Foreign Direct Investment

Foreign Direct Investment

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Course Name: Seminar (FDI) Prepared by: Taherou mass Kah Assign by Prof: Dr Murat doğanlar

Foreign Direct Investment

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Definition

Foreign direct investment (FDI) is a direct investment into production or

business in a country by an individual or company of another country, either by

buying a company in the target country or by expanding operations of an existing

business in that country. Foreign direct investment is in contrast to portfolio

investment which is a passive investment in the securities of another country

such as stocks and bonds.

Broadly, foreign direct investment includes "mergers and acquisitions,

building new facilities, reinvesting profits earned from overseas operations and

intra company loans".[1] In a narrow sense, foreign direct investment refers just

to building new facilities. The numerical FDI figures based on varied definitions

are not easily comparable.

As a part of the national accounts of a country, and in regard to the GDP

equation Y=C+I+G+(X-M)[Consumption + gross Investment + Government

spending +(Exports - Imports], where I is domestic investment plus foreign

investment, FDI is defined as the net inflows of investment (inflow minus

outflow) to acquire a lasting management interest (10 percent or more of voting

stock) in an enterprise operating in an economy other than that of the

investor.[2] FDI is the sum of equity capital, other long-term capital, and short-

term capital as shown the balance of payments. FDI usually involves participation

in management, joint-venture, transfer of technology and expertise. There are

two types of FDI: inward and outward, resulting in a net FDI inflow (positive or

negative) and "stock of foreign direct investment", which is the cumulative

number for a given period. Direct investment excludes investment through

purchase of shares.[3] FDI is one example of international factor movements

In another words, Foreign Direct Investment (FDI) is a category of

investment that reflects the objective of establishing a lasting interest by a

resident enterprise in one economy in an enterprise that is resident in an

economy other than that of the direct investor. The lasting interest implies the

existence of a long-term relationship between the direct investor and the direct

investment enterprise and a significant degree of influence on the management

of the enterprise. The direct or indirect ownership of 10% or more of the voting

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power of an enterprise resident in one economy by an investor resident in

another economy is evidence of such a relationship. FDI is not just a transfer of

ownership as it usually involves the transfer of factors complementary to capital,

including management, technology and organizational skills.

Types OF FDI

1) Horizontal FDI arises when a firm duplicates its home country-based

activities at the same value chain stage in a host country through FDI.(for

example, Toyota assembling cars in both Japan and the UK.)

2) Platform FDI Foreign direct investment from a source country into a

destination country for the purpose of exporting to a third country. This is

the most unusual form of FDI as it involves attempting to overcome two

barriers simultaneously - entering a foreign country and a new industry.

This leads to the analytical solution that internationalisation and

diversification are often alternative strategies, not complements.

3) Vertical FDI takes place when a firm through FDI moves upstream or

downstream in different value chains. (for example, Toyota acquiring a car

distributorship in America) and Backward Vertical FDI is where

international integration moves back towards raw materials (for example,

Toyota acquiring a tyre manufacturer or a rubber plantation).

Horizontal FDI decreases international trade as the product of them is usually

aimed at host country; the two other types generally act as a stimulus for it. FDI

is building new facilities.

Methods Of FDI

The foreign direct investor may acquire voting power of an enterprise in an

economy through any of the following methods:

by incorporating a wholly owned subsidiary or company anywhere

by acquiring shares in an associated enterprise

through a merger or an acquisition of an unrelated enterprise

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participating in an equity joint venture with another investor or enterprise

Forms of FDI incentives

Foreign direct investment incentives may take the following forms:

low corporate tax and individual income tax rates

i. tax holidays

ii. other types of tax concessions

iii. preferential tariffs

iv. special economic zones

v. EPZ – Export Processing Zones

vi. Bonded warehouses

vii. Maquiladoras

viii. investment financial subsidies

ix. soft loan or loan guarantees

x. free land or land subsidies

xi. relocation & expatriation

xii. infrastructure subsidies

xiii. R&D support

xiv. derogation from regulations (usually for very large projects)

Governmental Investment Promotion Agencies (IPAs) use various marketing

strategies inspired by the private sector to try and attract inward FDI,

including Diaspora marketing.

Importance and barriers to FDI

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The rapid growth of world population since 1950 has occurred mostly in

developing countries. This growth has been matched by more rapid increases in

gross domestic product, and thus income per capita has increased in most

countries around the world since 1950. While the quality of the data from 1950

may be of question, taking the average across a range of estimates confirms this.

Only war-torn and countries with other serious external problems, such as Haiti,

Somalia, and Niger have not registered substantial increases in GDP per capita.

The data available to confirm this are freely available.

An increase in FDI may be associated with improved economic growth due to

the influx of capital and increased tax revenues for the host country. Host

countries often try to channel FDI investment into new infrastructure and other

projects to boost development. Greater competition from new companies can

lead to productivity gains and greater efficiency in the host country and it has

been suggested that the application of a foreign entity’s policies to a domestic

subsidiary may improve corporate governance standards. Furthermore, foreign

investment can result in the transfer of soft skills through training and job

creation, the availability of more advanced technology for the domestic market

and access to research and development resources. The local population may be

able to benefit from the employment opportunities created by new businesses.

