fdi theory positive and negative impact

7/28/2019 FDI Theory Positive and Negative Impact

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Theories of Foreign Direct

Investment (FDI): positive

and negative impact of FDI

Prepared By:

Jennifah Nordin

Nur Afisha Yusuf

UiTM Sarawak

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Presentation Outline

Definition of FDI

Introduction to FDI

Statistical Data of FDI in Malaysia

Theories of FDI

Positive Impact of FDI

Negative Impact of FDI

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Definition of FDI

Foreign direct investment (FDI), defined as

investment made to acquire a lasting interest inor effective control over an enterprise operating

outside of the economy of the investor

(International Monetary Fund 1993 as cited inJuma;2012)

As an investment by foreign corporation in any

country (Bose; 2012)

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FDI in Malaysia

Budget 2013 announced that net inflows ofFDI amounted to RM13.6 Billion

Malaysia was ranked the third largestrecipient of FDI among the ASEANcountries, after Singapore and Indonesia(Investment performance 2011)

Total investment approved in the Malaysiaeconomy in year 2011 was RM148.6 Billion

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Statistics from MIDA-2013 & 2012

PROJECT APPROVED BY COUNTRY

2013 AND 2012 MIDA.pdf

PROJECT APPROVED BY MAJOR

INDUSTRY 2013 AND 2012 MIDA.pdf

TOTAL PROJECT APPROVED BY

STATE MIDA.pdf

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http://localhost/var/www/apps/conversion/tmp/scratch_10/PROJECT%20APPROVED%20BY%20COUNTRY%202013%20AND%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/PROJECT%20APPROVED%20BY%20COUNTRY%202013%20AND%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/PROJECT%20APPROVED%20BY%20MAJOR%20INDUSTRY%202013%20AND%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/PROJECT%20APPROVED%20BY%20MAJOR%20INDUSTRY%202013%20AND%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/TOTAL%20PROJECT%20APPROVED%20BY%20STATE%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/TOTAL%20PROJECT%20APPROVED%20BY%20STATE%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/TOTAL%20PROJECT%20APPROVED%20BY%20STATE%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/TOTAL%20PROJECT%20APPROVED%20BY%20STATE%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/PROJECT%20APPROVED%20BY%20MAJOR%20INDUSTRY%202013%20AND%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/PROJECT%20APPROVED%20BY%20MAJOR%20INDUSTRY%202013%20AND%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/PROJECT%20APPROVED%20BY%20COUNTRY%202013%20AND%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/PROJECT%20APPROVED%20BY%20COUNTRY%202013%20AND%202012%20MIDA.pdf


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Why Countries seek FDI

Domestic capital is inadequate forpurpose of economic growth;

Foreign capital is usually essential, at least

as a temporary measure, during the period

when the capital market is in the process

of development;

Foreign capital usually brings it with other

scarce productive factors like technical

know how, business expertise andknowledge

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Theories of FDI

1. Modernization theories

Theory suggest that FDI could promote economic growth indeveloping countries

While economic growth requires capital investment

Believe that transfer of technology through FDI in developingcountries is important to develop the country

Also lead to managerial skill and marketing network

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Theories of FDI

2. Dependency Theory

Dependence on FDI-lead to negative effect on growth anddistribution of income

Create industrial structure in which monopoly ispredominant

Economy controlled by foreigners would not developorganically but would rather grow in a disarticulated manner

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Theories of FDI

3. Product Life Cycle Theory

Develop by Raymond Vernon

Explain why US manufacturers shift from

exporting to FDI Relevant to manufacturers initial entries

into foreign market

Manufacturers-gain monopolistic export

advantage from product innovations

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Cont

Stage 1: New product stage, where the

product continues to be concentrated in

the United States

Stage 2: Product becomes standardize in

its growth

Stage 3: Mature stage: cost competition

among producers and start to look

countries that can offer lower production

cost

(Shenkar, 2007)

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Theories of FDI

4. Monopolistic Advantage Theory

Stephen H. Hymer found that FDI take

place because powerful MNE choose

industries/markets in which they have

greater competitive advantage

Suggests that the MNE posseses

monopolistic advantage that enables it to

operate subsidiaries abroad which is more

profitable than local competing firms

Monopolistic advantages drawn from two

sources namely superior knowledge and

economies of scale (Shenkar, 2007).

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Theories of FDI

5. Japanese FDI Theory

Developed in 1970s by Terumoto Ozawa

the theory relates with the FDI inflow and

outflow of a country and its relation toeconomic growth

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Theories of FDI

1. 1st phase of economic growth

The country is underdeveloped

Labour costs are very low

Become a target by foreign companies who seek tolower down their production cost

At this stage, there is almost zero FDI outflow

2. 2nd phase of economic growth

New FDI starts to flow inside the country due togrowing internal markets and improve standard of

living

More FDI outflow happens due increase in labour cost

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Theories of FDI

3. 3rd Phase of economic growth Competitiveness of a country measured based

on level of innovation

FDI inflows and outflows are motivated by both

market factors and technological factors

http://unctad.org/en/docs/iteiitv1n1a3_en.pdf

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Theories of FDI

6. Five Stage Theory - John Dunning

Stage 1

Low incoming FDI, but foreign

companies are beginning to discoverthe advantages of the country

No outgoing FDI no specific

advantages owned by the domestic

firms


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Five Stage Theory - JohnDunning

Stage 2

Growing incoming FDI do the advantages of the

country - especially the low labour costs

The standards of living are rising which is

drawing more foreign companies to the country Still low outgoing FDI

Stage 3

Still strong incoming FDI, but their nature is

changing due to the rising wages

The outgoing FDI are taking off as domesticcompanies are getting stronger and develop

their competitive advantages


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Five Stage Theory - JohnDunning

Stage 4

Strong outgoing FDI seeking

advantages abroad (low labour costs)

Stage 5 Investment decisions are based on the

strategies of TNCs

The flows of outgoing and incoming FDI

come into equilibrium

http://aib.msu.edu/awards/19_1_88_1.pdf


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1. Human Capital Development

What is Human Capital Development???

