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FDI

Page history last edited by Brian D Butler 9 years, 7 months ago

 

 

 

 

 

Foreign Direct Investment

 

The main question is:  "when is it a good idea to take ownership or control of foreign assets"?   Note that there are many other ways to conduct business overseas that do not involve direct control of foreign assets.  You can license your technology, you can export, you can set up a franchise, or you can find local distributors....

 

When considering an FDI investment, it is essential to first consider if this is really the best step for you to take.  In this section, we will outline some of the basic considerations that you should go through before thinking about FDI.  Once that decision has been made, the we will look at choosing the right location for FDI

 

 

Table of Contents


 

Student'sResources:

 

 

A Call for Chinese Investment in the United States

Share this Policy Innovation Memorandum with students to help them understand the rationale for promoting Chinese investment in the United States. Have students supplement the report's recommendations with their own analysis. Download the Report »

 

 

 

 

FDI data:

 

Global foreign direct investment (FDI) inflows are estimated to have fallen by 21% in 2008 to an estimated $1.4 trillion, and will likely fall farther in 2009, according to new estimates released today by UNCTAD

 

Developing countries still growing in 2008:

in spite of the credit crisis, FDI to emerging markets still grew in 2008:  "The growth rate of FDI inflows to developing countries, while lower than in 2007 (when it exceeded 20%), should still have remained positive for 2008 at an estimated 4%."

Table 1. FDI inflows and cross-border M&As, by region and major economy, 2007-2008 (Billions of dollars)
Source: UNCTAD:

Expectations 2009:

sharp fall....Why falling with credit crisis?  :   "Decreased earnings of developed-country transnational corporations (TNCs) and a decline in syndicated bank loans have particularly limited financing for investment. A drop in leveraged buyout transactions also dampened cross-border mergers and acquisitions (M&As), further depressing FDI flows. Cross-border M&A sales in developed countries fell by a similar magnitude (33%) as estimated FDI flows in 2008 (table 1)." 

 

 

 

 

Hurdles to overcome with FDI investments:

  1. Overcome "costs of foreignness",
  2. Need enough advantage to offset the costs of operating at a distance in an abroad location.

 

 

Dunning's eclectic theory of Foriegn direct investment?

FDI = O+ L+ I

OLI theory for trade:  According to Dunning FDI will occur when these conditions are satisfied:

 

O:  There is an Ownership advantage- the firms must own some unique competitive advantage that overcomes the disadvantages of competing with foreign firms on their home turfs. (monopolistic advantages (patent), scarce resouce ownership, technology, brand name, benefits of economies of scale, scope, access to financial markets, diversification advantages, etc)...

 

L: There is a Location advantage: Undertaking the business activity must be more prodfitable in a foreign location than undertaking it in a domestic location.  These are "country specific advantages"

 

I:  There is a Internalization advantage: the firm must benefit more from controlling the foreign business activity than from hiring an indepedent local company to provive the service.  Refers to HOW a company moves abroad.  Export vs. JV , or set up subsidiary, fully owned, etc...

 

read more:

 

 

 

International strategy 101

 

The idea that I found the most interesting was the concept of dividing up the Value Chain and then locating each component of that value chain in the country / region that offers the lowest mix of cost-factors that are most important to that function. I am fascinated by the concept that one location has a comparative advantage over others, and that this explains why certain activities occur in certain locations, and not in others. For example, if you divide the value chain into areas such as operations, R&D, sales, marketing, customer service, and purchasing, you find transnational companies locating each of these activities in an area that gives them the largest competitive advantage, and lowest costs for each individual function. Manufacturing, for example, might be placed in the location with the lowest factor input costs related to labor, but R&D might be located in a place which has advanced education, a history of innovation, or a developed and highly competitive consumer market. It is best to allow each asset to be specialized and to use the location that has the best mix of factor costs that are important to that function. For example, the USA might be selected for design, China for manufacturing, UK for research, and India for call center outsourcing or software design, creating many “centers of excellence” across the globe, which are all globally linked together through the Value Chain. Porter’s “Diamond” analysis tool is very helpful for conducting this comparative analysis.

