As compared to 2006 India slid one place to the third position in terms of projects, which numbered 676. In terms of jobs created India dropped to the second position in 2007 from being the first in 2006. Jobs created stood at 246,361. In comparison to 2006 it was a 45% decline in job creation for the Indian job market in 2007.
UK was at fourth position in terms of number of projects, which were 622 in 2007. In comparison to 2006, 2007 saw a sharp decline in the projected investment value (which stood at US$18.7 billion) and in the number of employment generated (which was 50,000).
The two UK regions accounting for the highest amount of FDI flow in 2007 were South East England and London. They accounted for over 300 projects in that period.
2007 effectively saw UK regaining its hold as knowledge based economy. The emphasis shifted from factors like incentives and low costs to issues like skills, business opportunities, R&D and regulatory environment.
The same kind of trend was reflected by other front ranking Western European nations like Germany and France.
Growth of investment in Europe in 2007 was largely powered by the Eastern European nations and stood at US$291 billion.
In 2007 Russia retained its position as the leading destination in Europe for FDI regarding investment and job creation.
Spain, Poland and Romania were the other European nations, which gave a good performance in 2007 and were enlisted within the top 10 performing nations.
With the global economy facing the brunt of financial instability in 2008, FDI is projected to become an important instrument for fostering global job creation and investment of capital.
Foreign Direct Investment (FDI) in India
FDI has helped the Indian economy grow, and the government continues to encourage more investments of this sort – but with $5.3 billion in FDI in 2004 India gets less than 10% of the FDI of China.
Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has – in a lot of ways – enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country.
India has continually sought to attract FDI from the world’s major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors.
FDI investments are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining industries.
A number of projects have been announced in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors.
The Indian national government also provided permission to FDIs to provide up to 100% of the financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately $352.5m.
Currently, FDI is allowed in financial services, including the growing credit card business. These services include the non-banking financial services sector. Foreign investors can buy up to 40% of the equity in private banks, although there is condition that stipulates that these banks must be multilateral financial organizations. Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased.
By 2004, India received $5.3 billion in FDI, big growth compared to previous years, but less than 10% of the $60.6 billion that flowed into China. Why does India, with a stable democracy and a smoother approval process, lag so far behind China in FDI amounts?
Although the Chinese approval process is complex, it includes both national and regional approval in the same process.
Federal democracy is perversely an impediment for India. Local authorities are not part of the approvals process and have their own rights, and this often leads to projects getting bogged down in red tape and bureaucracy. India actually receives less than half the FDI that the federal government approves.
Benefits of Foreign Direct Investment In The Host Country
One of the advantages of foreign direct investment is that it helps in the economic development of the particular country where the investment is being made.
This is especially applicable for the economically developing countries. During the decade of the 90s foreign direct investment was one of the major external sources of financing for most of the countries that were growing from an economic perspective. It has also been observed that foreign direct investment has helped several countries when they have faced economic hardships.
An example of this could be seen in some countries of the East Asian region. It was observed during the financial problems of 1997-98 that the amount of foreign direct investment made in these countries was pretty steady. The other forms of cash inflows in a country like debt flows and portfolio equity had suffered major setbacks. Similar observations have been made in Latin America in the 1980s and in Mexico in 1994-95.
Foreign direct investment also permits the transfer of technologies. This is done basically in the way of provision of capital inputs. The importance of this factor lies in the fact that this transfer of technologies cannot be accomplished by way of trading of goods and services as well as investment of financial resources. It also assists in the promotion of the competition within the local input market of a country.
The countries that get foreign direct investment from another country can also develop the human capital resources by getting their employees to receive training on the operations of a particular business. The profits that are generated by the foreign direct investments that are made in that country can be used for the purpose of making contributions to the revenues of corporate taxes of the recipient country.
Foreign direct investment helps in the creation of new jobs in a particular country. It also helps in increasing the salaries of the workers. This enables them to get access to a better lifestyle and more facilities in life. It has normally been observed that foreign direct investment allows for the development of the manufacturing sector of the recipient country.
Foreign direct investment can also bring in advanced technology and skill set in a country. There is also some scope for new research activities being undertaken.
Foreign direct investment assists in increasing the income that is generated through revenues realized through taxation. It also plays a crucial role in the context of rise in the productivity of the host countries. In case of countries that make foreign direct investment in other countries this process has positive impact as well. In case of these countries, their companies get an opportunity to explore newer markets and thereby generate more income and profits.
It also opens up the export window that allows these countries the opportunity to cash in on their superior technological resources. It has also been observed that as a result of receiving foreign direct investment from other countries, it has been possible for the recipient countries to keep their rates of interest at a lower level.
It becomes easier for the business entities to borrow finance at lesser rates of interest. The biggest beneficiaries of these facilities are the small and medium-sized business enterprises.
Disadvantages of Foreign Direct Investment
The disadvantages of foreign direct investment occur mostly in case of matters related to operation, distribution of the profits made on the investment and the personnel. One of the most indirect disadvantages of foreign direct investment is that the economically backward section of the host country is always inconvenienced when the stream of foreign direct investment is negatively affected.
The situations in countries like Ireland, Singapore, Chile and China corroborate such an opinion. It is normally the responsibility of the host country to limit the extent of impact that may be made by the foreign direct investment. They should be making sure that the entities that are making the foreign direct investment in their country adhere to the environmental, governance and social regulations that have been laid down in the country.
The various disadvantages of foreign direct investment are understood where the host country has some sort of national secret – something that is not meant to be disclosed to the rest of the world. It has been observed that the defense of a country has faced risks as a result of the foreign direct investment in the country.
At times it has been observed that certain foreign policies are adopted that are not appreciated by the workers of the recipient country. Foreign direct investment, at times, is also disadvantageous for the ones who are making the investment themselves.
Foreign direct investment may entail high travel and communications expenses. The differences of language and culture that exist between the country of the investor and the host country could also pose problems in case of foreign direct investment.
Yet another major disadvantage of foreign direct investment is that there is a chance that a company may lose out on its ownership to an overseas company. This has often caused many companies to approach foreign direct investment with a certain amount of caution.
At times it has been observed that there is considerable instability in a particular geographical region. This causes a lot of inconvenience to the investor.
The size of the market, as well as, the condition of the host country could be important factors in the case of the foreign direct investment. In case the host country is not well connected with their more advanced neighbors, it poses a lot of challenge for the investors.
At times it has been observed that the governments of the host country are facing problems with foreign direct investment. It has less control over the functioning of the company that is functioning as the wholly owned subsidiary of an overseas company.
