Analyze the Effects of the Foreign Direct Investment

Outline

  • Introduction
  • Effects of Foreign Direct Investment on Globalization
  • FDI of USA
  • FDI of India
  • FDI of China
  • FDI of Brazil
  • FDI of EU
  • Conclusion

Introduction

Foreign direct Investment can be defined as a strategy whereby a company which originates from a different country makes investment in another country which is regarded as foreign by having a physical investment such as the directly building of a factory. On the other hand it can be regarded as a method whereby the foreigners invest in the country which is not of their own by establishing the enterprises.

Thus the foreign direct investment consists of investments which are made to get the lasting effects on the economy of the foreign country other than the country of origin of the investor (Egan, P.J.2008).usually the foreign investment structure is made up of the parent enterprise who is the originator of the investment and the foreign investor who acts as the foreign affiliate. The parent enterprise and the foreign firms combine to form what is commonly known as the multinational corporation or the multinational company respectively.

The foreign direct investment which is characterized by the building of the factories, machines and the establishment of the manufacturing equipments is different from the portfolio investment which is one form of indirect investment (www.unctad.org). However the foreign direct investment has taken many forms in the recent past by including the direct obtaining of the foreign firms, building of the manufacturing facilities or the joint alliance with the foreign firms by use of the technology and consequently protecting the intellectual property rights. Nowadays the foreign direct investment has a major impact in the internalization and the globalization of trade in the world.

The advert of the improved information technology and the consequate decrease of the communication cost in the global arena have made the output of the Foreign Direct Investment to be more manageable than before. At the same time the privatization and the deregulation of the manufacturing industries in the world has also promoted the increase of the foreign Direct Investment of various companies in the world. The amount of the foreign direct investment can be used to measure the rate of growth of the global economies such as the free trade and the global finance.

This paper tries to analyze the effects of the Foreign Direct investment on globalization and the pattern of trade in the most developed countries of the world such as the United States of America, china, European Union, china, and India. At the same time this paper tries to analyze the future of the Foreign Direct Investment after the end of the global recession.

Effects Of Foreign Direct Investment On Globalization

The Foreign Direct Investment has been found to be having a profound effect which can be regarded as being extra ordinary in nature. Mostly the effects of the Foreign Direct Investment policies have an indirect effect on the business globalization. This includes the increase of the free trade and the global finance in general (IMF, 1999). The Foreign Direct Investment has been seen as the outstanding criteria which have helped to shape the economies of the developed countries such as the United States of America, Brazil, China, India and the European Union in general.

The Foreign Direct Investment policies usually provides the involved companies and firms with the free and new markets which have consequently provided the marketing channels for the finished goods of the involved firms. At the same time the Foreign Direct Investment has proved to be providing the cheaper production facilities in the destination foreign country. Moreover some firms opt for the Foreign Direct Investment because of the improved information and production technology which may be cheaper compared to their own country. At the same time the available skills and the availability of the labor force may prove to be of importance for the foreign firms.

The Foreign Direct Investment policy not only does it benefit the foreign firms and companies but also the host country benefits to a greater extent as it receives most of the investments(Falzoni,Anna, M,2000). On the first case the host countries benefit by getting the new technologies which are transferred by the foreign firms. This new technologies makes the host countries to start using them in different sectors which leads to the general development of the host economies. At the same time the foreign firms have been implicated as the source of capital to the host government which benefit by the tax which they impose on the foreign firms respectively. Now days the managerial skills have been exported to the host countries by the foreign firms which has been utilized in the economic development of the host counties.

In reality the Foreign Direct Investment involves the creation of the facilities such as factories, houses, machines, land and the firm equities. These developed enterprises act together between the local companies and the government organization, thus it can be regarded as the joint ventures or the alliance ventures. In relation to the outflows of the country which ventures in the Foreign Direct Investments, it means that it is exporting the finances to buy the foreign production services which will remain as the assets of the country’s control. The Foreign Direct Investment has been found to be strengthening the world trade networks and the finance inflow and out flow. But on the other hand the Foreign Direct Investment can have the negative effect on the economic growth of some countries by exerting some pressure.

Initially when the Foreign Direct Investment was initiated after the Second World War, it was Marjory controlled by the United States of America, but this has taken a new direction as the FDI has now spread to take the shape of global arena. The Foreign Direct Investment has now shown to have great importance in the growth of the c global economies. It estimated that the Foreign Direct Investment capital constitutes of about twenty percent of the total global gross domestic product of the world(Jose, Brandao de Brito &Felipa de Mello Sampayo,2005).

