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Foreign Investments

Explore the surge in FDI flows, its impact on global value chains, developing countries, and policy implications. Learn about FDI regimes, dual policy frameworks, and the rise of multinational corporations in the global economy.

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Foreign Investments

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  1. Foreign Investments

  2. Types of Investment • FDI • FPI

  3. Advantages Expertise Foreign Exchange Job Creation Increase of Exports/ decrease in Imports Disadvantages Monopoly National Sovereignty Exploitation Transfer Pricing Threat to Small business Advantages and Disadvantages of FDI

  4. Foreign Direct Investment • The surge in flows of FDI in the last 2 decades has had important effects on global value chains of production, on developing countries (DCs), and on attitudes towards such investment. • Attitudes towards FDI and experiences with it in DCs affect host economy policies, which in turn affect subsequent experiences. • Both FDI policies and experiences, as well as their perceived feedback, influence attitudes toward negotiating a multilateral framework for investment (MFI).

  5. Recent Trends and Effects • Very rapid growth in global FDI 1999-2007. • Especially rapid growth (general opening up) and ( Asian crisis LatAm privatizations). • In most years, FDI grew faster than global trade and GDP.

  6. Index of World Exports, FDI Outflows, and Output, 1990-2002 (1990=100) Source: Exports & GDP – WEO Database; FDI Outflows – UNCTAD FDI database.

  7. FDI Top 10 in Developing Asia

  8. Domestic Policy Changes • Host country policy framework plays a critical role in determining the effects of FDI on a recipient country. • A key argument concerns the nexus between trade and FDI liberalization. Trade reform alters the incentive of production for the domestic market relative to exports, resulting in a fundamental shift in the behaviour of MNEs and in the FDI cost-benefit calculus from ‘rent-seeking’ to ‘efficiency-seeking’ FDI.

  9. FDI Regimes • Dual policy regimes • FDI regimes have become more open but considerable selectivity across sectors and firms. Typically a mix of both ‘rent-seeking’ and ‘efficiency-seeking’ FDI, reflecting partial reform of trade regimes, and the political economy of dispensing patronage, e.g. • FDI policy may differ between regions. • Large inter-industry differences in protection, and thus incentives. • SOEs typically receive preferential treatment, especially in PRC, India and Viet Nam, and their MNE joint venture partners. • Most countries offer fiscal or financial incentives. These vary by sales orientation, the technology introduced by the foreign investor, location of investment, and other factors. • The regulatory regime frequently offers more than one entry option.

  10. The Commercial Environment • As economies open up, governments have to make the transition from protectionist/regulatory regimes to an emphasis on promotion and efficiency. • The ‘three I’s’: incentives, infrastructure, and institutions. • Note too that domestic investors are invariably the key players in any economy.

  11. THE RISE OF THE MULTINATIONALCORPORATION • I. The MNC • A. Definition • a company with production and distribution facilities in more than one country.

  12. THE RISE OF THE MULTINATIONALCORPORATION • 2. MNC supercedes theory: • a. mobility of factors • b. different costs/skills • between nations • c. prime transmitter of • competitive forces

  13. THE RISE OF THE MULTINATIONALCORPORATION • C. EVOLUTION OF THE MNC • Reasons to Go Global: • 1. raw materials • 2. more markets • 3. minimize costs of production

  14. THE RISE OF THE MULTINATIONALCORPORATION • 1. RAW MATERIAL SEEKERS • exploit markets in other countries • historically first to appear • modern-day counterparts • Anaconda Copper • Standard Oil

  15. THE RISE OF THE MULTINATIONALCORPORATION • 2. MARKET SEEKERS • produce and sell in foreign markets • heavy foreign direct investors • representative firms: • IBM • Nestle • Levi Strauss

  16. THE RISE OF THE MULTINATIONALCORPORATION • 3. COST MINIMIZERS • seek lower-cost production abroad • motive: to remain cost competitive • representative firms: • Texas Instruments • Atari • Zenith

  17. THE RISE OF THE MULTINATIONALCORPORATION • D. THE MNC: A BEHAVIORAL VIEW • 1. State of mind: • committed to producing, • undertaking investment and marketing, and financing globally.

  18. THE RISE OF THE MULTINATIONALCORPORATION • E. THE GLOBAL MANAGER • 1. Understands political and • economic differences; • 2. Searches for most cost- • effective suppliers; • 3. Evaluates changes on value of the firm.

  19. MNCs • I. THE MULTINATIONAL FINANCIAL SYSTEM • A. Main Objective of MNC: • Maximize shareholder wealth • B. Other Objectives Reflect Ability to Link: • Via Affiliate transfer mechanisms

  20. C. Mode of Transfer • Reflects freedom to select a variety of financial channels. • D. Timing Flexibility • Most MNC have some flexibility • in timing of fund flows.

  21. E. Value • The ability to avoid national taxes has led to controversy.

  22. II. FUNCTIONS OF FINANCIAL • MANAGEMENT • A. Two Basic Functions: • 1. Financing • 2. Investing

  23. Issues • Transfer Pricing • Exploitation • Creates Monopoly

  24. B. Additional Factors Facing the MNC Executive • 1. Political risk • 2. Economic risk

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