This leads to serious issues. The investor does not have to be completely obedient to the economic policies of the country where they have invested the money. At times there have been adverse effects of foreign direct investment on the balance of payments of a country. Even in view of the various disadvantages of foreign direct investment it may be said that foreign direct investment has played an important role in shaping the economic fortunes of a number of countries around the world.
Determinants of Foreign Direct Investment In The Host Country
One of the most important determinants of foreign direct investment is the size as well as the growth prospects of the economy of the country where the foreign direct investment is being made.
It is normally assumed that if the country has a big market, it can grow quickly from an economic point of view and it is concluded that the investors would be able to make the most of their investments in that country.
In case of foreign direct investments that are based on export, the dimensions of the host country are important as there are opportunities for bigger economies of scale, as well as spill-over effects.
The population of a country plays an important role in attracting foreign direct investors to a country. In such cases the investors are lured by the prospects of a huge customer base.
Now if the country has a high per capita income or if the citizens have reasonably good spending capabilities then it would offer the foreign direct investors with the scope of excellent performances.
The status of the human resources in a country is also instrumental in attracting direct investment from overseas. There are certain countries like China that have taken an active interest in increasing the quality of their workers.
They have made it compulsory for every Chinese citizen to receive at least nine years of education. This has helped in enhancing the standards of the laborers in China.
If a particular country has plenty of natural resources it always finds investors willing to put their money in them. A good example would be Saudi Arabia and other oil rich countries that have had overseas companies investing in them in order to tap the unlimited oil resources at their disposal.
Inexpensive labor force is also an important determinant of attracting foreign direct investment. The BPO revolution, as well as the boom of the Information Technology companies in countries like India has been a proof of the fact that inexpensive labor force has played an important part in attracting overseas direct investment.
Infrastructural factors like the status of telecommunications and railways play an important part in having the foreign direct investors come into a particular country.
It has been observed that if the infrastructural facilities are properly in place in a country then that country receives a substantial amount of foreign direct investment. If a country has extended its arms to overseas investors and is also able to get access to the international markets then it stands a better chance of getting higher amounts of foreign direct investment.
It has been observed in the recent years that a couple of countries have altered their stance vis-a-vis overseas investment. They have reset their economic policies in order to suit the interests of the overseas investors.
These companies have increased the transparency of the legal frameworks in place. This has been done so that the overseas companies can understand the implications of their investment in a particular country and take the appropriate decisions.
Foreign Direct Investment and Economic Development Of The Host Country
Foreign direct investment has a major role to play in the economic development of the host country. Over the years, foreign direct investment has helped the economies of the host countries to obtain a launching pad from where they can make further improvements.
This trend has manifested itself in the last twenty years. Any form of foreign direct investment pumps in a lot of capital knowledge and technological resources into the economy of a country.
This helps in taking the particular host economy ahead. The fact that the foreign direct investors have been able to play an important role vis-a-vis the economic development of the recipient countries has been due to the fact that these countries have changed their economic stances and have allowed the foreign direct investors to come in and improve their economies.
It has often been observed that the economically developing as well as underdeveloped countries are dependent on the economically developed countries for financial assistance that would help them to achieve some amount of economical stability.
The economically developed countries, on their part, can help these countries financially by investing in these countries. This financial assistance can be channelized into various sectors of the economy. The channelization is normally done on the basis of the requirements of particular sectors.
It has been observed that the foreign direct investment has been able to improve the infrastructural condition of a country. There is ample scope of technological development of a country as well. The standard of living of the general public of the host country could be improved as a result of the foreign direct investment made in a country. The health sector of many a recipient country has been benefited by the foreign direct investment. Thus it may be said that foreign direct investment plays an important role in the overall economic and social development of a country.
It has been observed that the private sector companies are not always interested in undertaking activities that help in improving the infrastructure of the country. This is because the gains form these infrastructural activities are made only in the long term; there are no short term benefits as such.
This is where the foreign direct investment can come in handy. It can also assist in helping economically underdeveloped countries build their own research and development bases that can contribute to the technological development of the country. This is a very crucial contribution as most of these countries are not able to perform these functions on their own. These assistances come in handy, especially in the context of the manufacturing and services sector of the particular country, that are able to enhance their productivity and ultimately advance from an economic point of view.
At times foreign direct investment could be provided in form of technology. Else, the money that comes in a country through the foreign direct investment can be utilized to buy or import technology from other countries. This is an indirect way in which foreign direct investment plays an important part in the context of economic development. Foreign direct investment can also be helpful in assisting the host countries to set up mass educational programs that help them to educate the disadvantaged sections of the society. Such assistance is often provided by the non-governmental organizations in the form of subsidies. The developing countries can also tackle a number of healthcare issues with the help of the foreign direct investment.
Foreign Direct Investment Policies
The foreign direct investment policies are the various rules and regulations that have been laid down by the various countries in order to regulate the overseas investment that is being made in a country.
The foreign direct investment policies take an important part in determining the amount of foreign direct investment that comes in a country. These policies play an important part in the decision making process of the foreign direct investors.
They are normally affected by the foreign direct investment policies that are in place in a country and make their decision based on these policies. If the policies are suitable enough for the companies they go ahead with their investment.
The foreign direct investment policies provide the various conditions under which foreign direct investment may be made in a country. They also state the various situations where exception would be made to the allowances that are provided to the foreign direct investors.
The foreign direct investment policies are reviewed on a regular basis. The changes that are made to the policies are also notified through a variety of means like the press notes for example. There is also some mention in the policies about the various ways in which foreign direct investment may be made in various sectors.
There are certain conditions where the investors need to seek permission from the various authoritative figures like the national government or any other entity that is responsible for looking after the various affairs that are related to foreign direct investment.
The foreign direct investment policies are made mainly by entities that are responsible for looking after the matters related to foreign direct investment in a country. The policies may also be formulated by organizations that are meant to promote the country as foreign direct investment destination. There are certain objectives behind the foreign direct investment policies. The makers of these policies have two broad objectives – to promote the investment opportunities that are present in the country to the overseas investors and strike a balance between the overseas and local investors.
These policies also have various proposals that are made in order to improve the policies that are in place for administering the foreign direct investment policies. These proposals are important as they help in improving the foreign direct investment policy situations and amend them so that they can appeal to the overseas investors. This would lead to an increase in the foreign direct investment that is coming into the country. The foreign direct investment policies also state the various areas where a country's government would not allow foreign direct investment to be made. Some of those areas are real estate and housing, gambling, lottery business, betting and chit funds for example.
