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FDI presentation

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Foreign Direct Investment

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FDI presentation

  1. 1. FOREIGN DIRECT INVESTMENT Presented to: Sir Ahmed Ghazali
  2. 2. GROUP MEMBERS  Muhammad Mansha 13024854-001  Hassam Khalid 13024854-009  Hafeez Ur Rahman 13024854-036  Faisal Naseer 13024854-048  Muhammad Waqas 13024854-050  Atif Afzal 13024854-064
  3. 3. CONTENTS  Introduction  Types of FDI  Forms of FDI  Source of FDI  Theories of FDI  Stages of FDI  Decision Framework for FDI
  4. 4. INTRODUCTION Foreign Direct Investment mean an individual, a group of individuals, an incorporated or un- incorporated entity or a public or private company investing his money in other country.
  5. 5. CONTINUE Increasing foreign direct investment is usually used as one indicator of growing economy. Foreign direct investment (FDI) plays a positive role in the process of economic growth.
  6. 6. TYPES OF FDI 1) Inward Foreign Direct Investment: Inward FDI for an economy can be defined as the capital provided from a foreign direct investor (i.e. the coca cola company) residing in a country, to that economy, which is residing in another country.
  7. 7. EXAMPLE Procter & Gamble (P &G) decides to open a factory in Pakistan. They are going to need some capital. That capital is inward FDI for Pakistan.
  8. 8. TYPES OF FDI 2) Outward Foreign Direct Investment: Foreign direct investment by a domestic firm establishing a facility abroad. Contrasts with outward FDI. Example: Q mobile wants to establish a new facility in UAE. Q mobile needs capital to establish new facility in UAE. It is outward FDI for Pakistan.
  9. 9. Muhmmad Mansha 13024854-001
  10. 10. FORMS OF FDI Two main forms of FDI: 1) Greenfield Investment 2) Merger & Acquisition
  11. 11. FORMS OF FDI Greenfield Investment: A green field investment is a form of foreign direct investment where a parent company builds its operations in a foreign country from the ground up. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees.
  12. 12. EXAMPLE A company start its operations in new country from the ground up that is Greenfield investment.
  13. 13. FORMS OF FDI Merger & Acquisitions: Mergers and acquisitions (M&A) is a general term that refers to the consolidation of companies or assets. While there are several types of transactions classified under the notion of M&A, a merger means a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.
  14. 14. EXAMPLE Pakistani operation of America and emirates banks were sold to union bank. Later on Union Bank and Standard Charted Bank merge and new name is Standard Charted Bank.
  15. 15. Faisal Naseer 13024854-048
  16. 16. GREENFIELD VS MERGER & ACQUISITION Greenfield: M & A:  You will have control over your staff  you will have control over your brand.  It is likely to cost more.  The entry process may take years.  You gain access to an established market.  You have skilled workers  Easy and Less Risky  A merger can lead to less choice for consumers
  17. 17. WHY FDI? There is a strong relationship between foreign investment and economic growth. Larger inflows of foreign investments are needed for the country to achieve a sustainable high trajectory of economic growth. Exporting Licensing
  18. 18. CONTINUE Exporting: Exporting is a function of international trade whereby goods produced in one country are shipped to another country for future sale or trade. Licensing: A business arrangement in which one company gives another company permission to manufacture its product for a specified payment .
  19. 19. CONTINUE Draw backs of Licensing:  Valuable Technology/Formula  Strategies no given  Management
  20. 20. Hafeez Ur Rahman 13024854-036
  21. 21. THEORIES OF FDI  MAC Dougall-Kemp Theory  Industrial Organization Theory (Hymer)  Location Specific Theory (Hood & Young)  Product Cycle Theory
  22. 22. MAC DOUGALL-KEMP THEORY A two-country model – one being the investing country and the other being the host country – and the price of capital being equal to its marginal productivity, they explain that capital moves freely from a capital abundant country to a capital scarce country and in this way the marginal productivity of capital tends to equalize between the two countries.
  23. 23. INDUSTRIAL ORGANIZATION THEORY (HYMER) The industrial organization theory is based on an oligopolistic or imperfect market in which the investing firm operates. Market imperfections arise in many cases, such as product differentiation, marketing skills, proprietary technology, managerial skills, better access to capital, economies of scale, government-imposed market distortions, and so on.
  24. 24. LOCATION SPECIFIC THEORY (HOOD & YOUNG) Hood and Young (1979) stress upon the location-specific advantages. They argue that since real wage cost varies among countries, firms with low cost technology move to low wage countries. Again, in some countries, trade barriers are created to restrict import. MNCs invest in such countries in order to start manufacturing there and evade trade barriers.
  25. 25. Muhammad Waqas 13024854-050
  26. 26. STAGES OF FDI  Innovation stage.  Industrialization stage.  Standardization stage.
  27. 27. INNOVATION STAGE Exports Develop Countries
  28. 28. INDUSTRIALIZATION STAGE Imports Consumption Production Exports Industrial Counties
  29. 29. STANDARDIZATION STAGE consumption Exports Imports Production Developing Counties
  30. 30. Presented By Atif Afzal 13024854-064
  31. 31. DECISION FRAMEWORK FOR FDI Are Transportation cost is high? No Import Barriers No Expor t Yes FDI Yes Easy to License Tight Control Necessary Protection Possible or not Licensing Yes No Yes No Yes No
  32. 32. BENEFITS FOR HOST COUNTRY  Inflow of equipment and technology  Increase Employment  Contribution to export growth  Improved consumer welfare through reduced cost, wider choice & improved quality.  BOP Surplus
  33. 33. DRAWBACKS FOR HOST COUNTRY  Crowing of local industry  Effect on national environment  Effect on culture  BOP deficit in form of currency outflow
  34. 34. Benefits for Home Country  BOP Surplus (Foreign earning)  Variable Skill Drawbacks for Home Country  Employment

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