Report on FDI

Introduction to Banking 26th March’09Topic: Foreign Direct Investment

TABLE OF CONTENTS

S.NO.

DESCRIPTION PAGE NO.

1 Foreign Direct Investment 3

2 Why FDI is important 4

3 Reasons for FDI 5

4 Benefits of FDI 7

5 Direction of FDI 7

6 FDI – Benefits to the host country 8

7 FDI – Cost to the host country 9

8 FDI – Benefits to the home country 10

9 APPENDIXES 11

Preston University, Page: 1


“ACKNOWLEDGEMENT”

“We would like to thank my respected instructor of the course of Introduction to Banking Miss Nabiha, who provides us the platform and the opportunity to give the presentation and report on Foreign Direct Investment.

Her encouragements and efforts in this course will be beneficial in our future.

RegardsAmmad ShakilSheikh Abdullah

Foreign Direct Investment:



Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical investment into building a factory in another country. It is the establishment of an enterprise by a foreigner. Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. Foreign direct investment can include:

Production, Distribution & R&D Facilities. Companies often do FDI for to open their own flagship stores,

production centres, R&D centres, & Distribution centres etc. This FDI can be obtain by purchasing the existing firm in the particular country.

Example: When Eastman Kodak USA, start their operations in Japan, so the company had done on the largest FDI, and had opened their own production centre, distribution centre, and that largest R&D lab.

Marketing Division.Most of the firms open their own marketing division, whose responsibility is just to market the company’s products, and this divisions also searches for the new markets.

Example: Volvo Corporation Sweden, have open their marketing division in Lahore, Pakistan by the name of Volvo Pakistan Limited, this division’s responsibility is just to market the Volvos’ buses, trucks, and commercial vehicles to the potential customers.

Sales & Service Centres.Companies often likes to open their own sales and service centres in order to achieve the maximum customer satisfaction, and to provice one window operation to the customer.

Example: The Malaysia’s largest car manufacturer Proton, have start their operation in Pakistan by making the joint venture with a local partner. The company have opened their own sales and service centre in all major cities of the country.

Parent Firms Extending Loans To Their Foreign Affiliates.



Parent Firms provide loan to their affiliates in the host country for to extend their operations and capabilities, this is also another type of foreign direct investment.

Mergers & Acquisitions with an existing firm.Most of the large MNE do FDI by acquiring or merging with the local competitor in the country, as a result the company size in terms of Technology, Land, Labor, Capital, R&D and market values enhance rapidly, while the rate of competition decrease.

Example: ‘Chrysler’ the third largest car manufacturer of USA, had started their operation in Germany, so Chrysler merger with the ‘Daimler-Benz group’ manufacturer of Mercedes-Benz cars and commercial vehicles, and as a result, both jointly shared their expertise for increase their market share in Europe.

WHY F.D.I. IS IMPORTANT ?

Making a direct foreign investment allows companies to accomplish several tasks:

Firms want presence in the foreign market. Firms want control over growth of these foreign markets. Circumventing trade barriers. Making the move from domestic export sales to a locally-based

national sales office. Capability to increase total production capacity. Opportunities for co-production, joint ventures with local partners,

joint marketing arrangements, licensing, etc

REASONS FOR F.D.I.:



There are seven basic reasons for MNE to FDI in other countries.

1. Increase Sales & ProfitsFirms like to increase sales, profits and market share, and for that large firms do FDI in other countries.

2. Enter Rapidly Growing MarketLarge firms continuously seek to enter in those markets which has rapid growth as compare with other markets, so that it helps the firms get rapid return on investments.

Example: China, India, Mexico, Brazil.

3. Reduce CostsLarge firms continuously seek increase their profits and to reduce their overall costs, thus most of the firms do FDI in those countries from where they can enjoy comparative advantage in the form of technology, labor, land, transportation, raw materials etc.

4. Gain Foothold on Economic BlocsEconomic blocs like European Union EU, NAFTA, ASEAN, these blocs are suppose as barriers for those firms who does not belong to the


Increase Sales & Profits

Enter RapidlyGrowing Markets

Acquire Tech. & ManagerialKnow-How

Reduce Costs

Gain Footholdin Economic

Blocs

Protect DomesticMarkets

Protect Foreign MarketsFDI


member countries of these blocs, thus most of the large MNE do FDI in these blocs in order to eliminate that barriers.

5. Protect Domestic MarketAnother reason for FDI is to protect one’s domestic market. Many MNE are now entering in international markets in order to attack potential competitors and thus prevent them from expending their operations in overseas.

6. Protect Foreign MarketSometimes MNE will use FDI in order to protect their foreign markets.

Example: in the US from 1981 to 1991 the total number of service stations had decline by over 50%. British Petroleum which has substantial investment in this market, realized that in order to protect its investment it would be necessary to make a substantial investment in order to upgrade its stations and to increase market share.

7. Acquire Technological and Managerial Know-howStill another reason for FDI is to acquire technological and managerial expertise. One way of doing this is to setup operations near those of leading competitors. This is why US firms have move some of their research and development facilities to Japan.

BENEFITS OF F.D.I.:

It helps in the economic development.



Permits the transfer of technologies.

Promotion of the competition within the local. input market of a country.

Human capital resources.

Helps in the creation of new jobs.

Increasing the salaries of the workers.

Development of the manufacturing sector of the host country.

Bring in advanced technology and skill set in a country.

DIRECTION OF F.D.I.:

FDI has grown sharply over the past two decades.

Developed countries still account for the largest share of on FDI inflows & outflows

Examples: USA, Europe & Japan (Triad Countries)

Their has been a recent increase in FDI to developing countries. Examples: Latin America, China, India, Estern

Europe

F.D.I. – BENEFITS TO THE HOST COUNTRY

Resources transfer effect



The benefit to the host country is that the FDI always bring technological, managerial and capital, which is good for the economic wealth of the country.Example : Capital, Technology, Management

Employment EffectWhen ever the FDI is occurs in generates employment for the citizens of the country.

Balance of payment effectFDI brings good results on the balance of payments of the country in the fiscal year.

Competition and Econimical GrowthFDI grown the competition and economic scale in the country, because FDI creates competition in the industry and every firm like to increase its sales and market share by offering competitive price.

F.D.I. – COST TO THE HOST COUNTRY

Adverse effect on competitionFDI creates adverse effect on competition which is not good for the local companies.



Adverse effect on Balance of PaymentsOnce firms do FDI that after getting their return on investment firms send their profits to the parent company in home country, which creates adverse effect on B.O.P.

Soverignty & AutonomySome host governments worry that FDI is accompanied by some loss of economic independence resulting in the host country’s economy being controlled by a foreign corporation

F.D.I. – BENEFITS TO THE HOME COUNTRY

Benefits form the inward flow of foreign earnings.

Employment

Technology & Skills



APPENDIXES

Appendix-A: FDI outflows, 1982-2002



Appendix-B: FDI flows by region 1994-2004

Appendix-C: FDI outflows by developed country 1998-2001



Appendix-D



Appendix-E: FDI Outflows by largest MNEs, 1999


Report on FDI

Documents

direct foreign investment

foreign markets

largest fdi

foreign affiliates

costs fdi

fdi relationship

host country fdi benefits

host country fdi cost