3. Foreign Direct Investment
Foreign investment that establishes a lasting interest in or
effective management control over an enterprise. Foreign
direct investment can include buying shares of an
enterprise in another country, reinvesting earnings of a
foreign- owned enterprise in the country where it is
located, and parent firms extending loans to their foreign
affiliates. International Monetary Fund (IMF) guidelines
consider an investment to be a foreign direct investment if
it accounts for at least 10 percent of the foreign firm's
voting stock of shares. However, many countries set a
higher threshold because 10 percent is often not enough to
establish effective management control of a company or
demonstrate an investor's lasting interest.
– http://www.worldbank.org/depweb/ english/beyond/global/glossary. html
4. Economic Growth
Quantitative change or expansion in a country's economy.
Economic growth is conventionally measured as the
percentage increase in gross domestic product (GDP) or
gross national product (GNP) during one year. Economic
growth comes in two forms: an economy can either grow
"extensively" by using more resources (such as physical,
human, or natural capital) or "intensively" by using the
same amount of resources more efficiently (productively).
When economic growth is achieved by using more labor, it
does not result in per capita income growth (see Chapter
4). But when economic growth is achieved through more
productive use of all resources, including labor, it results in
higher per capita income and improvement in people's
average standard of living. Intensive economic growth
requires economic development.
– http://www.worldbank.org/depweb/ english/beyond/global/glossary. html
5. Trends in FDI
Flow and stock increased in the last 20
years
In spite of decline of trade barriers, FDI
has grown more rapidly than world trade
because
– Businesses fear protectionist pressures
– FDI is seen a a way of circumventing trade
barriers
– Dramatic political and economic changes
in many parts of the world
– Globalization of the world economy has raised
the vision of firms who now see the entire
world as their market
6. The Direction of FDI
Historically, most FDI has been directed at the developed
nations of the world as firms based in advanced countries
invested in other markets
– The US has been the favorite target for FDI inflows
While developed nations still account for the largest share
of FDI inflows, FDI into developing nations has increased
– Most recent inflows into developing nations have been targeted at
the emerging economies of South, East, and Southeast Asia
8. Does Fact = Theory?
Gross fixed capital formation summarizes the
total amount of capital invested in factories,
stores, office buildings, etc.
SO…
– This makes FDI a crucial determinant factor
of increased future growth rate of an
economy
…RIGHT???
9. Costs of FDI to Host Countries
Adverse effects on competition
Adverse effects on the balance of payments
– After the initial capital inflow there is normally a
subsequent outflow of earnings
– Foreign subsidiaries could import a substantial number of
inputs
National sovereignty and autonomy
– Some host governments worry that FDI is accompanied
by some loss of economic independence resulting in the
host country’s economy being controlled by a foreign
corporation
12. The Radical View
Marxistview: MNE’s exploit
less-developed host countries
–Extract profits
–Give nothing of value in exchange
–Instrument of domination, not
development
–Keep less-developed countries
relatively backward and dependent
on capitalist nations for
investment, jobs, and technology
13. The Radical View
Bythe end of the 1980s radical
view was in retreat
–Collapse of communism
–Bad economic performance of countries
that embraced the radical view
–Strong economic performance of
countries who embraced capitalism
rather than the radical view
14. The Free Market View
Nations specialize in goods and services
that they can produce most efficiently
Resource transfers benefit and strengthen
the host country
Positive changes in laws and growth of
bilateral agreements attest to strength of
free market view
All countries impose some restrictions on
FDI
15. Trinidad and Tobago, a recipient of
substantial FDI inflows in its natural gas
http://ideas.repec.org/p/dgr/unuint/200307.html
Lou Anne A. Barclay
– FDI inflows in its natural gas industry for the last
decade
– FDI-assisted development only occurs when
governments in less-developed economies pursue
credible, selective intervention policies
16. Pragmatic Nationalism
FDI has benefits and costs
Allow FDI if benefits outweigh
costs
–Block FDI that harms indigenous
industry
–Court FDI that is in national interest
Taxbreaks
Subsidies
17. REGIONAL DEVELOPMENT
IMPLICATIONS OF FDI
Post Communist Eastern Europe, e.g.
Czech Automotive Components
Foreign direct investment (FDI) has been accorded a central role
in the post-communist economic transformation of Central and
Eastern Europe.
Regional effects of FDI in Central Europe (Czech Republic,
Hungary, Poland and Slovakia) in the 1990s.
Defining FDI’s role in regional economic transformations
– Intensification of Uneven Development
– Development of a Dual Economy
– Failure to Develop Linkages with Local and Regional Economies
– Contributionto Increased Regional Economic Instability
– Petr Pavlínek
– http://eur.sagepub.com/cgi/reprint/11/1/47.pdf#search=%22FDI-Economic
%20Development%22
18. Legal Institutions and FDI
Debate over relationship between legal
institutions and foreign investment flows
– Traditional/orthodox view: legal institutions play a
crucial role in the process of market-oriented
development
by protecting private rights, especially the property
and contract rights of foreign investors
By creating the legal foundations for market-oriented
reform
19.
20. GOALS
: Investor experience suggests that:
A conventional program of market-oriented legal reform is
NOT a prerequisite for foreign investment
– Try to Identify Why!
Legal institutions play a small, if any, role in determining
the initial decision to invest
– WHY???
The form and content of useful law, as well as the
significance of law generally, seem to depends on the
details of the project and the setting
– What are the constants that can be identified in
“Success stories?”
Editor's Notes
FDI Flows by Region ($ billion) Notes: 2004 data represent preliminary estimates. Sources: Complied by the author from data in United Nations, World Investment Report, 2004 (New York and Geneva: United Nations, 2004), and United Nations Conference on Trade and Development, “World FDI Flows Grew and Estimated 6% in 2004,” UNCTAD press release, January 11, 2005. Figure 7.2, p. 241
Three primary costs of FDI concern to host countries are: adverse effects on competition, adverse effects on the balance of payments; and a loss of national sovereignty and autonomy.
Historically, ideology toward FDI has ranged from a dogmatic radical stance that is hostile to all FDI at one extreme to an adherence to the noninterventionist principle of free market economics at the other. Between these two extremes is an approach that might be called pragmatic nationalism.