 

Macroeconomic interrelations shift periodically, and a competitive advantage in one location may become a disadvantage over time. This could happen if there are changes in exchange rates, if there are local inflationary pressures, if there are raw material shortages, or if there are changes in government policies. When a country develops, it will lose comparative advantage in wages, and needs to move up the value chain (as was described in “Beyond Cheap Labor”). There is a direct relationship between GDP per person and wages per hour, so even China will someday loose its comparative advantage as the worlds cheap labor market as its GDP per person rises over time. A country need to manage the transition from competing on low cost labor to more value added products and services. It was interesting that the book “Driving Growth” placed such high value on a country’s ability to develop a competitive local service market as a means for improving the standard of living. This focus on developing the market for local services is essential for unlocking productivity growth that will drive competitive advantage in many other areas.

 

Not all competitive advantages of a location will necessarily be based on the traditional factors of land, labor and raw materials, but instead they may be based on culture and on the specific talents of the individuals in an area. There are certain cultural aspects of some places that partially explain why they have become global centers for particular activities. Innovation and global learning may come from anywhere in the world, but it is interesting to me that the US, and California in particular have been so successful at developing worldwide innovations. One of the reasons that I believe these US based companies have been so successful at sustaining innovation has been a direct result of the culture of innovation and risk taking that defines California. In the US, there is a culture of risk-taking where there is not a cultural bias against individuals that fail. As we discussed in class, many cultures in Latin America place great shame on individuals that fail in business. This has a cultural effect of creating disincentive to take huge risks that are necessary to achieve true innovations. This topic and its potential remedies was a heated discussion during our facilitator sessions.

 

 

 

Business Clusters

 

 

Why invest overseas?

 

On one hand, there are many disadvantages to investing directly in your own factory overseas (laws may be different, regulations, labor practices, languages, culture) that a foreign company will always be at a disadvantage to a true local company.  For that reason, it only makes sense to invest in FDI if there are clear competitive reasons to do so. It wouldn’t make sense to invest in a factory if you were going to produce a standardized product that would compete in a competitive market based on price.

 

In order to make FDI in a factory attractive, you have to find markets in which you will have a significant competitive advantage by doing so (and not licensing your product to a local producer). If you have some particular method of production that is unique and that you want to protect that knowledge from the local producers, then it might really make good sense for you to invest in your own factories overseas.

 

A company that has an intellectual property advantage, or some sort of production or trade secret would be better off by investing in their own factories overseas, rather than licensing that technology, or sharing their know-how with the local producers.

 

For example, US based television companies made the tragic mistake of licensing their production to Japanese producers as they tried to gain access to the Japanese market after WWII. But what happened was that the Japanese took that technology and learned how to make them better, and then started exporting to the US (wiping out the US television industry in the process). According to the “appropriablity theory”, a company might have too much to lose if they were to partner with the local companies. This is especially true if they have a valuable trademark or patent that they wish to protect (or exploit). A company would not want to risk losing control of a key competitive advantage. In this way of thinking, FDI is a purely defensive strategy.

 

A lot of times a company will first become successful at their home country and then look overseas as a way of expanding their market (or keeping up with their competition). In the beginning they may look at just making a sales or distribution office in the foreign country, by over time they may try to partner or invest in their own manufacturing facilities overseas. This is the classic “product cycle theory” as described by Raymond Vernon.

 

There are different ways to look at the FDI investments made by companies. The companies that actually invest in factories absolutely love the liberal IPE framework. The structuralists on the other hand, see FDI motivations in a whole other light.

 

In the early years, companies such as East India Company were set up to expand the influence of the state back home. There was an incentive to expand not just the political but also the business empires of the states. While that relationship may not be as strong today, as most of the TNCs are private enterprise, there are still hints of structuralist thoughts that criticize companies such as the giant oil companies for serving the needs of the home governments.

 

There is a (mostly) false stereotype of TNCs as being all powerful and monstrous companies that invest North-South in order to exploit cheap labor and extract cheap raw materials. The reality is that most TNCs are too small to have global influence, and there are cheap labor and raw materials in many countries (in Africa for example) that do not attract significant levels of FDI. There are other reasons that are much more important.

 

There have been three major drivers that have led companies to invest in factories overseas. One is that policies have changed allowing them to invest and then take home their gains and profits. The lowering of trade barriers and the elimination on the controls of capital has greatly improved the atmosphere surrounding the foreign investment. This so called “Washington consensus” of lowering trade barriers and releasing the free flow of capital are seen as essential to providing the proper environment for foreign investment to exist.

