Patterns of foreign direct investment (FDI)
Foreign direct investment (FDI) expanded rapidly throughout the 1990s. After growing about 20% per year in the first half 1990s, FDI inflows grew by about 40% per year in the second half of the decade. FDI also continues to grow faster than the world production and trade. Developed countries account for about 70% of global FDI inflows. In comparison, developing countries share of world FDI flows is 30%.
Among developed countries, European Union nations, the United States, and Japan account for the majority of world inflows. The EU was the world's largest FDI recipient (more than 57% of the world total), with inflows of more than $374 billion in 2002. FDI inflows to developing Asian nations were just over $95 billion in 2002, with China, attracting nearly $53 billion, and India attracting nearly $3.5 billion. FDI inflows to all of Africa accounted for 1.7% of total world FDI inflows in 2002.
Globalization and a growing number of mergers and acquisitions account for the rising tide of FDI flows over the past decade or so, and will continue to propel it in the future.
Foreign direct investment theories
the international product lifecycle states, a company will begin by exporting its product, and later undertake foreign direct investment as a product used its life cycle. A product passes through three stages: new-product stage, maturing product stage, and standardized product stage.
Market imperfections theory states when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection.
The eclectic theory states firms undertake foreign direct investment. When the features of a particular location, combined with ownership and internationalization advantages to make a location appealing for investment. The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment.
Foreign direct investment management issues
companies investing abroad are often concerned with controlling activities in the local market. The local governments might require a company to hire local managers were require that all goods produced locally be exported.
A key concern is whether to purchase an existing business or to build an international subsidiary from the ground up. Acquisition generally provide an investor with of existing plant and equipment and personnel. Factors reducing the appeal of purchasing of existing facilities include obsolete equipment, poor relations with workers, and an unsuitable location. Adequate facilities are sometimes simply unavailable in the company must go ahead with a Greenfield investment.
Labor regulations can increase the hourly cost of production several times. An approach companies may use to contain production costs is rationalize production -- in which a product's components are produced in the lowest-cost location.
A local market presence might help companies gained valuable knowledge about the behavior of buyers that it could not obtain from the home market. Firms commonly engage in foreign direct investment. When doing so puts them close to both client firms and rival firms.
Government intervention in the free flow of foreign direct investment
Both host and home countries interfere with the free flow of FDI for a variety of reasons. One reason that governments of host countries intervene in foreign direct investment flows is to protect their balance of payments. Allowing FDI to come in is a nation a balance of payments boost. Countries also improve their balance of payments position from the exports of local production operations created by FDI. But when direct investors sent profits made locally back to the parent company and the home country, the balance of payments decreases. Local investment in technology also tends to increase the productivity and competitiveness of the nation. Encouraging FDI also brings in people with management skills who can't train locals and improve the competitiveness of local firms. Furthermore, many local jobs are also created as a result of incoming FDI.
Home countries also intervene in FDI flows. For one thing, investing and other nations, sends resources out of the home country -- lowering the balance of payments. Yet profits on assets abroad that are returned home increases a home country's balance of payments. Also, outgoing FBI may ultimately damage a nation's balance of payments by taking the place of its exports. And jobs that result from outgoing investments may replace jobs at home that were based on exports to the country.
Policy instruments that governments used to promote and restrict foreign direct investments
Host country governments can impose ownership restrictions that prohibit not domestic companies from investing in businesses and cultural industries and that is vital to national security. They can also create performance demand that influence how international companies operate in the host nation.
They can also grant companies tax incentives such as lower tax rates or offer to waive taxes on local profits for a period of time. A country may also offer low interest loans to investors. Some governments prefer to lower investment by making local infrastructure improvements -- that are seaport suitable for containerized shipping, improve roads, and increased telecommunications systems.
To limit the effects of outbound FDI on the national economy, home governments may impose differential tax rates that charge income from earnings abroad at a higher rate than domestic on a. Or they can't impose outright sanctions that prohibit domestic firms for making investments in certain nations. But to encourage outbound FDI home country, governments can offer insurance to cover investment risks abroad. They can also grant lends to firms that wish to increase their investments abroad. A home country government may guarantee loans that a company takes from financial institutions. They might also offer tax breaks on profits earned abroad or negotiate special tax treaties. Finally, it may have apply political pressure on other nations to get them to relax restrictions on inbound investments.