A key assumption is that there are no institutional barriers to discretionary

redistribution, so any group can appropriate all expropriated resources. Because

the group in power is not forced to transfer resources to other groups, a “tragedy

of the commons” arises: there is too much expropriation in equilibrium. A

tragedy of commons occurs when property rights of an asset cannot be enforced;

a typical example is fishing on a lake. Typically this gives rise to over-

consumption or under-investment (see Gordon 1954 or Lancaster 1973). In our

model, it is precisely the fact that groups cannot ensure ex ante that they will

receive the benefits of expropriation in the future that cause overexpropriation

in the first period, making the level of bribes inefficiently large. The degree of

such inefficiency is related to how likely it is that the current group in

government retains power in the second period. That is, the degree of such

inefficiency is related to the political instability.

While countries that have higher political instability are predicted to exhibit

higher levels of indirect expropriation, direct expropriation levels are lower. The

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intuition is as follows: because each group finds its chances of being in power in

the second period very unlikely, it becomes shortsighted and demands a large

quantity of bribes when in power (i.e., in the first period). This discourages

investment, and the reduction of capital decreases the marginal cost of direct

expropriation.

FDI in some countries

CHINA FOREIGN DIRECT INVESTMENT

Foreign Direct Investment in China increased to 1175.86 USD Hundred

Million in December of 2013 from 1055.06 USD Hundred Million in November of

2013. Foreign Direct Investment in China is reported by the National Bureau of

Statistics of China. Foreign Direct Investment in China averaged 374.80 USD

Hundred Million from 1997 until 2013, reaching an all time high of 1175.86 USD

Hundred Million in December of 2013 and a record low of 18.32 USD Hundred

Million in January of 2000. . This page contains - China Foreign Direct Investment

- actual values, historical data, forecast, chart, statistics, economic calendar and

news. 2014-01-28

ACTUAL PREVIOUS HIGHEST LOWEST FORECAST DATES UNIT FREQUENCY

1175.86 1055.06 1175.86 18.32 352.58 | 2014/01 1997 - 2013 USD HUNDRED MILLION MONTHLY NSA

Foreign Direct Investment

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See TRADING ECONOMICS for more information [a]

TRADE LAST

PREVIOUS HIGHEST LOWEST FORECAST

UNIT TREND

CURRENT ACCOUNT 403.77 2013-08-15 509.00 1330.85 -8.96 570.47 2013-11-30 USD HUNDRED MILLION

CAPITAL FLOWS -168.16 2012-06-29 2210.56 2210.56 -168.16 -316.98 2012-12-31 USD HML

EXTERNAL DEBT 7369.86 2012-12-31 6949.97 7369.86 158.28 7425.63 2013-12-31 USD HML

FOREIGN DIRECT INVESTMENT 1175.86 2013-12-31 1055.06 1175.86 18.32 352.58 2014-01-31 USD HUNDRED MILLION

TERMS OF TRADE 99.09 2013-11-15 101.93 118.33 81.75 100.96 2013-12-31 INDEX POINTS

TOURIST ARRIVALS 165.60 2013-12-15 175.10 216.60 21.70 153.19 2014-01-31 TENS OF THOUSANDS

CURRENT ACCOUNT TO GDP 2.30 2012-12-31 1.90 10.10 -3.70 2.30 2013-12-31 PERCENT

BALANCE OF TRADE 256.41 2013-12-15 338.01 404.00 -319.71 171.93 2014-01-31 USD HUNDRED MILLION

EXPORTS 2077.42 2013-12-15 2022.05 2077.42 13.00 1839.25 2014-01-31 USD HUNDRED MILLION

IMPORTS 1821.02 2013-12-15 1684.04 1830.13 16.60 1716.14 2014-01-31 USD HUNDRED MILLION

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FDI in Africa

Foreign direct investment (FDI) and the emergence of multinational firms

(MNEs) have proven successful strategies for the growth performance of host

countries. In recent years, developing economies have gained substantial shares

of such worldwide FDI flows. Now, a “new wave of FDI” has even swept African

countries, (one of the poorest regions of the world (figue3) . With this, the

inflows to Africa are also becoming less and less concentrated compared to the

recent past, both geographically – dispersing across ever more countries – as well

as sectorally, shifting from extractive sectors to light manufacturing and services.

The increase in the size and geographical scope of the flows is partly due to a

significant expansion of South-South FDI – in particular intra-African FDI flows,

along with those from emerging economies such as China, India and other Asian

countries.

