currents trends in fdi

8/7/2019 Currents Trends in FDI

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Current Trends in FDI



Introduction To FDI.

� FDI is categorized as cross border investment made by aresident in one economy (the direct investor) with theobjective of establishing a ¶lasting interest· in an enterprise(the direct investment enterprise) that is resident in an

economy other than that of the direct investor.

� Direct investment allows the direct investor to gain access tothe direct investment enterprise.

� The motivation of the direct investor is a strategic long termrelationship with the direct investment enterprise and it·smanagement.



� The objectives of direct investment are different from those

of portfolio investment whereby investors do not generallyexpect to influence the management of the enterprise.

� During last twenty to twenty-five years, there has been atremendous growth in global Foreign Direct Investment (FDI).

�There is substantial growth in international trade.

�The growth in international flows of goods and capital implies

that geographically distant parts of the global economy arebecoming increasingly interconnected as economic activity isextended across boundaries



FDI in earlier INDIA.

� In the Indian context till the end of March 1991, FDI wasdefined to include investment in:

1. Indian companies which were subsidiaries of foreigncompanies.

2. Indian companies in which 40 percent or more of theequity capital was held outside India in one country.

3. Indian companies in which 25 percent or more of theequity capital was held by a single investor abroad.



� As a part of its efforts to bring about uniformity in the

reporting of international transactions by various membercountries, the International Monetary Fund (IMF) hasprovided certain guidelines which enable inter-countrycomparisons.

� Reflecting this with effect from March 31, 1992 theobjective criterion for identifying direct investment has beenmodified.

� A committee was constituted by the Department ofIndustrial Policy and Promotion (DIPP) in May 2002 to bringthe reporting system of FDI data in India into alignment withinternational best practices.



TYPES OF FDI

1. Inward Foreign Direct Investment:

This refers to long term capital inflows into a countryother than aid, portfolio investment or a repayable debt.It is done by an entity outside the host country in thehome country.

2. Outward Foreign Direct Investment:

This refers to a long term capital outflow

from a country other than aid, portfolio investment or arepayable debt. It is done by an entity outside the hostcountry in the home country.



3. Horizontal Foreign Direct Investment:

This refers to a multi-plant firm producing the same line ofgoods from plants located in different countries.

4. Vertical Foreign Direct Investment:

If the production process is divided into upstream (parts andcomponents) and downstream (assembly) stages, and only thelatter stage is transferred abroad, then the newlyestablished assembly plant·s demand for parts andcomponents can be met by exports from home-countrysuppliers. This is what Lipsey and Weiss (1981, 1984) andother researchers describe as ´Vertical FDIµ, whose aim is toexploit scale economies at different stages of productionarising from vertically integrated production relationships.

�



5. Greenfield Foreign Direct Investment:

Greenfield FDI is a form of investment where the MNCconstructs new facilities in the host country.

6. Brownfield Foreign Direct Investment:Brownfield FDI implies that the MNC or an affiliate ofthe MNC merges with or acquires an already existing firmin the host country resulting in a new MNC affiliate



Likely Benefits of FDI.

1. FDI is less volatile than other private flows andprovides a stable source of financing to meet capitalneeds.

2. FDI is an important and probably dominant channelof international transfer of technology. MNCs, themain drivers of FDI are powerful and effectivevehicles for disseminating technology fromdeveloped to developing countries and are often theonly source of new and innovative technology which isnot available in the arm·s length market.



3. The technology disseminated through FDI generallycomes as a package including the capital, skills andmanagerial knowhow needed to appropriate technologyproperly.

The resilience of foreign direct investment duringfinancial crises may lead many developing countries toregard it as the private capital inflow of choice. Althoughthere is substantial evidence that such investment

benefits host countries, they should assess its potentialimpact carefully and realistically



Recent years have seen increased public concern that thebenefits of FDI have yet to be demonstrated and that, wherebenefits exist, they may not be shared equitably in thesociety.

The adjustment costs associated with FDI include:

1. Higher short term unemployment due to corporaterestructuring,

2. Increased market concentration.

3. Incomplete utilisation of FDI benefits due to incoherentinstitutional policies and regulatory conditions, unavailabilityof skilled labour and infrastructure.

LIKELY COSTS OF FDI



FACT ORS WHICH ATT RACT FDI IN A COUNT RY

� Host countries with a sizeable domestic market, measured

by GDP per capita and sustained growth of these marketsmeasured by growth rates of GDP, attract relatively large

volumes of FDI.

� Resource endowments of a host country including naturaland human resources are a factor of importance in the

investment decision process of the foreign firms.

� Macroeconomic stability signified by stable exchange rates

and low rates of inflation is a significant factor in attracting

foreign investors.



� Infrastructure facilities including transportation andcommunication are important determinants of FDI.

� Political stability in the host countries is an important factor inthe investment decision process of foreign firms.

� A stable and transparent policy framework towards FDI is an

attractive factor to potential investors.

� Foreign firms place a premium on a distortion free economicand business environment.

� Fiscal and monetary incentives in the form of tax concessionsdo play a role in attracting FDI.



� MNCs are potentially subject to taxation in both the host and

home countries. It is found that the way in which parentcountry reduces double taxation on their MNCs can have

implications for FDI.

� Trade protection is also found to encourage FDI. It is foundthat FDI response to these trade actions (tariff jumping FDI)occurs only for firms with previous experience as MNCs.

� Wages are an important factor determining inward FDI. It ispossible that lower wages are associated with higher levels ofinward FDI.

� It is found that FDI is positively correlated to the right toestablish unions, to strike, to collective bargaining and to theprotection of the union members



The Current FDI Trends

� Global inflows of foreign direct investment (FDI) fell by 39%from US$1.7 trillion in 2008 to a little over US$1.0 trillion in2009, based on UNCTAD estimates.

� The decline in FDI was widespread across all major groups ofeconomies.

� FDI flows to developed countries continued their dramaticdecline in 2009 (by a further 41%).

� FDI flows to developing and transition economies, which hadrisen in 2008, declined in 2009 (by 35% and 39%,respectively), as the impact of the global financial andeconomic crisis continued to unfold.



� Cross-border mergers and acquisitions (M&As) were the

most affected, with a 66% decrease in 2009 as compared to

2008.

� After a sharp fall in the first quarter of the 2009, followed by a

slight rebound in the second quarter, FDI flows in the third

quarter remained relatively stable.



Factors for the Current FDI Trends

� FDI flows to the developing world are expanding

again.

� Regional FDI patterns are shifting in the developingworld.

� South-South FDI is significant and growing.

� China continues to be the developing world¶s FDI

magnet.



� Strong commodity prices are boosting FDI for extractive

industries.

� Private investment in public infrastructure is surging.

� Efficiency-seeking FDI is an increasing share of all FDI in

developing countries.

� The end of global textile/apparel quotas has had mixed

impacts on FDI.

� OECD¶s Policy Framework for Investment is an important

new analytical tool.



FDI flows to the developing world areexpanding again

� Worldwide FDI flows peaked in 2000, and then ± in anenvironment of global economic recession and uncertainty

± declined through 2003 for both developed and

developing countries and we saw again a decline at the

time of global recession period of 2008.

� FDI inflows have again begun to grow. In the developing

world the increase has been dramatic: in 2009/2010 FDI

inflows rose by 30 percent from the 2008/2009 through.

� Reports suggest that in developing countries the flow of

FDI is more rapid than in high income countries.



Global FDI Inflows



SHARE OF TOP INVESTING COUNTRIES FDI EQUITY

INFLOWS

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