 

On the surface it may appear as if Honda and Toyota invested in factories in the US in order to get around trade barriers, but I believe that there were other reasons as well. In the mid 1980’s there was a general fear of all things Japanese in the US, as Americans were afraid that all jobs were going to be lost. People rallied around the “buy American” campaign. But if you see Toyota ads today, they are boastfully proud of their made in the USA tradition and they continuously talk about how many Americans are employed directly and indirectly here in the USA. Its an incredible advertising campaign and was extremely successful in winning over the hearts and minds of American consumers. It used to be that Japanese trucks couldn’t sell in the US because they seemed un-American. Today, the Toyota Tundra is on the best selling vehicles.

 

Also, there has been a significant improvement in technology, communication and in transportation. In this effect, the world really has gotten smaller, and has therefore allowed companies greater control in managing global enterprises. With the improvements in logistics (air, land and sea) the goods produced in one side of the world can be transported to the other in a very short period of time.

 

In the old days, TNCs would invest in overseas markets in order to protect and exert monopoly power. In today’s world this is hardly ever the case. Most companies today invest in foreign factories in order to keep up with other TNCs that are also investing overseas. The competition in global markets is one of the key drivers that keep TNCs investing in overseas production facilities.

 

There are two basic strategies that a company might be following when they invest in a factory overseas. First of all they might be planning the manufacturing facility for local distribution and local consumption. This was shown in the Dell example in that they invested in Brazil in order to serve the Brazilian market. One of the main reasons for deciding to produce in Brazil, and not import the products was that Brazil had a relatively high import tariff on imported computers. This is often the reason why a factory will chose to produce locally. Another reason why Brazil was chosen was because they were apart of a regional trading block MERCOSUL. By producing locally in Brazil, Dell got access to all of the MERCOSUL countries markets. Also, Dell has a reputation for fast delivery system in which they cut out the middle market and sell directly from the factory to the consumer. Based on their unique business model, it made sense for them to produce products close to the consumer, and cut down on inventory items.

 

These are all good reasons as to why a company would want to invest in a factory in an overseas country. Being close to your customers is one very good reason to invest FDI in a local manufacturing facility.

 

Another good reason to invest locally is because you might be discriminated against if you are importing products in to that country (import tariffs). But if you set up local production in that country, then you will be treated as a local company and can compete on a level playing field with local companies.

Another reason to invest in a foreign factory was shown in the Intel case study, in that they invested in Costa Rica in order to produce for export only. In Intel’s case, they built the factory in Costa Rica to take advantage of the lower production costs as compared to the United States, who was to be the primary market for the products. But labor costs alone do not fully explain why Costa Rica was chosen and not Mexico for example. This case highlighted that companies invest in factories in countries that have many other intangibles. A good set of incentives will help make the decision easier, but the region also needs an educated workforce and adequate infrastructure.

 

 

 

Relating Political Risk to FDI

 

political risk assessment

 

 

What a company can do to lessen political risk in an FDI investment

 

In this essay, I will assume that I am the Country Risk manager of a foreign investment bank considering opening an office in the USA.  I am going to assume in this essay that I am concerned about the ICRG variable of terrorism, and how it might have an impact on our proposed investment decision. 

 

As an investment bank, it seems likely that New York (downtown Manhattan, near Wall Street) would be the prime location for us to set up business.  This is because of the close proximity to other trading banks, the availability of human resources, and so on.  But, because the US, and financial firms in New York in particular seems to have become an international targets for terrorism (symbolism of hitting the US where it hurts most), I would be concerned about the terrorism threat involved in setting up operations in NYC.   Specifically, I might be afraid of purchasing real state in the financial district near Wall Street (by the old world trade center). 

 

In order to alleviate this risk, there a number of options that I would consider.  First of all, I would consider avoiding the risk all together, perhaps by relocating to another areas such as mid-town, or even setting up shop across the river in New Jersey.  By avoiding Wall Street, we could reduce some of the “target” risk associated with symbolic terrorism.

 

In addition to choosing other “safer” locations, we might also consider purchasing an insurance policy against terrorism.  We might look to groups such as MIGA of the World Bank, or even private insurance companies such as Lloyds of London to see if we can secure terrorism insurance to protect our company financially against the threat of terrorism. 

 

Another alternative may be to look to the derivatives markets to see if there are any innovative plays using options that might rise in value if NYC real estate were to suddenly lose in value.  Purchasing a put option against the fall of real estate in NYC might be an option to mitigate some of the risk .  Other financial or insurance options could also be considered.

 

 

 

What a government can do to lessen investors fears of political risk

 

 

 

 

In this essay, I will assume that I am a government official from Jamaica, working in the trade promotion authority office, and am seeking to alleviate some concerns that potential FDI investors have with regards to Jamaica’s ICRG factor of “Socioeconomic conditions”, which looks at factors such as unemployment, consumer confidence and poverty. 