However in the past few years some emerging economies such as china and India have been seen as the best destinations of the Foreign Direct Investment and these countries have been regarded as the countries with most investor confidence compared with the united states of America and other European Union countries. For instance china has the Foreign Direct Investment of 18.48 billion us dollars (IMF, 1995), followed by India with approximately FDI of 17.5 billion USA dollars.Most of the effects has been implicated in the developing countries which have shown an increase in the Foreign Direct Investment which has been attributed by the consequate mergers and the internalization on the production. The exchanges of the foreign investment benefit the foreign countries and the host country.

Foreign Direct Investment Of The United States Of America

The United States of America has been regarded as the largest economic power with a lot of the Foreign Direct Investment In the global arena and it has been seen as the biggest investor in the foreign countries.The USA has consequently promoted the foreign policies which help in attracting many foreign investors. The United States of America is a country with a lot of diversity and improved facilities which make it to attract many private firms. It is approximated that in the year of 2006 the foreign investor firms used $184 in the USA business investments (IMF, 2001). The United States of America has promoted the friendly conditions in the foreign investments in the international side.

The United States of America is a unique country in that it is regarded as the largest recipient of the foreign investors and the largest foreign direct investor in the world. Thus the USA can be referred as a country with the dual role in the globalization of the world trade. Thus the spread of the economic growth is the major characteristic of the United States of America. Hence through the Foreign Direct Investment the United States of America has become one of the economic empires in the world. According to the department of commerce the foreign investing led to the investment of about &184 billion in the investment made in business and the estates (Lipsey, Robert, E, 2001).

Consequently the Foreign Direct Investment increased in the year of 2005 by 29%(IMF, 2001).For a long time the United States of America has been regarded as the most outstanding country in the Direct Foreign Investment. For the past fifty years the government of the United States of America has made much effort in trying to make an impact in negotiating for the reduction of the restrictions pertaining to the foreign Direct Investments.

The government of the United States of America has promoted equal investment treatment between the foreign investors and the local investors.In the year of 1977 the USA president of that time Mr. Carter summarized in his speech” the United States will neither encourage nor discourage the inflow or outflow of international investment”(OECD,1996).

This statement meant that the foreign international investment will lead to the most outstanding principles of proper allocation of resources in relation to the market demands. Government interventions in the field of Foreign Direct Investment would have either the negative or positive effects depending on the strategies employed but the United States of America has come up with techniques which are geared towards enticing the foreign investors by ensuring that foreign investors are treated in the same way as the local investors with no discrimination.

US International Direct Investment Flows

Period FDI Outflow FDI Inflows Net
1960-69 $ 42.18 bn $ 5.13 bn + $ 37.04 bn
1970-79 $ 122.72 bn $ 40.79 bn + $ 81.93 bn
1980-89 $ 206.27 bn $ 329.23 bn – $ 122.96 bn
1990-99 $ 950.47 bn $ 907.34 bn + $ 43.13 bn
2007-09 $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn
Total $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn

Foreign Direct Investment Of India

India has been regarded as one of the outstanding countries which have recorded growing percentage in the Foreign Direct Investment. The FDI is one of the catalysts in the growing economy of India (Heckman, James, J, 1979). This has been obtained due to the factors such as security which provide the investment environment. Moreover India has the direct market and the efficient labor as a result of the large population.

The Foreign Direct Investment in the Indian context is allowed to take place by either having the direct financial collaborations and the establishments of the direct joint ventures in the technical fields. At the same times the foreign Direct Investments can be obtained through the capital markets through the Euro issues. Now days the foreign direct investment has been promoted by using the private placements. The engineering sector has got the highest Foreign Direct Investment, however this department has on the past witnessed a tremendous decline of the inflows and outflows.

India Foreign Direct Investment Flows

1980 2000 2007 2008 2009* TOTAL

Approvals in Rs. Crores 739 5256 11189 13590 37489 39453 57149 25103 189968

Approvals in US$ million 325 1781 3559 4332 11245 11142 15752 6132 54268

Actual inflows in Rs Crores 351 675 1786 3009 6720 8431 12085 8433 41490

Actual inflows in US$ million 155 233 574 958 2100 2383 3330 2073 11806

Actual inflows as percentage of approvals (in US$ terms) 47.7 13.1 16.1 22.1 18.7 21.4 21.1 33.8 21.7

The Foreign Direct Investment Of China

The Foreign Direct Investment in the Republic of China has increased tremendously for the last ten years. China is the leading country in the aspects of foreign investment followed by India. Among the developing nations it’s the leader and the second among the great eight countries. The Chinese Foreign Direct Investment is largely concentrated in the Greenfield investment in contrast with the United States which has concentrated on the enterprise take over (Stephen B.Tallman, 1988).