Certain countries have formulated a number of foreign direct investment acts. These acts lay down the various conditions where certain companies have to seek permission from important authorities in order to receive foreign direct investment of any form and shape. There are certain companies that are granted such permissions but only after they complete certain formalities.
These formalities also need to be observed even after the permission has been provided to these companies as far as foreign direct investment is concerned. The various options in which an overseas investor can gain entry into the market of a country for the purposes of making foreign direct investment are also mentioned in these foreign direct investment policies.
Foreign Direct Investment and Infrastructure Development
One of the many areas in which foreign direct investment can benefit a country or any entity, for that matter, is that of development of infrastructure. It has been observed over the years, that a lot of countries as well as other recipients of direct investment from overseas entities have used that money in order to develop the infrastructural facilities at their disposal.
All the various types of infrastructure that are at the disposal of a country like health or education, for example, may be benefited by foreign direct investment.
Technological infrastructure is one of the many areas in which foreign direct investment is meant to benefit a country. With the help of foreign direct investment being made in a country the government can construct, as well as, improve the existing technological tools at their disposal.
This in turn also plays a very crucial role in the economic development of a country as this technological advancement assists a country in upgrading its industries and thus helps them to face the challenges of the contemporary global economy.
Foreign direct investment is also capable of upgrading the health infrastructure of a particular country. This could be done by way of providing high-end equipments or medicines.
Such investment is normally made by the world level organizations in countries that are economically backward and have no or little medical infrastructure to speak of. For years, the World Health Organization, as well as the World Bank and the International Monetary Fund have been providing a number of the economically backward countries, all over the world and especially in Africa, with money and medicines in order to eradicate critical diseases or improve the medical infrastructure in place.
They have also been sponsoring public health awareness programs that make people aware about critical diseases that need to be eradicated. In India, for example, pulse polio and HIV prevention measures have been at the center of such activities.
Communication infrastructure is an important area where the foreign direct investment can come in handy. The money that is invested in a country by overseas entities can be used for the construction of roads, railways and bridges.
These facilities are used for establishing connections with the remote areas of a country and for transporting important services to these parts like medicines and aids at times of floods or other natural disasters. A lot of construction groups are taking active interest in developing the communicational infrastructure of other countries.
Foreign direct investment is also used for the purpose of educating the unskilled labor force that is present in a country. In India during the later stages of 80s and 90s there was a situation whereby there was a huge labor force but it was mostly unskilled and was employed in the unorganized sector.
It was possible with the help of the financial assistance from the overseas direct investors to train these people so that they may be capable of being recruited into the industry. Foreign direct investment is also useful for executing mass educational programs that can educate those people who remain out of the bounds of conventional and institutional education as they are not able to afford it or it may not be available in their areas.
The challenge for policy makers in 2008 is to build up a business environment, which is competitive as well as flexible. Economic policies of nations need to be conducive for investment. Side by side they need to possess an efficient regulatory framework for the promotion of market security as well as the disbursement of long run economic benefits among the populace.
Inflows in Foreign Direct Investment
The United States of America has been doing well as far as foreign direct investment is concerned. It is presently one of the major recipients of foreign direct investment in the world. However, this position of the USA is corroborated by the decent performance of the economically developed countries as far as receiving foreign direct investment is concerned.
During the year 2006 the foreign direct investment made in the economically developed countries has been $800 million. This has been an improvement of 48%.
The amount of foreign direct investment made in the United Kingdom has also been on the higher side compared to the previous years. The 25 members of the European Union have received 45% of the total foreign direct investment made in the year 2006.
The foreign direct investment in the members of the Organization for Economic Co-operation and Development has been far from being impressive. The foreign direct investments made in these countries have been on a downward slope since 2003.
This situation has been brought about by the relatively unimpressive economic performance of the significant members of this association in the recent times.
Such a recession in the performance has acted as a hindrance to the external and the internal investors. The foreign direct investors have not been interested in the companies of these countries. With regards to foreign direct investment the condition of Japan has been critical in the recent times. In the year 2006 Japan experienced its first negative cash inflow in 17 years.In Africa the foreign direct investment has touched new heights. More than $38 billion has been invested in the recent years and this is a record in itself. This has happened owing to the increase in the foreign direct investment that is being made in countries that have high oil and other natural resources.
It has been observed that these countries have been receiving foreign direct investment from the economically developed, as well as developing countries. The mergers and acquisitions in the first six months of 2006 have also been three times higher than what they were in the similar time in 2005. However, it has also been seen that countries that have lesser natural resources have lesser foreign direct investment.
In the Caribbean and the Latin American region the rate of foreign direct investment has been on the wane. Mexico and Brazil are the leading countries in this region as far as foreign direct investment is concerned. The inflows have increased by 6% in Brazil and in Mexico the rate has been steady.
Chile has experienced a 48% increase in the foreign direct investment being made in their country. This has been owing to the fact that the mining industry of Chile has had the lion's share of the reinvested earnings. However, the foreign direct investments made in Argentina and Chile have gone down by 30% and 52% respectively.
In the countries like Bolivia, Venezuela and Ecuador the governmental stance towards the extractive industries has changed. They are now pushing for increased revenues, as well as governmental control. This is expected to have a negative effect on the investors.
In Asia and Oceania the foreign direct investment has been on the higher side. The figure for 2006 was $230 billion and this was an improvement of 15% from 2005. China, Hong Kong and Singapore have been the leading investment destinations in this area.
In the South Asian region, China and India have been the leading investors. India has invested twice that what it did in 2005. India has also experienced unprecedented levels of foreign direct investment in the country. In the West Asian region, countries like Turkey and others that have vast oil reserves have also been receiving high foreign direct investment.
Foreign Direct Investment in 2007
In the year 2007, world has witnessed an improvement in the total foreign direct investment by 17.8% compared to 2006. In 2006 the figure was 1305.9 billion dollars and in 2007 the figure became 1537.9 billion dollars.
Among the developed economies of the world Netherlands has had the highest percentage increase in the foreign direct investment received. It got 104.2 billion dollars in 2007 compared to 4.4 billion dollars in 2006. This was an improvement of 2285.1% .
The second in this case has been France, which has collected foreign direct investments worth 123.3 billion dollars, compared to 81.1 billion dollars in 2006. This is an improvement of 52.1%.
The economically developing countries have also been doing well in the recent years in the context of receiving foreign direct investment. In the year 2006 they received 379.1 billion dollars through foreign direct investment and in 2007 the amount went up to 438.4 billion dollars.
This was an increase of 15.7%. The highest grosser in Africa was Morocco, who got 5.2 billion dollars in 2007 compared to 2.9 billion. This was an increase of 78.6% from 2006. However, the African continent has received only 35.6 billion dollars in 2007 compared to 35.5 billion dollars in 2006.