Figüre 3: FDI inflows worldwide, to developing economies and to Africa, 1970-

2010

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The empirical findings suggests that, as in other parts of the world, FDI flows

impact positively also on African domestic firms. We estimate in particular

vertical linkage effects – example . effects of FDI on firms that serve either as

suppliers or as customers to MNEs – and their impact on output per worker,

product innovation and process innovation of these firms. The study is not only

interested in the direction and size of the effects but also on the channels

through which they take place. Specifically, it investigates whether the

performance effects of the customer/supplier relation with multinationals can be

intensified by support from the government or from a multinational customer.

The idea is that with such support, firms may be able to build up better

absorptive capacities; they may thus not need to only rely on their own efforts.

Figure 4 shows that African firms in many countries (though with considerable

variance between countries) indeed utilised support both from governments and

from MNEs. The bulk of such help clearly came from the multinationals, with

around 30% of all firms in the dataset reporting receipt of such help. Support was

more often utilised when the African firm was a supplier to a MNE than when it

was a customer, and the support usually took the form of workforce upgrading or

technology transfer.

Figure 4. Support for African firms trading with MNEs

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Overall, the results from the data analysis show for the average domestic firm:

Supplying to a foreign multinational (the backward linkage) fosters product

innovation and, to a lesser extent, process innovation.

When also considering support either from government or MNEs,

supplying to a multinational also improves the domestic firms’ labour

productivity.

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Buying from a multinational (the forward linkage) fosters labour

productivity, but does not affect or even discourages product and process

innovation.

These results have important policy implications. The observed mechanisms

can, at least to some extent, be influenced by policies, either through direct

government support efforts, or by providing incentives for multinationals to give

assistance. As the data show, the current level of such support is still quite low,

leaving substantial room for improvement.

FDI IN EUROPEN COUNTRİES

EU-27 foreign direct investment (FDI) is still affected by the global

economic and financial turmoil. In 2012, EU outward flows declined sharply,

down 53 % compared with 2011, and recorded their lowest level since 2004.

Similarly, EU inward flows decreased from the previous year — down 34 %, to

the lowest level since 2005. In this way, 2012 EU FDI flows stood at more than 60

% below the record peaks of 2007 in both inward and outward investment

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relations with the rest of the world (see Figure)

In 2010, total FDI outflows decreased by 8 %, mainly due to a sharp decline in

'equity capital', though partially compensated by an increase in 'reinvested

earnings'. In 2011, they recovered slightly, up 18 %, again due to recovery in

equity capital invested outside the EU EU inward flows declined in 2010 by 22 %

but recovered partially in 2011, up 13 %. 'Other capital' contributed the most to

the positive change, together with reinvested earnings. The income return from

both EU outward and inward investment in 2011 was slightly down from the

previous year but remained above the levels of 2008-2009 (see Figure 3).

Provisional figures for 2012 show that EU investment vis-à-vis the rest of the

world decreased, partially confirming the lasting impact of the global economic

crisis. As in earlier years, FDI flows channeled through special-purpose entities

(SPE) played a very significant role in the results for 2012.

Summary

Foreign direct investment occurs when a business invests in a foreign country by

either acquiring a foreign business that it controls or starting a business in the

foreign country. Advantages and disadvantages often depend upon whether you

are the investing company or the foreign country. Advantages for the company

investing in a foreign market include access to the market, access to resources,

and reduction in the cost of production.

Disadvantages for the company include an unstable and unpredictable

foreign economy, unstable political systems, and underdeveloped legal systems.

Advantages for the foreign country include infusion of foreign capital, increases

in revenue, development of new industries, and the ability to learn from foreign

investors. Disadvantages for the foreign country include getting caught in a race

to the bottom resulting in poor labor treatment and environmental destruction,

the risk that foreign investment will crowd out local development, and the

possibility of undue political influence of foreign investors.

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References

1. Boly A, N D Coniglio, F Prota and A Seric (2012), “Which Domestic Firms Benefit from FDI?

Evidence from Selected African Countries,” Working Paper, UNIDO.

2. Bwalya, S M (2006), “Foreign direct investment and technology spillovers: Evidence from panel

data analysis of manufacturing firms in Zambia,” Journal of Development Economics, 81, 514–526.

3. Görg, H and E Strobl, (2005), “Spillovers from foreign firms through worker mobility: an empirical

investigation,” Scandinavian Journal of Economics, 107, 693-709.

4. Görg, H and A Seric, (2013), “With a little help from my friends: Supplying to multinationals,

buying from multinationals, and domestic firm performance,” Kiel Working Paper 1867, Kiel

Institute for the World Economy.

5. http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx

6. http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Foreign_direct_investment_stat

istics

7. IMF (International Monetary Fund) 1993, Balance of Payments Manual 5th Edition,

Washington DC.

8. IMF (International Monetary Fund) 1995, Balance of Payments Compilation Guide, 1st

Edition, Washington DC.

9. IMF (International Monetary Fund) 2001, Balance of Payments Statistics Yearbook,

Washington DC.

10. OECD (Organisation for Economic Cooperation and Development) 1996, Benchmark

Definition of Foreign Direct Investment, 3rd Edition, Paris.