What is Foreign Direct Investment (FDI)? A source of capital and investment involving foreign control of production A source of exploitation? A channel of technology transfer and industrial development?

A source of capital and investment involving foreign control of production

A source of exploitation?

A channel of technology transfer and industrial development?

What is FDI…? Foreign direct investment (FDI) is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. The FDI relationship, consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm.

Foreign direct investment (FDI) is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based.

The FDI relationship, consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC).

In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate.

The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm.

Types of FDI Greenfield investment : direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nation’s promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. downside of Greenfield investment is that profits from production do not feed back into the local economy, but instead to the multinational's home economy. This is in contrast to local industries whose profits flow back into the domestic economy to promote growth.

Greenfield investment : direct investment in new facilities or the expansion of existing facilities.

Greenfield investments are the primary target of a host nation’s promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace.

downside of Greenfield investment is that profits from production do not feed back into the local economy, but instead to the multinational's home economy. This is in contrast to local industries whose profits flow back into the domestic economy to promote growth.

Types of FDI Continued………. Mergers and Acquisition 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 entity.

Mergers and Acquisition

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 entity.

Types of FDI Continued………. Horizontal Foreign Direct Investment: investment in the same industry abroad as a firm operates in at home. Vertical Foreign Direct Investment: Takes two forms: 1) backward vertical FDI: where an industry abroad provides inputs for a firm's domestic production process 2) forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic production

Horizontal Foreign Direct Investment: investment in the same industry abroad as a firm operates in at home.

Vertical Foreign Direct Investment: Takes two forms:

1) backward vertical FDI: where an industry abroad provides inputs for a firm's domestic production process

2) forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic production

Types of FDI based on the motives of the investing firm Resource 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 natural 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. Market Seeking : Investments which aim at either penetrating new markets or maintaining existing ones.

Resource 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 natural 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.

Market Seeking : Investments which aim at either penetrating new markets or maintaining existing ones.

Efficiency 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 resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm. Typically, this type of FDI is mostly widely practiced between developed economies; especially those within closely integrated markets (e.g. the EU).

Efficiency 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 resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm.

Typically, this type of FDI is mostly widely practiced between developed economies; especially those within closely integrated markets (e.g. the EU).

Global Trends…….. Concentrated in the USA, Japan and Western Europe FDI of developed countries in 1998: Inflows: USD 460 billion Outflows: USD 595 billion Top five host countries: China Brazil Mexico Singapore Indonesia had 55% of FDI inflows to developing countries in 1998

Concentrated in the USA, Japan and Western Europe

FDI of developed countries in 1998:

Inflows: USD 460 billion

Outflows: USD 595 billion

Top five host countries:

China

Brazil

Mexico

Singapore

Indonesia

had 55% of FDI inflows to developing countries in 1998

Attractiveness as FDI Destination Strong and stable government Pro-active government policies Investor-friendly and transparent decision making process Sound diversified industrial infrastructure Comfortable power situation Abundant skilled manpower Harmonious industrial relations Quality work culture Peaceful life Incentive packages Cosmopolitan composition Fluent English Chennai ranked second-best by BT Gallup Survey of Best Cities to do Business (Dec. 2001)

Strong and stable government

Pro-active government policies

Investor-friendly and transparent decision making process

Sound diversified industrial infrastructure

Comfortable power situation

Abundant skilled manpower

Harmonious industrial relations

Quality work culture

Peaceful life

Incentive packages

Cosmopolitan composition

Fluent English

Chennai ranked second-best by BT Gallup Survey of Best Cities to do Business (Dec. 2001)

Dollar Flows to Asia

Dollar Flows to Asia

Dollar Flows Growth Rate

FDI Inflow

April-September

Advantages of FDI in India… Domestic Investment Advantages FDI encourages domestic investment by providing: New markets Demand for inputs New technology Labor is mobile and often moves from multinational firms to domestic firms Increased competition makes markets more efficient Investments in new sectors simulates the growth of new industry and new products

Domestic Investment

Advantages

FDI encourages domestic investment by providing:

New markets

Demand for inputs

New technology

Labor is mobile and often moves from multinational firms to domestic firms

Increased competition makes markets more efficient

Investments in new sectors simulates the growth of new industry and new products

Employment Generation and Labor Skills Foreign firms generate hundreds or thousands of jobs They generate employment in suppliers