This has meant an improvement of only 0.1%. In Africa the second country in terms of foreign direct investment has been Egypt. It has earned 10.2 billion dollars in 2007 and in 2006 it had earned 10 billion dollars by way of foreign direct investment.
In the Latin America and the Caribbean region there has been a marked improvement in the foreign direct investment received by the country. In 2006 the figure was 83.8 billion dollars and in 2007 the amount was 125.8 billion dollars.
The leader in this zone has been Brazil with a 99.3% increase in the foreign direct investment received by Brazil. In 2006 the amount was 18.8 billion dollars and in 2007 the amount was 37.4 billion dollars. In this area Mexico has been the second highest grosser with a 92.9% increase in the foreign direct investment. It had earned 36.7 billion dollars in 2007 compared to 19 billion dollars in 2006.
In the Asia and Oceania area there was an improvement of 6.6%. In 2006 the foreign direct investment was 259.8 billion dollars and in 2007 the amount was 277 billion dollars. Malaysia has been the leader in Asia and Oceania with foreign direct investment worth 9.4 billion dollars compared to the 6.1 billion dollars in 2006. This has meant an improvement of 54.4%.
As far as the transitional economies are concerned the foreign direct investment received by them has been on the higher side in 2007 compared to 2006. In the year 2006 the amount was 69.3 billion dollars and in 2007 the amount stood at 97.6 billion dollars.
This was an improvement of 40.8 billion dollars. The Russian Federation has been the highest grosser in this region. It had earned 28.7 billion dollars in 2006 and in 2007 it earned 48.9 billion dollars by way of foreign direct investment. This was an improvement of 70.3%.
Sectoral Performance through Inflows of Foreign Direct Investment
As per the reports of the UNCTAD or United Nations Conference on Trade and Development, it is pretty clear that the sectoral performance of the inflows of foreign direct investment is not always as good as it is expected to be.
For example, in 1999 the foreign direct investment in India went down to 2.2 billion dollars compared to 2.6 billion dollars in 1998.
This should not have been the case as the economic liberalizations had been effected and a better performance was being expected on the foreign direct investment front. This is all the more surprising in the context of the fact that the foreign direct investment made in India had gone up from 2.4 billion dollars in 1996 to 3.6 billion dollars in 1997.
During the same period in 1998, the total foreign direct investment made in the world has experienced a major rise. The amount had gone up to 644 billion dollars and this was an increase of 40%. In 1999 the total foreign direct investment of the world reached 865 billion dollars.
It was an increase of 27%. The foreign direct investment in the health sector has picked up in the recent years. This has been, to a large extent, owing to the General Agreement on Trade in Services, which has sought to liberalize the trading of services.
This agreement recognizes the foreign direct investment to be an important part of the trade agreements. However, there are some important areas in this case that need to be looked at and considered carefully. The various details of the agreement like the commodities and type of negotiation are extremely important in this case and the performance of the foreign direct investment would depend highly on these factors.
There has been a huge amount of foreign direct investment in the power markets around the world. This is applicable for the economically developing as well as developed countries. As far as the economically developing countries are concerned the Chinese power sector has been one of the major names.
During 2002 the Chinese power sector received 52.7 billion dollars in foreign direct investment. The United States of America is one of the leading names when it comes to receiving foreign direct investment in the economically developed countries is concerned. However, it is expected that in the near future China would leave the USA behind in terms of receiving foreign direct investment in the power sector.
The sectoral performance of the foreign direct investment in case of the service sector has been comparatively limited in the economically developing countries. This is all the more applicable for the countries in the South-East Asian region like Sri Lanka, Bangladesh, India, Nepal, and Pakistan.
All of these countries, with the exception of Nepal, have liberalized certain sections of their service sectors for the foreign direct investors. This has also reflected in the sectoral performance statistics of the foreign direct investors in the country. Overall, in 2005 the South-East Asian countries have received 30 billion dollars in foreign direct investment and the investments have mostly been in the financial, telecommunications, construction and transportation service sectors.
UNCTAD Commitment on FDI
UNCTAD, as one of the major institutional stakeholders in the Financing for Development process, is deeply committed to make a contribution on FDI.
Presently some developing countries are taking advantage of the opportunities offered by globalization. Most of the African countries constituting least developed countries (LDCs) and small, vulnerable economies remain relatively marginalized from global economic opportunities. In all cases a substantially increased availability of development resources is necessary for achieving the millennium development goals (MDGs) and for securing sustainable development.
Global flows to developing countries picked up in 2004.But concentration was on few countries. The concentration is even higher if one looks at quality FDI. For many low-income countries, including most LDCs, the issue is not only how to attract foreign direct investment but how to attract the kind of FDI that can contribute to economic growth and development.
In connection with facilitating FDI, two aspects have arisen that are now receiving special attention from the international community that is risk mitigation and home country measures.
Facilitating flows of FDI, including the technology transfer associated with it, may require the direct and active involvement of the home countries of transnational corporations (TNCs). UNCTAD research has found that providing tax breaks for small and medium-sized enterprises in developed countries that are willing to invest in developing countries could stimulate such flows. Home country incentive schemes to stimulate linkages between foreign affiliates and domestic firms in developing countries could also help developing countries benefit more from foreign direct investment.
In terms of the impact of FDI, an important challenge is to encourage and facilitate the contributions that TNCs can make for attaining MDGs. Specifically; corporations should be encouraged to include information on their MDG contributions in their annual reports.
UNCTAD is examining the issue of maximizing the contribution of corporations to the economic development of host developing countries and minimizing costs. It is also committed to disseminating best practices in this matter.
FDI in BIMST-EC Countries
Foreign direct investment (FDI) in the Bay of Bengal initiative for Multi-Sectoral Technical and Economic co-operation' (BIMST-EC) comprising Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan and Nepal has declined to US$12 billion in 2003-04 from US$15 billion in 1999-2000, according to an ASSOCHAM study.
An analysis conducted by associates chambers of commerce and industry of India revealed that India on an average accounted for 69.6% while Thailand attracted 21.7% of total FDI inflows in the region during the year 2003-04.
ASSOCHAM president M.K.Sanghi said in a statement that," The region has lagged behind in attracting FDI because it still operates within framework of regulatory reforms beside it faces infrastructure and procedural bottlenecks. Socio political conditions are not so conducive to attract foreign investors."