 

When looking at this variable, foreign investors might be scared as they see a risk rating of 6 out of 12, a relatively high rating for risk in this category. 

 

As a trade promotion civil servant, I would be concerned that potential foreign investors may shy away from investing in Jamaica.  Although I may not be in a position of power in the government to eradicate poverty, I am in a position where I could frame the discussion so that the potential investor could see the situation in another light. 

 

For example, a major industry in Jamaica is tourism.  A large FDI project might be a resort or hotel chain that is considering developing a large stretch of land and converting it into luxury hotels, condos, golf courses, etc.  But they may be afraid of investing in Jamaica for fear of risk due to poor socioeconomic conditions in the country (social unrest could lead to riots, or retaliation against foreign businesses, for example).

 

In order to attract FDI, the first step is to be open about the existence of a condition.  In this case, the Jamaican government can’t hide the fact that cities such Kingstown are poor, and are sedated with gang violence as a result of unemployment, and drug industry.  

 

On the other hand, however, the government may focus the FDI attention toward the area of island that is more suited to tourism and golf course development. Rather than focusing on poor socioeconomic conditions on the island as a whole, the Jamaican government official may focus attention to the relatively well educated workforce that lives around this particular local community.  This way, by segregating the island and dividing it up into little “zones” it is easy to show how the general numbers of the country as a whole do not apply to the region of the investment.

 

Also, I may spin it another way…the labor for the hotel will be less expensive, and the local people more grateful for the opportunity to work for such a well known, international brand.

 

Another approach that I would take would be to focus the investor’s attention on the potential rewards of investing in Jamaica.  Yes, it is true that Jamaica has some political risk that needs to be considered when making an FDI investment, but sometimes you have to be willing to take a little risk if you are going to enjoy the largest returns.  If I were the trade promotion authority, who was looking for FDI, I would focus on the relative returns, and use that context to frame the issue of political risk. 

 

A final step could be to steer the FDI investor toward international organizations that offer insurance for political risk events.  If the company were from the US, we might recommend OPIC, or MIGA of the World Bank, among others.   With our guidance, we might be able to assist them to alleviate their fears of political risk, and to encourage investments.

 

 

 

 

Importance of Law and Order in attracting FDI

 

 

Any country which wishes to attract foreign investment will need to first reassure investors that contracts will be honored, and that the courts will be fair and predictable in their judgments.  For this reason, there is generally a positive correlation between the rule of law and the investment profile of a nation.

 

In general, we would expect to see countries with a better system of law and order to also have a more positive environment for investment.  This is because foreign investors will have more faith that the laws will be predictable, and that new administrations coming into power will not bring with them new laws which will change the competitive landscape for the business.  In general, any environment that reduces the unknown, or variability of laws will attract more foreign investment than a country that has flimsy courts, and randomness to their laws. 

 

 

But when looking specifically at the ICRG ratings of “law and order” and “investment profile”, I found it curious to see that the relationship between these two specific variables was not perfectly correlated. 

 

 

For example, we see: 

 

 

·         Canada : law and order 6.0/6 (perfect score);  investment profile 12/12 (perfect score)

·         USA       : law and order 4.5/6 (slightly lower);  investment profile 12/12 (but still perfect)

·         Mexico : law and order 3.0/6 (much lower);  investment profile 10.5/12 (but still pretty good)

 

What is happening is that the “investment profile” ratings already contains many relevant factors such as  “contract viability/expropriation, profits repatriation,  and payment delays”, all of which cuts right to the heart of the contract enforcement and rule of law in dealing with international investors. 

 

So, foreign investors risk profile is already considered in this ICRG variable, and does not need to be repeated in the “law and order” category.

 

My belief is that the “law and order” category is more geared toward internal enforcement of the law within the country, and less to do with how reliable the country is in its dealings with foreigners ( the ability of foreign corporations to enforce contracts, get paid, and conduct business in the multinational context). 

 

Another explanation is that “law” and “order” are different, and affects the international investor differently (this is why ICRG separates them).   

The category of “law” may be much more important to the international investor, as it looks at the strength and fairness of the legal system, and the extent to which laws are predictable, enforceable, and based on the matter of precedent. 