Employment Generation and Labor Skills

Foreign firms generate hundreds or thousands of jobs

They generate employment in suppliers

Technology Advantages Foreign firms bring new technology Increased productivity of labor and capital Improved product standardization Reduced error rates Foreign firms invest in new technology Upgrades overall stock of capital More efficient in raising and using financial resources Unrestricted access to parent company's technology Access to tacit knowledge

Technology

Advantages

Foreign firms bring new technology

Increased productivity of labor and capital

Improved product standardization

Reduced error rates

Foreign firms invest in new technology

Upgrades overall stock of capital

More efficient in raising and using financial resources

Unrestricted access to parent company's technology

Access to tacit knowledge

Export Competitiveness Advantages Dominant technologies brought in by foreign companies makes products suitable for export Foreign technology increases production, reduces error rates and improves quality Foreign firms have strong distribution and marketing facilities Foreign firms have brand names that help exports

Export Competitiveness

Advantages

Dominant technologies brought in by foreign companies makes products suitable for export

Foreign technology increases production, reduces error rates and improves quality

Foreign firms have strong distribution and marketing facilities

Foreign firms have brand names that help exports

Disadvantages of FDI in India… Domestic Investment Disadvantages FDI crowds out domestic investment by: Being a monopolistic competitor Raises demand for money Raises interest rates Foreign firms have more: Advertising power Ability to dominate the market Predatory pricing to prevent entry Financial inflows raise the exchange rates, making exports unattractive

Domestic Investment

Disadvantages

FDI crowds out domestic investment by:

Being a monopolistic competitor

Raises demand for money

Raises interest rates

Foreign firms have more:

Advertising power

Ability to dominate the market

Predatory pricing to prevent entry

Financial inflows raise the exchange rates, making exports unattractive

Technology Disadvantages Technology brought may be inappropriate The technology may be too capital-intensive Pollution-intensive technologies may be exported from countries where they are banned Sometimes, external transactions allow foreign technology to be acquired more cheaply, especially if the technology is mature

Technology

Disadvantages

Technology brought may be inappropriate

The technology may be too capital-intensive

Pollution-intensive technologies may be exported from countries where they are banned

Sometimes, external transactions allow foreign technology to be acquired more cheaply, especially if the technology is mature

Environment Disadvantages Foreign firms operating in regions where rules are non-existent or not enforced have greatly exceeded emissions and effluent levels allowed in their home countries Foreign firms have exercised significant political influence to prevent the imposition of rules regarding the environment

Environment

Disadvantages

Foreign firms operating in regions where rules are non-existent or not enforced have greatly exceeded emissions and effluent levels allowed in their home countries

Foreign firms have exercised significant political influence to prevent the imposition of rules regarding the environment

Some of the major pitfalls…. FDI flows have simply enabled trans-national giants like Coke and Pepsi to set up monopolies in highly profitable sectors where Indian business concerns were already meeting the requirements of the market. Coke and Pepsi, with their monopolistic stranglehold on the bottling and distribution chain have wiped out niche producers; consumers have less choice than they did before, and must pay more. Neither have these companies brought in any valuable new technology.

FDI flows have simply enabled trans-national giants like Coke and Pepsi to set up monopolies in highly profitable sectors where Indian business concerns were already meeting the requirements of the market. Coke and Pepsi, with their monopolistic stranglehold on the bottling and distribution chain have wiped out niche producers; consumers have less choice than they did before, and must pay more. Neither have these companies brought in any valuable new technology.

Contd ….. Highly controversial Enron Power project The Emerging Telecom Scandal FDI has come in the form of speculative investments in India's stock market

Highly controversial Enron Power project

The Emerging Telecom Scandal

FDI has come in the form of speculative investments in India's stock market

Conclusion………. Foreign firms do generate technological development in the host country Crowding out is not a major problem Host countries should enforce environmental regulations This will not make foreign firms leave the country, as the cost of conforming to regulations is much lower than the difference in cost of labor Benefits in increased: Competition Efficiency Innovation

Foreign firms do generate technological development in the host country

Crowding out is not a major problem

Host countries should enforce environmental regulations

This will not make foreign firms leave the country, as the cost of conforming to regulations is much lower than the difference in cost of labor

Benefits in increased:

Competition

Efficiency

Innovation