Foreign Direct Investment: An Overview Essay

What is outside(prenominal) channel enthronisation?Foreign cypher investiture (FDI) is defined as a long-term investing by a outside govern investor in an endeavor resident in an economy other than that in which the immaterial direct investor is based. The FDI relationship consists of a p atomic number 18nt enterprise and a foreign affiliate which together form a transnational mass (TNC). In order to qualify as FDI the investiture must afford the parent enterprise withstand over its foreign affiliate. The UN defines control in this case as makeing 10% or more of the popular shares or voting power of an incorporated unattackable or its equivalent for an unincorporated hard.Understanding Foreign Direct InvestmentForeign direct enthronement (FDI) plays an extraordinary and growing theatrical role in planetary business. It can provide a firm with saucy foodstuffs and selling channels, cheaper output facilities, doorway to new engineering, products, skills and fin ancing. For a army ut nearming or the foreign firm which receives the enthronization, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to sparing development. Foreign direct investment, in its classic definition, is defined as a company from one coldming making a physical investment into building a factory in a nonher earth. In recent years, given rapid growing and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firms headquarters country.As such, it may take many forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic on the wholeiance with a local anaesthetic anesthetic firm with attendant input of engineering, licensing of intellectual property, I n the past decade, FDI has come to play a major role in the internationalization of business. Reacting to changes in technology, growing liberalization of the national regulatory framework judicature investment in enterprises, and changes in capital markets profound changes remove occur bolshie in the size, scope and methods of FDI.New information technology outlines, decline in global communication cost have made management of foreign investments far easier than in the past. The sea change in disdain and investment policies and the regulatory environment globally in the past decade, including trade policy and tariff liberalization, easing of restrictions on foreign investment and acquisition in many nations, and the deregulation and privatization of many industries, has probably been the most(prenominal) significant catalyst for FDIs aggrandiseed role.The most profound effect has been seen in developing countries, where yearly foreign direct investment flows have incr facilit ate from an average of less(prenominal) than $10 one thousand thousand in the 1970s to a yearly average of less than $20 billion in the 1980s, to explode in the 1990s from $26.7billion in 1990 to $179 billion in 1998 and $208 billion in 1999 and now comprise a large portion of global FDI. Proponents of foreign investment render out that the exchange of investment flows benefits both the floor country (the country from which the investment originates) and the host country (the destination of the investment).The push factors indicate the benefits to the investors and the pull factors to the host countries. First, international flows of capital reduce the risk confront by owners of capital by allowing them to diversify their lending and investment. Second, FDI allows capital to seek out the highest rate of return. Third, FDI helps to expand market. For the host countries, it can contribute to the general development as well as to the poverty step-down objective in a variety of ways . Major benefits to host countries are as follows FDI allows transfer of technologyparticularly in the form of new varieties of capital inputsthat cannot be achieved through financial investments or trade in goods and services. FDI can in any case promote challenger in the domestic input market. Recipients of FDI often build employee training in the course of operating the new businesses, which contributes to human capital development in the host country. Profits generated by FDI contribute to corporate tax revenues in the host country. Thus, it contributes not unaccompanied to the direct source of investment but also to the policy-making sympathies revenue. FDI helps to integrate the host countries economy to the global economy.Determinants of FDIFDI is the investment decision of profit-maximising firms facing world-wide competition and where significant differences in cost structures (due to say, factor productivity, wage differential) loose cross-border investment and production. a. Institutional features of the host country degree of political stability and government intervention in the economy the existence of property law legislation the property and tax system adequate stand, and so forth b. Economic factors trade and investment regime the degree of openness of the host countries, the absorptive capacity and growth prospects of the host country fix and variable costs of production relocation the degree of monopolistic competition which prevents the entry of other (domestic and foreign firms general macro sparing performance (inflation, monetary and fiscal policy) etc.c. insurance related factors Fiscal (tax rebates and exemptions) and financial incentives (subsidized loans), laws that restrict FDI in certain sectors on the ground of political sensitiveness of certain industries (oil, broadcasting, etc.) policy that restricts the degree of foreign ownership, (temporal or permanent) the remittance of interest, dividends and fees for technolo gy and the shares allowed to foreign -owned firms through limits on capital repatriation, minimum investment, etc. d. Characteristics of the labor force education, skills, etc. close to features of world FDI drilla. The stabbing increases in world FDI activities that started after 1985. b. Increased activity and concentration of FDI. Indeed, in the 1990s, FDI has become one of the most important sources of external finance in developing countries. USA has become the largest host country in international capital markets, receiving capital from both Japan and Europe. Japan has emerged as a major home country of FDI outflows.c. Developing countries have liberalized financial markets and offered special incentives (lower taxes, subsidies for infrastructure, etc) to attract FDI in the hope of acquiring technical transfer, know-how, and in general, positive externalities.Basic pillowcases of FDI Greenfield investment direct investment in new facilities or the intricacy of existing fa cilities. Greenfield investments are the primary station of a host nations promotional efforts because they compel new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. However, it often does this by crowding out local industry multinationals are able to produce goods more cheaply (because of mod technology and efficient processes) and uses up resources (labor, intermediate goods, etc). Another downside of greenfield investment is that profits from production do not feed back into the local economy, but instead to the multinationals home economy. This is in demarcation line to local industries whose profits flow back into the domestic economy to promote growth. Mergers and Acquisitions transfers of existing assets from local firms to foreign firms takes place the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal ent ity. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Unlike greenfield investment, acquisitions provide no long term benefits to the local economy even in most deals the owners of the local firm are paid in commonplace from the acquiring firm, meaning that the money from the sale could never reach the local economy. Horizontal Foreign Direct Investment investment in the same industry foreign as a firm operates in at home. Vertical Foreign Direct Investment Takes two forms1) Backward vertical FDI where an industry afield provides inputs for a firms domestic production process. 2) Forward vertical FDI in which an industry abroad sells the outputs of a firms domestic production.FDI based on the motives of the investing firmFDI can also be categorized based on the motive behind the investment from the perspective of the investing firm Resour ce Seeking Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. cheap labor and inhering resources). This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe. merchandise Seeking Investments which aim at either penetrating new markets or maintaining existing ones. FDI of this kind may also be employed as defensive strategy it is argued that businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one. susceptibility Seeking Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after either r esource or market seeking investments have been realized, with the expectation that it further increases the party favorableness of the firm. Importance of FDIMaking a direct foreign investment allows companies to accomplish several tasks Avoiding foreign government pressure for local production.Circumventing trade barriers, hidden and otherwise.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.What do companies considering FDI require?Depending on the industry sector and type of business, a foreign direct investment may be an attractive and viable option. With rapid globalization of many industries and vertical consolidation rapidly taking place on a global level, at a minimum a firm needs to keep abreast of global trends in their industry. From a competitive standpoint, it is importa nt to be aware of whether a companys competitors are expanding into a foreign market and how they are doing that. At the same time, it also becomes important to monitor how globalization is affecting domestic clients. Often, it becomes imperative to follow the expanding upon of key clients overseas if an active business relationship is to be well-kept.New market access is also another major reason to invest in a foreign country. At some stage, export of product or service reaches a particular mass of amount and cost where foreign production or location begins to be more cost effective. Any decision on investing is thusly a combination of a number of key factors includingassessment of internal resources,competitiveness,market analysismarket expectations.From an internal resources standpoint, does the firm have senior management support for the investment and the internal management and system capabilities to support the set up time as well as ongoing management of a foreign subsid iary? Has the company conducted extensive market research involving both the industry, product and local regulations governing foreign investment which will set the broad market parameters for any investment decision? Is at that place a realistic assessment in place of what resource utilization the investment will incriminate?Has information on local industry and foreign investment regulations, incentives, profit retention, financing, distribution, and other factors been completely canvas to determine the most viable vehicle for entering the market (greenfield, acquisition, merger, joint venture, etc.)? Has a plan been bony up with reasonable expectations for expansion into the market through that local vehicle? If the foreign economy, industry or foreign investment climate is characterized by government regulation, have the relevant government agencies been contacted and concurred? Have political risk and foreign exchange risk been factored into the business plan?Policies to at tract Foreign Direct InvestmentThere is keen competition among developed and developing countries to attract foreign direct investment (FDI).This motion to lure investment often extends to the sub national level, with different regional authorities pursuing their own strategies and assembling their own baskets of incentives to attract new investments. Various reforms and strategies have been implemented, with mixed results. Some are critical of the high costs of many of these initiatives, arguing that it would be more rewarding to improve a countrys general business environment.The many different methods used by policymakers to attract FDI and their effectiveness are as follows providing targeted fiscal incentives, such as tax concessions, cash grants, and specific subsidies improving domestic infrastructure promoting local skills development to meet investor needs and expectations establishing broad-reaching FDI promotion agencies improving the regulatory environment and decre asing red tape and engaging in international governing arrangements.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.Countries have adopted their various(prenominal) 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 t o help investors through this administrative paperwork. Finally most of the countries have entered into international governing arrangements to increase their attractiveness for more investment.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. renew 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(prenominal) and every country over the globe is stepping forward to change the climate for attracting more investment. Opening up of doors by most of t he nations have compelled them for adopting reforms.Relaxation of rules and regulations, of course, is an essential requirement but not sufficient on its own to bring in FDI. As the study points out, business rules in India still bar FDI in most sectors. It was only last February that the government there decided to allow FDI of upto 51 percent in the single brand retail sector, which is expected to trigger a new flurry of investment. As things stand, Pakistan is far ahead of India in terms of offering all kinds of incentives to foreign investors although some administrative bottlenecks still proceed to be removed. It also boasts a high economic growth rate and there exists a consensus among all political forces on following the market economy model.Still, it has failed to catch the fancy of foreign investors at the want level. The designated target was to raise foreign investment from 1 billion dollars to 27 billion dollars during a five-year period. That target is nowhere near realization.The government claims to have brought foreign investment to the 3 billion dollars mark this year. exclusively that is a fallacious claim since the money has come in on account of privatization of government-owned entities. There has only been a transfer of assets from the public sector into private hands no new generation of activity in the retail or production sector, which is badly wanted to address the twin problems of poverty and unemployment. The smudge underscores the need not only to remove administrative hurdles but also to create ease of operations vis--vis law and order and the socially restrictive atmosphere.