A study said despite the fall in FDI the total International trade from the region has increased rapidly. Total exports from BIMST-EC countries have increased to US $143.2 billion in 2003-04 from US$ 104.9 billion in 1999-2000 and imports touched to US$152.5 billion fromUS$103.4 billion in 1999-2000.
The US is the leading trade partner with BIMST-EC countries followed by Japan and Singapore.
The member countries feel that integration of textile and clothing sector into WTO would impact the exports prospects of the region, as majority of them are exporters of textiles and clothing. There is need of strong ties among themselves with introducing innovations in these areas to increase shares in the overseas market.
FDI IN INDIA AND US
India and the US have multi faceted relations in the field of politics, economics and commerce. India-US economic relations in the form of bilateral investments and trade constitute important elements in India-US bilateral relations particularly because India is now the second fastest growing economy in the world and USA is the world's largest economy.
Economic Reforms introduced since 1991 have radically changed the course of the Indian economy and has led to its gradual integration with the global economy. The effect of this reform process on trade and investment relation with US is profound. USA is the largest investing country in India in terms of FDI approvals, actual inflows, and portfolio investment. US investments cover almost every sector in India, which is open for private participants. India's investments in USA are picking up. USA is also India's largest trading partner. By 2003, India became the 24th largest export destination for the US. In terms of exports to the US, India now ranks eighteenth largest country.
US investment in India
With regards to FDI U.S. is one of the largest foreign direct investors in India. The stock of actual FDI Inflow increased from U.S. $11.3 million in 1991 to US $4132.8 million as on August 2004 recording an increase at a compound rate of 57.5 percent per annum. The FDI inflows from the US constitute about 11 percent of the total actual FDI inflows into India.
Top sectors attracting FDI from USA are: Fuels (Power & Oil Ref.) (35.93%), Telecommunications (radio paging, cellular mobile & basic telephone services (10.56%) Electrical Equipment (including Computer Software & Electronics) (9.50%), Food Processing Industries (Food products & marine products) (9.43%), and Service Sector (Fin. & Non-Fin. Services) (8.28%).
India's investment in US
India's direct investment abroad was initiated in 1992. Streamlining of the procedures and substantial liberalization has been done since 1995. As of now, Indian corporate/Registered partnership firms are allowed to invest abroad up to 100% of their net worth and are permitted to make overseas investments in business activity.
The overall annual ceiling on overseas investment and also the requirement of prior approval of RBI for diversification of activity and for transfer by way of sales of shares have been done away with. The need for opening up the regime of Indian investments overseas has been the need to provide Indian industry access to new markets and technologies with a view to increasing their competitiveness globally
Since 1996 and upto September 2004, the total approved Indian investment abroad amounts to US $ 11083.11 mln, of which 60.9% has been the actual outflow. US share ($ 2080.367 mln.) constitutes 18.77% of the total approval. Since 1996, USA attracted highest Indian direct investments (US$ 2080.367 mn) followed by Russia (US$ 1751.39 mn), Mauritius (US$ 948.864 mn) and Sudan (US$ 912.03 mn). India's outgoing investments has been largest in the field of manufacturing (54.8%) followed by non-financial services including software development (35.4%).
In the current financial year 2004-05(April- August, 2004) actual outflows from India on account of overseas investment was US$ 575.14 million as compared to US$ 384.49 million in the corresponding period of last year. In the current year, USA attracted highest Indian direct investments (US$ 125.4 mn) followed by Australia (US$ 116.33 mn), Kazakhstan (US$ 39.05 mn) and Hong Kong (US$ 28.49 mn). India's outgoing investments was largest in the field of manufacturing at US$ 279.07 million followed by non-financial services (including software development) at US$ 75.27 million, Others at US$ 61.27 million and Trading Sector at US$ 30.3 million. The returns on account of repatriation of dividend, royalty, consultancy fee etc. from overseas JV/WOS during April-August, 2004 amounted to US$ 40.87 million.
The US investor community is increasingly sharing confidence in the future of the Indian economy presently. The growing synergy between the two countries in the technology sectors and mutually shared respect for democracy, rule of law and well established business practices have considered the two countries natural business partners from time to time.
Steps to Attract FDI
Promotional efforts to attract foreign direct investment (FDI) have become the important point of competition among developed and developing countries. This competition is also maintained when countries are adopting economic integration at another level. While some countries lowering standards to attract FDI in a "race to the bottom," others praise FDI for raising standards and welfare in recipient countries.
There are several trends, which are reinforcing traditional impulses for foreign direct investment that is access to natural resources, markets, and low-cost labor. With the rise of globalization technological progress allows for the separation of production into more discrete phases across national barriers. Expansion in Information and communication technologies, Improvement in logistics necessarily allow production to be close to markets while taking advantage of the specific characteristic of individual production locations.
Countries have adopted their respective policies for attracting more investment. Some countries rely on targeted financial concessions like tax concessions, cash grants and specific subsidies. Some countries focus on improving the infrastructure and skill parameter and creating a base meet the demands and expectations of foreign investors. Others try to improve the general business climate of a country by changing the administrative barriers and red tapism. Many governments have created state agencies to help investors through this administrative paperwork. Finally most of the countries have entered into international governing arrangements to increase their attractiveness for more investment.
"Better Investment Climate" Need of the Hour.
Sound investment climate is crucial for economic growth. Microeconomic reforms aimed at simplifying business regulations, strengthening property rights, improving labor market flexibility, and increasing firms' access to finance are necessary for raising living standards and reducing poverty in a country.
Reform is necessary for creating an investment-oriented climate. Reform management matters as investment climate reforms are done politically. They often favor unorganized over organized groups and the benefits tend to accrue only in the long term, while costs are felt up front. Political decisions play a significant role in this context.
Each and every countries over the globe are stepping forward to change the climate for attracting more investment. Opening up of doors by most of the nations have compelled them for adopting reforms.
FDI make it Pro-Poor
Foreign investors are exploiting workers in poor countries and initiating a "race to the bottom" in environmental and labor standards. The experience comes from countries like Singapore, China, Chile and Ireland which demonstrate how foreign direct investment (FDI) - with its transfer of technical and organizational innovations and best practices stimulate rapid growth in incomes for all members of society. When international flows of capital falter there's evidence that the poor in developing countries suffer the most. In this context World Bank President James D. Wolfensohn predicted that between 20,000 and 40,000 more children may die worldwide and some 10 million more people may be condemned to live below the poverty line of one dollar a day because of the global economic aftershocks.