Marjory the Foreign Direct Investment in China has been attributed by the inflow from the Asian continent other than Japan. Mostly the inflow is from Hong Kong, Singapore and Thailand. But at the same time since the year of 1996 the inflow has changed its direction to include the Foreign Direct Investment from Europe, North America and Japan. Nowadays the Chinese government is interested in the domestic market later than in the export market.

FDI inflows (US$ bn) .
Contracted Utilized
1980 2.7 1.3
1985 5.9 1.7
1986 2.8 1.9
1987 3.7 2.3
1988 5.3 3.2
1989 5.6 3.4
1990 6.6 3.5
1991 12.0 4.4
1992 58.1 11.0
1993 111.4 27.5
1994 82.7 33.8
1995 91.3 37.5
1996 73.3 41.7
1997 51.0 45.3
1998 52.1 45.5
1999 41.2 40.4
2000 64.2 42.1
2001 71.1 48.8
2002 84.8 55.0
2003 115.1 53.5
2004 153.5 60.6
2005 162.2 60.3
2008 167.5 63.0
2009 178.0 74.8
Source:US Department of Commerce, Bureau of Economic Analysis (BEA).

The factors behind the increase in the Foreign Direct investments include the secure working environment and the presence of the labor force and the ready market created by the large population of china. At the same time the Chinese government has started to make some reforms which are aimed at placing china in to the World Trade Organization (Robert Grosse &Len J, Trevino, 1996)

Foreign Direct Investment In Brazil

Brazil is one of the countries in the Latin America with a lot of the Foreign Direct Investment. Usually Brazil contributes about half of the Foreign Direct Inflows which come into the continent of South America. Even in the global arena, Brazil is regarded as one of the outstanding countries with the best foreign investments. Since the years of 1990s the Foreign Direct Investments of Brazil have grown by the average of US$12 billion.

Most of the foreign investors in Brazil are the European countries such as France, Portugal, Italy and Holland. Nowadays the United States of America has started to increase it’s inflows to Brazil. The availability of the domestic market in Brazil as a result of the large population has attracted many foreign investors. Actually it has been anticipated that most of the foreign companies have shown interests of continuing to invest in Brazil. The estimated Foreign Direct Investment in Brazil stands atUS$25 billion at the year of 2009(Le Quanvu, &Zak, Paul J, 2006).

The Brazilian companies are also involved in the Foreign Direct Investment which has led to enormous foreign investment outflows internationally. For example the Petrobras oil company has increased its outflows in terms of assets, employment and sales by the US$1O billions by the year of 2009.

Foreign Direct Investment, Inflows/Outflows (Millions of US dollars)
1980-2000
(Annual average)
2003 2007 2008 2009
FDI Inflows
(USD million)
12 000 10 144 18 146 15 066 18 782
FDI Outflows
(USD million)
1 048 249 9 807 2 517 28 202

The European Union is regarded as the largest foreign investor. It has been rated as the world’s largest investor which promotes great financial outflows. Most of the Foreign Direct Investment by the European Union is concentrated on the green field investment. At the same time the European Union has remained as the largest recipient of the Foreign Direct Investors (Hubert, P.Janicki$Phanindra V.Wunnava, 2004).

The Foreign Direct Investment flows in the European Union has increased due to the fact that the countries who are the members of the European Union have the internal market and the external investors have strived to make sure that the European Union has a good reputation in the world and they have tried to improve the production technology in general. The improved technology which has concentrated in the European Union especially the outstanding transport and communication technology has made the foreign investors to increase their productivity and the marketing of their products.

