi-Fibre Arrangement (which benefits the
Asian countries, especially China).
The effects of regional FTA are unclear (especially with
respect to regional rules of origin).

28. What policies should be pursued?
Technology policies
Incentives: macroeconomic policies, free trade and domestic competition
Skills: indigenous capacity building
Information and technical support (links with research institutes, R&D institutions)
Finance for the industrial technology development
Conscious policies that will regenerate the environment and the society, and equipping the various agencies responsible for the environment