FOREIGN DIRECT INVESTMENT Dosen : R. Widya Setiabudi, S.IP.,S.Si., M.T Viani Puspita Sari, S.IP.,M.M
Foreign Investment • FI can be divided into 2 components: 1. Portfolio investment The purchase of stocks and bonds to obtain a return on the funds invested 2. Direct investment The purchase of sufficient stock in a firm to obtain significant management control
Portfolio investment • Although portfolio investors are notdirectly concerned with the control of a firm, they invest immense amounts in stocks and bonds from other countries • Example : persons residing outside the US owned American stock and bonds other than US Treasury securities with a value of $2,861 billion in 2002 (including $ 1,171 billion in corporate stocks, a decline of $ 293 bilion from 2001 level).
Direct investment • By which the investors participate in the management of the firm in addition to receiving a return on their money. • The distinction between the two components has begun to blur, particularly with the growing size and number of international mergers, acquisitions ,and alliances in recent years. • Ex : investments by a foreign investor in the stock of a domestic company generally are treated as direct investment when the investor’s equity participation ratio is 10% or more
Level and Direction of FDI • If a nation is continuing to receive appreciable amount of foreign investment, its investment climate must be favorable. This means that political forces of the foreign environment are relatively attractive and that the opportunity to earn a profit is greater there than elsewhere. • Other reasons for investing exist, to be sure :however if the above factors are absent, foreign investment is not likely to occur.
Trade leads to FDI • Historically, FDI has followed foreign trade. One reason is that FDI is typically less costly and less risky than making a direct investment into foreign markets • Management can expand the business in small increments rather than through the considerably greater amounts of investment and market size that a foreign production facility requires. • Typically, a firm would use domestic or foreign agents to export. As the export business increased, the firm would set up an export department and hire sales representatives to live in overseas market. The firm might even establish its own sales company to import in its own name continuously make a subsidiary as a reason of creating economic of scale
Does trade lead FDI or does FDI lead Trade ? • Trademarket expansion FDI • FDIintegrate the entire production regionally or globallytrade decisions
Ways to invest… • Acquire going companies or build new ones?
Why enter foreign markets? • Increase profits and sales • Preferential trading arrangements • Faster growing market • Improved communications • Greater revenue • Lower cost of goods sold • Higher overseas profits as an investment motive • Protect market, profits and sales • Using foreign production to lower costs • Attack in competitor’s home market.
In – bond plants (maquiladora)investments • new concept reverse maquila