However the great challenge of the European Union is attracting the Foreign Direct Investing as there is a lot of signs that the countries involved are loosing confidence to the investors. The challenges are mostly concentrated in the research and development investments which are shifting to other economic empires such as China and India(Suhejla Hoti&Michael McAleer,2004). Thus the policies of the European Union are aimed at attracting the foreign investors by creating the single common market and at the same time improving the infrastructure. EU foreign direct investment 1996 In million ECU

Intra- plus extra-EU of whichintra-EU Intra plus extra: change over 1995 Intra- plus extra-EU of whichintra-EU Intra plus extra: change over 1995 Intra- plus extra-EU: outflows minus inflows
EU 95,432 49,275 1% 66,822 40,947 -15% 28,610
Belgium/Lux 7,417 3,340 8% 10,968 10,005 54% -3,550
Denmark 1,985 1,614 -15% 605 208 -81% 1,380
Germany 20,332 9,881 -27% 594 739 -94% 19,737
Spain 3,648 1,345 33% 5,048 3,689 8% -1,399
France 21,217 10,393 47% 16,918 11,440 -9% 4,299
Italy 5,092 3,732 16% 2,784 2,274 -24% 2,308
Netherlands 15,937 7,188 72% 5,296 2,165 -33% 10,641
Austria 1,111 357 39% 2,992 2,903 516% -1,882
Portugal 607 190 14% 485 539 -4% 122
Finland 2,695 1,959 154% 514 779 44% 2,181
Sweden 337 779 -93% 3,389 2,015 -63% -3,052
UK 10,628 3,621 -30% 14,765 2,823 36% -4,137

EU Direct Investment flow in 2007

Inward FDI Outward FDI FDI Assets FDI Liabilities
Total $ billion in 2007 40.9 21.3 323.6 377.0
Country/region/trade block Per cent share of total
United States of America 39% 26% 47% 25%
European Union 19% 12% 9% 19%
United Kingdom 5% 7% 9% 17%
Canada 9% 8% na 3%
Japan 8% 1% 0% 7%
New Zealand -2% 18% 14% 2%
Singapore 3% 3% 2% 2%
Other 18% 24% 19% 25%

Conclusion

Foreign Direct Investment has taken a new shape in the recent times. Most of the foreign firms have concentrated their activities in China and India. At the same time the United States of America, European Union and Brazil have increased their foreign inflows and outflows. The Foreign Direct Investment has a profound effect in the globalization which involves the free trading and the improvement of the global finance. The Foreign Direct Investing has been greatly affected by the recession and depression problem which has affected the production costs and the marketing of the products. The recovery of FDI depends mostly on the recovery of the world market.

References

Egan, p. j., 2008 “attracting the locusts? the politics of foreign direct investment in brazil” Paper presented at the annual meeting of the MPSA Annual National Conference, Palmer House Hotel, Hilton, Chicago, IL Online.

Falzoni, Anna M. (2000) “Statistics on Foreign Direct Investment and Multinational Corporations: a Survey”, University of Bergamo, Centro de Studi Luca d’Agliano and CESPRI. Foreign Direct Investment, United Nations Conference on Trade and Development.

Heckman, James J, 1979. “Sample Selection Bias as a Specification Error,” Econometrica, Econometric Society, vol. 47(1), pages 153-61.

Hubert P. Janicki & Phanindra V. Wunnava, 2004. “Determinants of foreign direct investment: empirical evidence from EU accession candidates,” Applied Economics, Taylor and Francis Journals, vol. 36(5), pages 505-509.

International Monetary Fund (IMF), 1993. Balance of Payments Manual, fifth edition (Washington, DC). Web.

(International Monetary Fund) 1995, Balance of Payments Compilation Guide, 1stEdition, Washington DC.

IMF (International Monetary Fund) 2001, International Finance Statistics Yearbook, Washington, DC.

José Brandão de Brito & Felipa de Mello Sampayo, 2005. “The timing and probability of FDI: an application to US multinational enterprises,” Applied Economics, Taylor and Francis Journals, vol. 37(4), pages 417-437.

Le, Quan Vu & Zak, Paul J., 2006. “Political risk and capital flight,” Journal of International Money and Finance, Elsevier, vol. 25(2), pages 308-329.

Lipsey, Robert E. (2001) “Foreign Direct Investment and the operations of multinational.

Robert Grosse & Len J Trevino, 1996.”Foreign Direct Investment in the United States: An Analysis by Country of Origin,” Journal of International Business Studies, Palgrave Macmillan Journals, vol. 27(1), pages 139-155.

Stephen B Tallman, 1988. “Home Country Political Risk and Foreign Direct Investment in the United States,” Journal of International Business Studies, Palgrave Macmillan Journals, vol. 19(2), pages 219-234.

Suhejla Hoti & Michael McAleer, 2004. “An Empirical Assessment of Country Risk Ratings and Associated Models,” Journal of Economic Surveys, Blackwell Publishing, vol. 18(4), pages 539-588, 09.

OECD (Organisation for Economic Cooperation and Development) 1996, Benchmark definition of Foreign Direct Investment, 3rd Ed.

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