Define as the reserve economically productive human

capabilities. Represent an issue of ability to do and individual

capabilities

Study-reveal that there is a strong relationship between

FDI inflow and human capital development of a hostcountry (Khalid Zaman, Iqtidar Ali Shah & Muhammad

Mushtaq Khan; 2011)

Foreigner engage in employee training (Zilinske;2010)

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2. Employment opportunity Due to competition brought by FDI, its competitiveness

increase and a country become more productive.

Porter in his book title The competitive advantage of

Nationshighlighted this issue Increase in competitiveness lead to creation of

employment (Arango;n.d)

Swiss affiliates have created more than 430,000 jobs

across the U.S. with 177,800 jobs in manufacturing and21,100 in R&D. Of the 5.3 million jobs supported in the

U.S.

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Job opportunities in Malaysia by

sectors-2012

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Overview approved project jan mac 2013

and 2012 MIDA.pdf
http://localhost/var/www/apps/conversion/tmp/scratch_10/Overview%20approved%20project%20jan%20mac%202013%20and%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/Overview%20approved%20project%20jan%20mac%202013%20and%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/Overview%20approved%20project%20jan%20mac%202013%20and%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/Overview%20approved%20project%20jan%20mac%202013%20and%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/Overview%20approved%20project%20jan%20mac%202013%20and%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/Overview%20approved%20project%20jan%20mac%202013%20and%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/Overview%20approved%20project%20jan%20mac%202013%20and%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/Overview%20approved%20project%20jan%20mac%202013%20and%202012%20MIDA.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_10/Overview%20approved%20project%20jan%20mac%202013%20and%202012%20MIDA.pdf


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Philippines-the Department of Labor andEmployment (DOLE) has announced that the

number of unemployed people nationwide continues

to decline, as foreign companies start renewing their

investment interests and contracts in the countrypost-2008 economic recession. The results of the

April 2012 Labor Force Survey (LFS) did indicatethat the number of unemployed people in the

country went down slightly from estimated 2.87million to 2.8 million in the same period last year(Gokianluy; 2012)

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Example

Wal-Mart set to grow in China

Tuesday, April 2, 2013

Wal-Mart (WMT.NYSE) says its growth in China is ontarget and it plans to invest US$80 million (RMB500million) to upgrade existing stores in the market, The Wall

Street Journal reported. The retail giant said it plans to

remodel 50 of its nearly 400 stores in China, and open30 new stores in the country in several second-tier cities.Wal-Mart will also look to boost investment in warehouses

and logistics networks to reduce costs and increase foodsafety standards. Wal-Mart may add 18,000 jobs to itsChina payroll this year

http://www.chinaeconomicreview.com/wal-mart-set-grow-

china5/28/2013 22
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3. Transfer ofTechnology

Ramirezhighlighted that FDI

allows transfer oftechnology and

specializedknowledge which in

turn increase

productivity (ascited in Arango;n.d)

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Horizontaltechnological

spillover (withinindustry)-refers tothe effect the

presence of MNCshas on domesticfirms in the same

sector

Verticaltechnologicalspillover (inter

industry) as a resultof the interaction

between domesticand foreign firms

that are not in thesame industry.(Aldaba; 2012)

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4. FDI lead to increase in competition Improve the factors of production and

accumulation of capital in the host country

The entry of MNCs increase the supply in

the host country market Thus forcing the local firms to reply to this

competition as to maintain their market

shares

Due to this competition, it will lead toincrease in productivity, lower pricesand more efficient allocation ofresources.

http://www.fep.up.pt/investigacao/workingpa

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5. Reduce Poverty

According to a poverty report provided by

the World Bank (2003), the percentage of

people living below the standard poverty

line in Vietnam decreased rapidly from 58

percent in 1993 to 29 percent in 2002

(Hung; n.d)

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HOW government of China control pollution? By having environmentalpolicy-mainly base on taxation

Lead to atmosphere pollution called SO2

Most of the sulfur dioxide (SO2) released into air is from coal (coal is the mostprimary source to meets its national energy

Kirkulak, Qiu and Yin (2011) reveal in their study that China has anabundance of energy and the most common form of energy is coal

1. Environment deterioration

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2. Cultural difference

1994-Wal-Mart expand their business to

china

Different perception of Chinese people

about US companies (Bose;2012)

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3. Decrease in expected profitability ofinvestment project

WHY?? Due to corruption-lead to investor will take

into consideration level of corruption in a host country

before making decision to invest Study conducted by Ali Al-Sadiq (2009) reveal that a

one point increase in the corruption level leads toa reduction in per capita FDI inflows about 11

percent. Houston study indicate that corruption has a

positive effect toward economic growth with a weak

rule of law, and its has a negative effect in countries

with sound institution (as cited in Ali Al Sadiq;2009)5/28/2013 29


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4. High level of FDI has a negative Impact onR& D

High level of FDI volatility-lead to less innovation-reduce R&D effort and reduce cost involve in R& D(Robert Lensink and Oliver Morrissey as cited inChangwatchai;2010).

Its happen in developing countries and Aseancountries.

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The endthanks for listening

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fdi theory positive and negative impact

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