The extent to which foreign investment can help or harm the poor largely depend upon what governments and firms choose to do. Many multinational companies voluntarily adopt environmental, social, and governance practices designed precisely to guard against abuse of the environment and the workforce when they invest in developing countries. But governments in developing countries should facilitate and encourage the transfer of this social and environmental practice and maximize the benefits from FDI. A Government keen to ensure FDI is truly pro-poor should follow the following points.
# Clear the way for free entry and exit in domestic markets by creating competition in product and labor markets and incentives to upgrade productivity and to prevent exploitation of consumers and workers.
# Promote education, worker training, and infrastructure to increase domestic capacity to absorb and diffuse good new practices introduced by foreign investors.
# Create a policy framework that encourages the adoption of appropriate social and environmental standards in corporate practices.
Trends in Global Foreign Direct Investment
Flow of Foreign Direct Investment has grown faster over recent past. Higher flow of Foreign Direct Investment over the world always reflect a better economic environment in the presence of economic reforms and investment-oriented policies.
Global flow of foreign direct investment reached at a record level of $ 1,306 billions in the year 2006. Increase in FDI was largely fuelled by cross boarder mergers and acquisitions (M&As). FDI in 2006 increased by 38% than the previous year.
# Most of the developing and least developed countries worldwide equally participated in the process of direct investment activities. FDI inflows to Latin American and Caribbean region increased by 11 percent on an average in comparison to previous year.
# In African region FDI inflows made a record in the year 2006.
# Flow of FDI to South, East and South East Asia and Oceania maintained an upward trend.
# Both Turkey and oil rich Gulf States continued to attract maximum FDI inflows.
# United States Economy, being world’s largest economy also attracted larger FDI inflows from Euro Zone and Japan.
The following diagram shows the annual Growth of FDI inflows over the world:
Higher inflows of FDI to a country largely generates employment in the nation. FDI in manufacturing sector creates more employment opportunities than to any other sectors.
For the year 2006, countries such as Luxembourg, Hong Kong China, Suriname, Iceland and Singapore ranked in the top of Inward performance Index Ranking of the UNCTAD.
Over recent years most of the countries over the world have made their business environment investment friendly for absorbing global opportunities by attracting more investable funds to the country.
Cross Boarder Merger and Acquisitions
Cross Boarder Merger and Acquisitions over the world has grown very strongly these days. In the year 2006, cross boarder merger and acquisitions increased at a rate of 23 percent. Growing value of merger and acquisitions was largely contributed by the better performance of the stock market and increased asset value of enterprises.
Number of deals among the enterprises globally reached at a record level led by desires among the firms to take part in global competition.
Merger and Acquisitions Scenario Across Regions:
# In North American region, value of merger and acquisition nearly doubled in 2006.
# In United States, largest cross boarder merger and acquisitions sales took place.
# Sale and purchases of Merger and Acquisitions remained buoyant in the European region.
# Investors from emerging market economies from the countries such India, China and Russian Federation actively participated in the field of Global Merger and acquisitions.
Merger and Acquisition mainly took place in consumer goods and services industries.
Number of Cross Boarder Merger and Acquisitions valued at over $ 1 Billion reached at 172 compared to 141 in previous year.
Find below the numbers of Cross Boarder Merger and Acquisitions valued at over $ 1 Billion:
India
FDI in India Grows 45% Despite Global Meltdown
Notwithstanding the global financial crisis, India recorded a 45 per cent growth in Foreign Direct Investment by receiving USD 23.3 billion between April and December 2008 over the same period in the previous year.
Even during the fiscal 2007-08, India's FDI was a record USD 32.4 billion, Finance Minister Pranab Mukherjee said while presenting the interim budget in the Lok Sabha.
Seeking to present a rosy picture of the country's financial health despite the global meltdown which began in 2007 impacting most emerging market economies, he said 7.1 per cent rate of GDP growth in the current year makes India the second fastest growing economy of the world.
"The fallout of global slowdown on Indian economy was countered with fiscal stimulus packages announced in December 2008 and January 2009 providing tax relief to boost demand and increasing expenditure on public projects," he said.
To keep the economy going, Mukherjee said, the government has accorded approval to 37 infrastructure projects worth Rs 70,000 crore from August 2008 to January 2009.
Government also gave in-principle or final approval to 54 central sector infrastructure projects with a project cost of Rs 67,700 crore and 23 projects amounting to Rs 27,900 crore were approved for viability gap funding in 2008-09. (MORE)
"India has arrived on the international economic scene," Mukherjee said.
"Increased global competitiveness of Indian enterprise, its resilience to global shocks, and a positive economic outlook has contributed to a marked change in the way the Indian economy is being viewed, within and outside the country," he said.
Foreign Direct Investment (FDI) in India
FDI has helped the Indian economy grow, and the government continues to encourage more investments of this sort – but with $5.3 billion in FDI in 2004 India gets less than 10% of the FDI of China.
Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has – in a lot of ways – enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that may have needed economic attention, and address the various problems that continue to challenge the country.
India has continually sought to attract FDI from the world’s major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage FDI and present a favorable scenario for investors.
FDI investments are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through Euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal & lignite or mining industries.
A number of projects have been announced in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors.
The Indian national government also provided permission to FDIs to provide up to 100% of the financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately $352.5m.
Currently, FDI is allowed in financial services, including the growing credit card business. These services include the non-banking financial services sector. Foreign investors can buy up to 40% of the equity in private banks, although there is condition that stipulates that these banks must be multilateral financial organizations. Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased.
By 2004, India received $5.3 billion in FDI, big growth compared to previous years, but less than 10% of the $60.6 billion that flowed into China. Why does India, with a stable democracy and a smoother approval process, lag so far behind China in FDI amounts?
Although the Chinese approval process is complex, it includes both national and regional approval in the same process.
Federal democracy is perversely an impediment for India. Local authorities are not part of the approvals process and have their own rights, and this often leads to projects getting bogged down in red tape and bureaucracy. India actually receives less than half the FDI that the federal government approves.
The Minister said Indian economy has grown at an "impressive" 8.6 per cent over the last five years, "which is faster than ever before".
This growth, he said, has been "more inclusive" providing people expanded opportunities for livelihood.
"The creative energies of our farmers, entrepreneurs, businessmen, scientists, engineers and workers have been unleashed," he said
US International Direct Investment Flows:
Period FDI Outflow FDI Inflows Net
1960-69 $ 42.18 bn $ 5.13 bn + $ 37.04 bn
1970-79 $ 122.72 bn $ 40.79 bn + $ 81.93 bn
1980-89 $ 206.27 bn $ 329.23 bn - $ 122.96 bn
1990-99 $ 950.47 bn $ 907.34 bn + $ 43.13 bn
2000-07 $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn
Total $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn
Climate for Foreign Direct Investment
Countries are adopting new approaches to growth and development based on economic liberalization and recognition that integration into the global economy is an important challenge. In particular, developing countries have increasingly come to see foreign direct investment (FDI) and international trade as a source of economic development, modernisation, income growth and employment.
