International Business

Prepared By

Manu Melwin Joy

Assistant ProfessorIlahia School of Management Studies

Kerala, India.

Phone – 9744551114Mail – manu_melwinjoy@yahoo.com

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Introduction

• FDI refers to investment in aforeign country where theinvestor retains control overthe investment. FDI has threecomponents.

– Equity capital.

– Reinvestment earnings.

– Intra Company loans.

Introduction

• There are differentkinds of FDI, two ofwhich—greenfieldand brownfield—areincreasinglyapplicable to globalfirms .

Greenfield FDI

• Greenfield FDIs occur whenmultinational corporationsenter into developingcountries to build newfactories or stores. Thesenew facilities are built fromscratch—usually in an areawhere no previous facilitiesexisted. The name originatesfrom the idea of building afacility on a green field, suchas farmland or a forestedarea.

Brownfield FDI

• A brownfield FDI is when acompany or governmententity purchases or leasesexisting production facilitiesto launch a new productionactivity. One application ofthis strategy is where acommercial site used for an“unclean” business purpose,such as a steel mill or oilrefinery, is cleaned up andused for a less pollutingpurpose, such as commercialoffice space or a residentialarea.

Why Governments Encourage FDI

• Financial incentives.

• Infrastructure.

• Administrativeprocesses andregulatoryenvironment.

• Invest in education.

• Political, economic,and legal stability.

Why Governments Encourage FDI

• Many governmentsencourage FDI in theircountries as a way tocreate jobs, expandlocal technicalknowledge, andincrease their overalleconomic standards.

How Governments Encourage FDI

• Financial incentives. Hostcountries offer businessesa combination of taxincentives and loans toinvest. Home-countrygovernments may alsooffer a combination ofinsurance, loans, and taxbreaks in an effort topromote their companies’overseas investments.

How Governments Encourage FDI

• Infrastructure. Hostgovernments improve orenhance localinfrastructure—inenergy, transportation,and communications—to encourage specificindustries to invest. Thisalso serves to improvethe local conditions fordomestic firms.

How Governments Encourage FDI

• Administrative processesand regulatoryenvironment. Host-countrygovernments streamline theprocess of establishingoffices or production intheir countries. By reducingbureaucracy and regulatoryenvironments, thesecountries appear moreattractive to foreign firms.

How Governments Encourage FDI

• Invest in education.Countries seek toimprove their workforcethrough education andjob training. Aneducated and skilledworkforce is animportant investmentcriterion for many globalbusinesses.

How Governments Encourage FDI

• Political, economic, andlegal stability. Host-country governmentsseek to reassurebusinesses that the localoperating conditions arestable, transparent (i.e.,policies are clearly statedand in the publicdomain), and unlikely tochange.

Example

• Countries like Hong Kongand Singapore long agorealized that both globaltrade and FDI would helpthem grow exponentiallyand improve thestandard of living fortheir citizens. As a result,Hong Kong (before itsreturn to China) was oneof the easiest places toset up a new company.

How Governments Discourage or Restrict FDI

• Ownership restrictions.

• Tax rates and sanctions.

How Governments Discourage or Restrict FDI

• Ownership restrictions. Hostgovernments can specifyownership restrictions if theywant to keep the control oflocal markets or industries intheir citizens’ hands. Somecountries, such as Malaysia,go even further andencourage that ownership bemaintained by a person ofMalay origin, known locally asbumiputra.

How Governments Discourage or Restrict FDI

• Tax rates and sanctions.A company’s homegovernment usuallyimposes theserestrictions in an effortto persuade companiesto invest in the domesticmarket rather than aforeign one.

Example

• For decades, many othercountries in Asia (e.g.,India, China, Pakistan,the Philippines, andIndonesia) restricted orcontrolled FDI in theircountries by requiringextensive paperwork andbureaucratic approvals aswell as local partners forany new foreignbusiness.