By “order”, the ICRG matrix looks for factors such as the willingness of the population to self-regulate and to willingly follow the rules and it may not affect the ICRG “investment profile” as strongly.   So, when you are comparing USA and Canada, it is clear that both countries have very strong, and predictable courts of law, but that Canadians are generally more “self-regulating” that Americans.  This excess of order, however, has very little impact on the “investment profile” for FDI considerations.  This explains why the US gets a perfect investment profile score in the ICRG standings, but is only 4.6 out of 6 in “law and order”.  

 

 

Mexico, on the other hand, has a relatively low score for “law and order”, but still maintains a good rating for “investment profile”.   As discussed above, I believe that this apparent paradox can be explained with two factors.  (1) is the fact that much of the legal concerns for foreign investors is already captured in the investment profile, so it does not need to be repeated in the “law and order” category, and (2) that the country might have a good reputation for honoring contracts (law), but a poor reputation for self-regulation (order).  Because foreign investors generally ignore the disorder around the investment, and are looking instead for a “diamond in the rough”, they may not mind a poor score in domestic order so long as they are relatively secure that the country will honor the foreign contracts and not subjugate them to any form of discrimination.  In this matter, Mexico scores well. 

 

 

 

Dell in Brazil

 

Why does Dell Want to invest in Brazil? Why does Dell consider a number of different states in Brazil?

 

Internal reasons – wants to invest in international markets to maintain rate of growth

 

Brazil specific reasons – does not yet have any manufacturing facility in S. America. Based on the model of selling directly from factory to consumer, it was important for Dell to have a factory near to the consumers. Brazil was a good choice because of the size of their market, the expected growth in consumer demand for personal computers, and for the market access that it offered to other Mercosul countries (duty free access to Argentina, Uruguay, Paraguay, and also Bolivia and Chile…for all products with more than 60% local content). Sales of PCs were growing faster in Latin America than anywhere else in the world. But imports of non-Mercosul products into Brazil were very high tariff.

 

It considers a number of different states in Brazil because of the various different incentive packages that the states could offer. Ideally, the factory would be in Sao Paulo because that’s where most of the consumers would be (and they had the highest number of well educated people and the best infrastructure). But exterior states were offering incentives to attract investment away from Sao Paulo, such as a reduced ICMS (sales tax), low interest loans and in some cases, free land to build infrastructure.

 

 

 

What characteristics does Dell seek in a state where it will locate its investment?

 

High levels of education, and sufficient numbers of qualified people, adequate supply of electrical energy, and high quality of telecommunications infrastructure. Also, they were looking for other special incentives that the states could offer.

 

 

Why does Dell select Rio Grande do Sul? What are some of the pros/cons of other states?

 

Not only did RS offer Dell the best financial incentives (75% reduction in sales and circulation tax (ICMS) for 12 years; R$20 million loan with 5 year grace period, and 10 years to pay back…but they also had investment promotion agency that Dell felt most comfortable with. The RS investment promotion agency was fully privatized, and acted similarly to the one they liked in Ireland. They liked that the investment promotion agency took their specific needs into consideration, and treated them differently than other companies (automotive for example). The also really liked the city of Porto Alegre and the type of well educated people they found there.

 

The next best financial offer came from Minas Gerais (70% reduction in ICMS for 10 years, R$20 million loan with 4 year grace period, and a four year repayment, and they also offered them free land for the plant site). The Dell executives visited MG many times, and almost selected them as the final site, but they were turned off by the perceived “rust belt” image of MG. They felt as if the investment promotion agency were too used to dealing with Automotive and mining companies, and were not tuned into the specific needs of the high tech companies like Dell.

 

Rio de Janeiro might have been a good site for the plant, but the first meeting with the investment promotion agency went badly, and the agency low-balled the first offer (expecting the Dell agency to come back with a high offer). The Dell executives were not into playing this game, and move on to other states.

 

Parana was too general in their presentation, and the Dell executives left the meeting with the impression that the same presentation was given to every company from every industry. They did not tailor the presentation to the specific industry, nor show much knowledge of the computer business.

 

Sao Paulo state had two cities the final consideration (Campinas, and Sao Jose dos Campos), but the again, the Dell executives were turned off by the lack of attention that they were given by the investment –promotion agency. Sao Paolo also was the only state that had a policy not to give any incentives (they didn’t need to). Sao Paulo was the main investment city in Brazil anyways. They have the largest pool of well educated people and it was the main market for PCs in South America.

 

 

 

After Governor Dutta threatens to rescind the agreement with the previous governor, what are Dell’s options?