Foreign Investment
In the immediate post-war period, stimulated by the success of the Soviet Union, most developing countries pursued a policy of investment-led growth. The emphasis was on increasing the investment rate and not the productivity of investment. However, many of the developing economies found that higher investment (which represents a sacrifice of current consumption) did not lead to high growth as many were faced with declining investment productivity. In recent years, many of these countries have shifted their focus from the absolute level of investment to the productivity of investment. The most important shift in this regard has been a move to trade liberalisation.
Perceived Benefits of Foreign Investment
The benefits that foreign investors may bring to host countries, although not guaranteed, may be vital in helping developing countries meet the challenge of integration into the competitive global economy. The major benefits associated with foreign investment include technology transfer, job creation and export development. Poor countries on average are helped by foreign investment in form of money, equipment, machines and factories, as well as infrastructure improvements such as roads and bridges.
The potential drawbacks include the deterioration of the balance of payments as profits are repatriated, lack of positive linkages with local communities, the environmental impact especially in the extractive and heavy industries, competition in national markets and the risk that host countries, especially small economies, may experience a loss of political sovereignty. Some of the expected benefits may prove elusive, if, for example, the technologies or know-how transferred turn out to be ill-adapted to the host economy.
Critics argue that foreign investment often leaves poor people vulnerable to the worst forms of corporate abuse. It is claimed that all too often, big business is allowed to trample on peoples’ rights, evicting them from their homes, squeezing them out of business and refusing to allow workers to join unions or make a decent wage. It has also been observed that there is no automatic link between foreign investment and growth. A report by Action Aid (2002) points to the experience of Latin America and the Caribbean in the 1990s compared with the 1970s to argue that “there is no automatic link between increased FDI and (economic) growth.” FDI in the region was 13 times greater in the 1990s than in the previous period, while growth in the region’s gross domestic product was 50 percent lower. The reason was that FDI was concentrated in buying state-owned assets, such as mines or telecommunications companies, rather than creating new industries that provided new jobs and technology.
Determinants of FDI
On balance, the benefits of FDI exceed the costs. Benefits are, however, not homogeneously distributed across sectors and countries. For maximising the benefits of FDI, policies matter. Many challenges befall the host country authorities to improve economic structures, infrastructure and human capital.
Market Access
Countries where the state exerts a large degree of control over economic activity and restricts the private sector’s freedom to conduct business are not attractive to potential investors. The regulatory environment must also allow MNCs to compete on an even footing against local companies (foreign firms are often monitored more closely than their local counterparts).
Capital Repatriation.
Investors focus on the regulations affecting their ability to take invested capital and profits out of the host country. Relevant regulations may consist of tax rates, restrictions or burdensome procedure on taking hard currency out of the country. Typically, local subsidiaries will transfer profits to the parent company through dividends, interest payments, or royalties and/or technical assistance payments. MNCs may also wish to sell some of their holdings of the local company. Countries that restrict these activities have less attractive investment climates.
Protection of Intellectual Property Rights
Intellectual property refers to a company’s ownership of the intangible as well as tangible products of its research. These include its manufacturing processes, software, and marketing techniques. A company’s ownership rights are protected through the use of patents, copyrights, trademarks, protection of trade secrets, and other laws covering proprietary technical data. Given that a significant proportion of their assets consists of intangibles, the protection of intellectual property is a high priority for MNCs, in dynamic industries such as computers, telecommunications, and pharmaceuticals, in which technology is a major competitive weapon in the development of new products and markets. For the host countries, the attraction of such industries is of the highest priority, because they offer the highest potential benefits in terms of technology transfer and development of a local high-technology industrial base. To attract investment in these industries, host governments must ensure the effective enforcement of intellectual property rights.
Some countries are lax in the protection of intellectual property because companies that use proprietary technology illegally may spring up quickly and provide jobs and growth for the host country. In the entertainment industry (through illegally produced videos, movies, and music) and the pharmaceuticals industry (through illegally copied drugs), this practice is widespread and costs the rightful owners of the patents and copyrights hundreds of millions of dollars in lost revenues. Because of the stakes involved, the protection of intellectual property has become a major trade issue between countries.
Trade Policies
Since cost is a crucial factor in the competitiveness of exports on international markets, high tariffs make countries unattractive to foreign investors. Similarly, quotas, burdensome licensing or approval procedures, and other nontariff barriers for imports may also raise costs or slow the production cycle and consequently dampen competitiveness and investment.
Licensing procedures also affect the ability to export goods out of the host country. Many countries require exporters to go through several steps before they can ship their products. They may have to get permission from the central bank, clear their goods through customs, or secure other approvals. Fees may also be charged for exporters to obtain the necessary licenses and permits. These requirements may raise costs and delay the appearance of the finished products at the market. Given the intense competition among global producers in numerous industries, higher costs and delays make host countries less competitive and less attractive.
Government Regulation.
Too much regulation can create distortions that raise costs and cause markets and firms to function less efficiently. For example, many governments have labour laws designed to protect workers’ jobs by making it difficult for firms to dismiss workers despite changing market conditions. Other laws may dictate wage rates for workers (such as the minimum wage law) or may require firms to provide a host of benefits. These laws may raise costs for foreign investors, who often look for competitive edges in labour costs in assessing potential investments. Thus, laws intended to help workers may actually hurt them by discouraging investors from investing their capital and creating jobs.
Government regulations in other areas also discourage potential investors. Policies may dictate interest rates and/or designate priority sectors where available capital should be invested. Governments may create numerous procedures for getting foreign investments approved or establish other bureaucratic requirements or restrictions that may hamper investors’ ability to move their capital and/or profits into and out of the country quickly. Investors seek flexibility to enable them respond to rapidly changing market conditions. Regulations that hamper firms’ flexibility (such as when governments reserve specific sectors for state-owned enterprises) serve as a deterrent to investment.
Tax Rates and Incentives.
Excessive tax burdens on investments and profits will discourage MNCs from investing in a prospective host country. The tax burden involves not only tax rates, but the tax treatment of dividends, royalties, remittances, and other transactions between local subsidiaries and their parent companies. To improve their attractiveness relative to competing countries, many countries offer packages of tax and other incentives for foreign investors.
Political Stability.
