1. The Political Economy Of Foreign Direct Investment
Chapter 7
The Political Economy Of Foreign Direct Investment

2. Case: FDI and the Irish miracle
FDI in Ireland grew from $164m (1985) to $24b (2000)
By 2000 two-thirds of Irelands top exporters were MNEs
Reasons for Ireland’s success
Member of EU (access to EU markets)
Highly educated workforce
Good infrastructure

3. Political ideology and FDI
Radical
View
Pragmatic
Nationalism
Free
Market

4. Radical view
Marxist view, that MNE’s exploit less developed host countries
Extract profits
Give nothing of value in exchange
Instrument of domination not development
Keep less-developed countries relatively backward and dependent on capitalist nations for investment, jobs, and technology

5. Radical view Radical view was popular (1945-80) among
Communist countries (China, Cuba)
Socialist countries in Africa
Nationalistic countries (Iran, India)

6. Radical view-short lived?
By end 1980s radical view was in retreat
Collapse of communism
Bad economic performance of countries that embraced the radical view
Strong economic performance of countries who embraced capitalism rather than the radical view

7. Free market view .
Nations specialize in goods and services that they can produce most efficiently
Resource transfers benefit and strengthen the host country
Positive changes in laws and growth of bilateral agreements attest to strength of free market view
However, all countries impose some restrictions on FDI

8. Pragmatic nationalism
FDI has benefits and costs
Allow FDI if benefits outweigh costs
Block FDI that harms indigenous industry
Court FDI that is in national interest
Tax breaks
Subsidies

9. Three main ideological positions regarding FDI

10. Benefits of FDI to host countries
Resource-transfer effects
Capital
Technology
Management
Employment effect
Direct
indirect

11. Benefits of FDI to host countries
Balance-of-payments effect.
Current account-surplus/deficit
Capital account
Increases competition and spurs economic growth

12. Resource-transfer effects
Capital
Technology
Management

13. Employment effects Brings jobs that otherwise would not be created
Direct: Hiring host-country citizens
Indirect:
Jobs created by local suppliers
Jobs created by increased spending by employees of the multi-national enterprise
Questions remain on whether net jobs gained

14. Balance-of-payments effects
Host country benefits from initial capital inflow when MNC establishes business
Host country records current account debit on repatriated earnings of MNC
Host country benefits if FDI substitutes for imports of goods and services
Host country benefits when MNC uses its foreign subsidiary to export to other countries

15. Balance of payment accounts
Current account deficit occurs when imports are greater than exports
Current account surplus occurs when exports are greater than imports
Capital account records transactions that involve the purchase or sale of assets

16. U.S. Balance of payments accounts

17. Effect on competition and economic growth
Increased
productivity growth
product and process innovation
greater economic growth
FDI can
Increase market competition
Lower prices
Create greater consumer choice
Stimulate capital investments

18. Home country FDI benefits
Improves balance of payments for inward flow of foreign earnings
Creates a demand for exports.
Export demand can create jobs
Increased knowledge from operating in a foreign environment
Benefits the consumer through lower prices
Frees up employees and resources for higher value activities

19. Costs of FDI to host countries
Can drive out local competitors or prevent their development
Profits brought home ‘hurts’ (debit) a host’s capital account
Parts imported for assembly hurt trade balance
Can affect sovereignty and national defense

20. Home country FDI benefits
Improves balance of payments for inward flow of foreign earnings
Creates a demand for exports
Export demand can create jobs
Increased knowledge from operating in a foreign environment
Benefits the consumer through lower prices
Frees up employees and resources for higher value activities

21. Home country problems with FDI
Negative effect on Balance of Payments
Initial capital outflow
MNC uses foreign subsidiary to sell back to home market
MNC uses foreign subsidiary as a substitute for direct exports
Potential loss of jobs

22. Government incentives for FDI
Risk insurance (Home)
Elimination of double taxation (Home)
Tax incentives (Host)
Low interest rates (Host)
Stable government and stable policies

23. Government disincentives for FDI
Limit capital outflows (Home)
Manipulate tax code to encourage domestic investment (Home)
Political restrictions on investing in certain countries (Home)
Ownership restraints. (Host)
Performance requirements (Host)

24. The nature of negotiation
Objective: reach an agreement that benefits both parties
In the international context, we must
understand the influence of norms and value systems
Be sensitive to how these factors influence a company’s approach to negotiations

25. The four Cs of negotiation
Fig 7.1

26. Determinants of bargaining power