 

Before looking to move to another state, I would engage the new Governor in private one-on-one discussions about the situation. No sense leaving until all of the negotiations are complete. First of all, we have a signed contract with the government, which I believe he would have difficulty rescinding. Second of all, if we were to leave, it would look bad (more egg on his face, like the Ford deal) and the state would lose not only jobs but also our investment in the education facilities (local universities). Also, I believe that the structuralist discussion that we had with the lawyer would be successful in dealing with the PT party. It’s worth a try.

 

But if the governor is still determined to go through with the rescinding of the offer, I would consider either moving to Minas Gerais, or to Sao Paulo. MG is probably the best option if they still have the offer on the table. It would be best to make sure about that before committing to leaving RS, or you might end up looking really foolish.

 

Although we know that manufacturing costs in RS are lower than SP (by enough to compensate for the additional trucking) even without the incentives, I would not keep my factory in the state if the governor rescinds the offer. It would just prove that the state was not committed to keeping you there and that they didn’t value your inputs. Also, it makes me think that states away from Sao Paulo carry with them some additional political risk. Sao Paulo is safer because it is more of an international city, and more accustomed to dealing with foreigners.

 

 

 

 

lessons to be learned

Dell should have paid more attention to the local elections and not been caught so off guard by the new governors tough stance on the incentive issue. They should have had a back up plan in place, and they should have discussed the issue the Dutra during his candidacy. In a country with such widely different political parties, they needed to factor in the political risk of their agreements with the existing governor. Also, they needed a better Brazilian lawyer to defend their contract. I believe that the rule of law and the honoring of contracts should have preceded any governor’s preferences (or political ambitions). With a better contract in hand, Dell should have felt more secure.

 

 

Reactions to TNCs/MNCs

 

TNC’s have always gotten a bad reputation from the structuralists, who have typically looked on TNCs with a untrusting eye. Each time you hear a person complaining that there is a McDonalds next the Eiffel Tower in Paris, or a Starbucks near the Forbidden Temple in Beijing, these are the structuralists speaking. There are a number of reasons why they dislike TNCs. The most obvious is the fears of having everything end up being the same. They dislike the creeping and intruding cultural influence that TNCs bring with them. The over Americanization. One of our classmates, Patrick, has written many times on the IPE chat board complaining about a Wal-Mart that is too close to Mexican ruins. The general complaint here is the intrusion of corporate influence, and the potential loss of the uniqueness of places and of cultures. I don’t think that the structuralist perspective on TNCs has changed much over the past 50 years. They were distrustful of TNCs back then, and they are perhaps more distrustful of them today.

 

From a mercantilist perspectives have changed over time, and have also changed depending upon who in the world you ask. When the US companies were expanding after WWII, it was the American economic nationalist that was all in favor of TNCs and their expansion in the world. But in the 1980s when Japanese companies started competing in the US; many mercantilists here cried about the loss of American-ness and feared the influence of the foreign firms. The mercantilists of the receiving country favored the TNCs when they brought FDI and investments in technology, but generally were against TNCs when they took away local jobs and forced local manufacturing facilities to close.

 

Over this 50 year period, the liberal perspective on TNCs has remained mostly the same. The liberals love TNCs and are in favor of creating an environment where TNCs can thrive. They typically are in favor of reducing trade barriers and releasing free capital flows in order to encourage TNC to invest in various countries around the world.

 

Fifty years ago would have been 1957, and the period of change for many countries was just beginning. World War II was over and the Cold War was just beginning. With the collapse of many of the old European colonial powers as a result of the crushing impact of the war, there was a wave of independence that was circling the globe. Many of these newly independent countries were both desperately wanting and also deeply fearful of FDI and of western companies’ money.

 

No matter what time you look at during the past 50 years, there have always been elements of TNCs that have both attracted and repelled the developing world. This is what the book called the “two faces of economic development”. On one side, the countries wanted to attract the foreign capital and technology, but on the other hand they were fearful of becoming dependent or exploited by the TNCs. This battle between the two faces of development has been a constant them over the past 50 years, and has manifested itself in different ways.

 

Some people see TNCs as the engine of growth for an economy. They bring money, technology, jobs and know-how. This in quite often the liberal point of view. Other people see TNCs as just another tool of exploitation. This is quite often the structuralist point of view.