Stable political environments give investors confidence that the “rules of the game,” or laws and regulations governing their investment and the markets in which they operate, will remain basically the same over the long term. When capital is risked in a direct foreign investment, a long-term time horizon is usually required for the investment to generate the expected profits. Investors’ confidence reflects not only their perceptions of the current climate but their expectations about the political as well as economic outlook over the medium and long term.
The attitude of government officials, labour leaders, and private-sector leaders in the host countries also affect perceptions of the host country’s stability and attractiveness. Some countries may espouse a policy of encouraging foreign investment on one level, while at other levels officials may seek to impede such investment through bureaucratic obstructions and other means. Similarly, labour leaders who threaten strikes create a climate of instability that undermines foreign investment. Private-sector leaders may wish to keep MNCs out of their local markets for fear of not being able to compete with them. These groups may take advantage of weak political systems and change the rules of the game in ways that are unfavorable to foreign investors.
CHARACTERISTICS OF MNCS:
- Co-ordination and control of various stages of individual production chains within and between different countries;
- Potential ability to take advantage of geographical differences in the distribution of factors of production and in state policies (taxes, trade barriers, subsidies etc); and
- Potential geographical flexibility to switch and re-switch between its sources and operations between locations at an international level.
(Dickens 2003)
THEORY OF GLOBALISATION OF THE FIRM
Most famous theory is John Dunning’s Eclectic Theory (multi-disciplinary framework) or OLI Paradigm.
The decision to internationalise occurs because of the advantages of:
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Ownership: of property rights over assets (capital, technology, labour, natural resources) and specific advantages of know-how (knowledge), organisational and entrepreneurial skills.
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Internalisation: reduction of transaction costs (compare Principal-Agent Theory) through hierarchial organisations and vertical integration and resulting fall in costs.
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Location-specific advantages: cultural, political and social environment of country; low labour costs; government incentives; and size and structure of market.
Decision to produce abroad depends on all three conditions, the relative importance of which will vary from situation to situation.
ORGANISATION OF MNCS
From the early 20th century and until 1970s the characteristics of mass-production have been called ‘Fordism’. This is named after Henry Ford’s River Rouge plan which employed 35,000 people under one roof: coal and iron went in at one end and complete Ford cars rolled out of the other.
Types of MNC expansion:
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Horizontally integrated MNCs: produces same product in different countries with some variations to suit local markets; for example, breweries. Primary objective of this strategy is to achieve growth by expanding into new markets.
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Vertically integrated MNCs: various stages of production in different countries are able to exert control over costs and reduce the uncertainty of the business environment; for example, the oil companies (extraction, refining, producing by-products, retail sales).
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Conglomerate MNCs: produce a range of different products in different countries. This spreads risks and by careful buying of overseas assets maximises returns. Examples of such companies include Unilever: (brands include Wall’s, Ben & Jerry’s icecream, Birds Eye frozen food, Knoor Soups, Ponds skin care products, Signal toothpaste, Dove and Lux soaps, Calvin Klein fragrances etc).
The above show that MNCs achieve both cost advantages and growth opportunities.
COSTS REDUCTIONS AND GROWTH OPPORTUNITIES
- COSTS REDUCTIONS:
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The costs of labour and other resources: Nike, American sportswear manufacturer, and 40 low cost labour locations in South-East Asia; the retailer Gap and Indian machinists of clothes.
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Labour skills: good quality labour and high productivity results in low costs per unit of production. Examples include graduate call centre operators in India.
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Economies of Scale: achieved by plants in different countries specialising in a particular part of the value chain. A business with large research and development (R & D) cost (usually accumulated in the home country) can spread this fixed cost over an increasing number of outputs, for example, the car assemblers.
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Transport Costs: achieved by local production serving local markets, for example, the breweries.
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Government Policies: for example, avoidance of tariffs and the take-up of government incentives including favourable tax rates, depreciation allowances, the provision of subsidised premises and subsidised labour costs.
- GROWTH OPPORTUNITY:
- Spreading Risks
- Exploiting Competitive Advantages in New Markets
- Learning from Experience in Diverse Markets
MULTINATIONALS AND THE HOST STATE:
ADVANTAGES
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Employment: both direct and indirect through the establishment of new supply networks and the increase in local incomes and expenditure (the multiplier effect).
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The Balance of Payments: FDI results in capital coming into the country and in the longer term import substitution and export promotion but there is an offsetting effect of repatriated profits to the parent country.
- Tracks payments to & receipts from other countries
- FDI can substitute for imports, & can export to other countries
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Technology Transfer: the demonstration effect.
- Taxation
- Resource transfer effects
Supplying capital, technology & management resources
- Employment effects
- Brings jobs directly by MNE employing & indirectly by suppliers employing.
- MNE tend to pay higher wages
- Effects on Competition & Economic Growth
- Green-field increases the number of players, increase competition
- Competition drive down prices & benefit consumers
- Increased productivity, innovation & economic growth
FALLACIES ABOUT MNC’S
- Uncertainty
- Control over Host Country
- Transfer Pricing
- The Environment
CONCLUSION
A variety of academic and international organization studies including the OECD argue that FDI and MNC can increase the rate of productivity growth in the host economy.
The higher productivity rates will lead to stronger real growth as well as lead to spillover effects in the host economy.
Studies on the UK experience with foreign investment conclude that there are significant externalities to foreign direct investment on domestic firms that lead to an increase in productivity in domestic firms in sectors outside of the direct investors'.
Spillover effects come from a variety of sources: corporate management style, labor market practices, scale of operations, corporate governance practices, R&D expenditures, imports, competition with domestic firms, IT experience, and knowledge based assets.
The UK experience suggests that, due to the externalities, the government is justified in actively pursuing policies that improve the investment climate for foreign investors. This includes the expenditure of government revenues in order to improve the investment climate. From earlier work with Japanese firms it is known that the policies that improve the investment environment for foreign firms also improve the investment climate for domestic firms. This can provide domestic political support for these new policy efforts.
The bottom line is that foreign direct investment into Japan will tend to raise productivity, increase competition, enhance labor market flexibility and mobility, reduce costs, create new financial products, reduce government expenditures, and raise real growth rates i.e. all round development . Any policy changes that the government could undertake to encourage foreign direct investment and MNC investment or to make the investment environment (for both domestic and foreign investors) more attractive should be implemented as soon as possible and can tackle any of the above said disadvantages by proper formulation of policies and careful implementation will lead to better than the already ripped benefits.
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Thank you
REFERENCES
- UNO WEBSITE DATABASE
- WTO DATBASE
- OTHER PUBLISHED PAPERS and JOURNALS
- SOME OF THE WORKPAPERS ETC…..