 

In the 50’s the world saw a massive movement toward the end of European colonialization. As many of the countries became independent they had many problems to face. One of the desires of the leaders was to follow through on promises of independence that they had promised to their population. With this feeing of independence, they were not in the best mood to turn to outsiders for help. For this reason, many developing nations viewed the TNCs of their old colonial powers with suspicion and resentment. Also, with the desire to be free from foreign influence, many developing nations were fearful of cultural influences that came with TNCs.

 

As the Cold War move into the 1960’s, many of the developing nations saw that they needed to align themselves with one of the two superpowers (the USA or USSR). This meant moving toward western style capitalism or state sponsored socialism. Perhaps due to the intellectual appeal of socialism, or maybe because of a desire to distance themselves from old colonial powers, many of the developing nations moved away from the US and western influences. This decision greatly shaped their attitudes toward TNCs and MNCs and greatly determined where FDI flows would be directed. For example, the US would heavily invest in Japan, S. Korea and Taiwan who were seen as strategic allies, but avoided investing in India who had adopted a more socialistic mentality.

 

During this period, many of the “south” countries came to see the influence of TNCs as a new form of “neocolonialism”. They saw the companies as performing a similar role as the old colonial governments in that they continued to dominate and exploit the developing nations. They saw multinationals as owning and controlling a substantial portion of the LDCs economies and natural resources. In particular, they were alarmed with the manner in which TNCs were able to control the international markets of the commodities (which the LDCs relied upon). This was clearly an issue in markets such as oil and energy. The critics of TNCs complained that the oil companies controlled exploration, extraction, distribution of the key resources of these developing nations (in much the same way those colonial governments once had). Critics of TNCs also complained that they controlled the technology and the money necessary for development.

 

In the 1990s there was another series of massive changes in the global structure of the markets, and this had a profound effect not just on TNC investments, but also on the global perception of TNCs in general. There was the fall of the communist government in the Soviet Union that eventually led to the opening up of all Eastern European economies to foreign investments. In addition, China went though a massive economic liberalization that culminated in their ascension to the WTO in 2001. This has let to a massive increase in FDI in that region of the world. Then, India also turned away from inward looking import substitution policies and embraced the outward looking and more market friendly policies that attract FDI. Suddenly the world opened up for TNCs and the FDI that they can invest in factories and in distribution systems worldwide. This has really opened up the global competition for FDI.

 

The economic mercantilists of the FDI receiving countries are typically very interested in attracting certain types of TNCs to their country. Many governments have created specific agencies that reach out to technology companies in particular and try to convince them to invest in their region. Technology companies or advanced manufacturing companies are especially attractive to economic nationalists in developing countries because they bring not only high wage jobs but also tech know-how that can impact other areas of the economy.

 

Economic nationalists have typically loved TNCs that invest in a country and build high tech companies that export 100% of their products. This was seen in the Intel case. The situation is particularly attractive because the company (Intel) was going to invest in a factory, and hire all those people, and transfer all of that technology…but they were not going to compete locally with other firms. That would mean that there would be no loss of jobs in other areas of the country due to displacement from the foreign firm. Wal-Mart on the other hand, is a bit more controversial because although they invest in FDI in a country, and they employ lots of people…they are seen as disruptive because they force many of the local mom-and-pop stores out of business.

 

One of the more interesting changes over the past 50 years is that there are now very many TNCs from the “developing world”. Companies like Odebrecht from Brazil are employed in Miami to build the new terminal at the airport. Other companies like Cemex are powerful around the world. Embraer from Brazil is on of the top manufacturers of airplanes. The book gave an example of South African Breweries which is now the 2nd largest brewery in the world, with production facilities in over a hundred countries.

 

As this trend of more and more TNCs coming from the developing world, there have been fewer and fewer protests against TNCs in general.

 

 

FDI news

 

EURO 65 BILLION FDI'S IN SOUTH EASTERN MEDITERRANEAN

7 June 2007

IPR Strategic Information Database

 

According to Al-Hayat newspaper (June 7, 2007), the French Agency for International Investment estimated at Euro 65 billion the total foreign direct investments inflow into the South Eastern Mediterranean sea region last year

 

 

UN Agency Sees FDI Back Above $1 Trillion Mark In 2006

1031 words

16 October 2006

10:00 AM

Dow Jones International News

English

(c) 2006 Dow Jones & Company, Inc.

 

LONDON (Dow Jones)--Global flows of foreign direct investment will this year exceed $1 trillion for the first time since 2000, driven by a mergers and acquisitions boom in which private equity funds are playing an increasingly important role, the United Nations Conference on Trade and Development said Monday. In its annual report on FDI, the U.N. agency added that while there have been some signs of rising hostility to foreign investment - most notably in Latin America - most legislative changes in recent years have been positive. UNCTAD said global inflows of foreign direct investment rose 29% in 2005 to reach $916 billion, following a 27% increase in 2004. But inflows remained far below the 2000 peak of $1.4 trillion, which marked the top of the last big M&A boom. According to an UNCTAD official, inflows have continued to increase this year and will likely also rise in 2007.

 

"In 2006 it's clear that there will be another increase, and inflows will clearly be above $1,000 billion," said Anne Miroux, head of the investment analysis branch at UNCTAD in Geneva. "In 2006 and 2007 the trend should continue because the wave of M&A is continuing to grow and we're going to see substantial investment in the natural resources sector."

 

UNCTAD said the value of cross border mergers and acquisitions rose 88% in 2005 to $716 billion, close to the highs seen during the boom that ran between 1999 and 2001. It added that a new feature of the M&A boom is the role of private equity, which accounted for 19% of total cross-border M&As in 2005. UNCTAD noted that private equity investments have an average life of five to six years, considerably shorter than the 20- to 30-year life of a direct investment made by a company operating in the same industry as the takeover target. For developing economies, direct investment has long been seen as the most reliable source of foreign capital, and likely to stay in the country even during times of financial crisis. But the involvement of private equity may change that perception. "From the host country point of view, it is less resilient, less inclined to stay in a financial crisis," said Miroux. "It's almost a portfolio investment."

 

FDI has also been considered a high quality source of foreign capital because it has in the past been associated with the transfer of new technology. Once again, the increased role of private equity may make FDI less beneficial to the host economy. "The logic is not the same," said Miroux. "If you invest in your own field of activity, the aspect of technology transfer is essential. Private equity is not necessarily involved in those decisions." The increased role of private equity funds in M&A activity has attracted hostility from labor unions and politicians around the world, including Germany, France and South Korea. They are critical of the short time horizon and argue that private equity funds usually rely on job cuts to generate the increase in profitability and capital gains they seek. Miroux said that may increase hostility towards foreign investment, although she stressed that the negative response is "more a reaction to private equity than to the foreign dimension."

 

Despite a number of high profile cases in which particular foreign investments have been the subject of controversy - including the acquisition by DP World of P&O and the bid by Mittal Steel to acquire Arcelor - UNCTAD noted that most regulatory changes in recent years have facilitated FDI. "At the end of the day, these operations have taken place," Miroux said, noting that few proposed foreign acquisitions have actually been stopped. The notable exception is the energy sector, and a limited number of other parts of the economy that are considered to be essential to national security. "Some notable regulatory steps were...taken to protect economies from foreign competition or to increase State influence in certain industries," the UNCTAD report said. "The restrictive moves were mainly related to FDI in strategic areas such as petroleum and infrastructure." But Miroux added that sensitivity to foreign investment in these areas isn't new. "In all times and in all economies these areas have been closely scrutinized by governments," she said. UNCTAD noted that moves to increase state intervention in the energy and natural resource sectors were particularly prevalent in Latin America. "There appears to be a trend towards greater state intervention in the region, above all in the oil industry and other natural resources," UNCTAD said. "Several governments are introducing rules that are less favorable to FDI than those established in the 1990s, when commodity prices were at record lows."

 

Despite the new regulations, FDI inflows to Latin America did rise slightly in 2005. But the scale of the increase was dwarfed by that of FDI flowing into another resource rich region, which UNCTAD calls western Asia, but which is better known as the Middle East. According to UNCTAD, inflows into the 14 economies that comprise the region jumped 85% in 2005 to reach $34 billion. In addition to the increased attractiveness of the region as high oil prices have boosted growth, UNCTAD noted that "the regulatory regime was further liberalized, with an emphasis on privatization involving FDI, notably in services." UNCTAD said the Middle East is also becoming a significant source of FDI. During previous periods of high oil prices, increased revenues have been deposited with international banks or invested in overseas equity and bond markets. "Unlike the previous periods of high oil revenues, the present phase is witnessing substantial outward FDI...in developing as well as developed countries," UNCTAD said. Globally, the bulk of the increase in FDI during 2005 was concentrated in service activities, and financial services and telecommunications in particular. Foreign investment in natural resources also experienced a steep rise. But the share of foreign investment going into manufacturing fell sharply, UNCTAD said.

 

 

External Links

 

 

http://www.fdi.net/ - World bank website on FDI

 

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