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INTRODUCTION

In the following essay FDI (Foreign Direct Investment) has been critically analyzed in different forms that

it has been utilized as well as its advantages and disadvantages of host and home country have been

crisply laid out with examples with regard to the relevant material.



FDI (Foreign Direct Investment) is when an organization sets up its establishments in other parts of the

world in the form of domestic assets such as, factories, lands etc. it involves an investment technique

where foreign funds are introduced into the firm which operates in a country away from the home

country, thus making it a multinational firm. The approach of FDI is followed in two mains methods

which are mergers and acquisitions or by an investment method called the Greenfield Investment.

Mergers and acquisitions are the most commonly used form of expanding FDI. It is usually done when

local companies transfer their assets over to a foreign company in order to become more stable in the

market as well as to become an affiliate. One of the examples which can explain this best is leading

Chinese IT Company Lenovo taking over IBM in 2005 for a stunning $1.75 billion, major reason being due

to a $100 million loss a year that was incurred by IBM. Another example of this approach can be the

merger of Boeing with McDonnell Douglas. The two companies had been longtime rivals and finally in

1996 Boeing took over the firm for an estimated amount of $13.3 billion. The reason for this was that

Boeing wanted to expand itself in the aerospace and defense sector, which McDonnell Douglas had a

strong advantage in; this merger brought in new technology and also increased the level of

competitiveness for other firms in the same industry.

Talking about Greenfield investment, which is another FDI approach is when a firm builds further

facilities in countries other than its origin in order to expand its enterprise, completely on new grounds

without taking over any existing companies in that region for expansion. A good example of green field

approach would be that of mega Korean car company Hyundai Motor Company when they decided to

establish in regions of Czech Republic like Moravia-Silesia in late 2008. This led to increase in job

opportunities for nearly 3000 people and was assumed to go up to 13000. The investment cost came up

to nearly €1.06 billion which is considered as one of the largest investments done in Czech Republic.

Greenfield investment can also be seen in one of the most popular food chain in the world

“McDonalds”. It has more than 31000 outlets in around 118 countries worldwide. McDonalds does not

only increase its job opportunities, it also trains young staff with professional training programs andprovides them with various facilities which is a reason why they are welcomed in a market.

Another approach that we could see very commonly used is the OLI paradigm evolved from John

Dunning’s Electric theory. This is a combination of three types of FDI’s. “O” being for Ownership

Advantages, also addressed as Firm Specific Advantage, “L” Location Advantage or Country Specific

Advantage and “I” Internalization Advantage. Ownership Advantages are intangible in nature, like brand

name and can be transferred within the firm for a minimal cost. This can result in higher revenues or

lower costs in a location away from the home country. Location Advantages are classified into Economic

advantages constituting of factors like market size scope and other minor costs like transport and

communication etc., Political advantages include the legal procedures and government norms of theparticular country, and socio-cultural advantages factors of how to approach the new diverse

environment and compete in the market. The last being the Internalization Advantages where the

organization can exist in a market which does not function poorly making transactions of external routes

higher. There is another theory that much similar to the Greenfield investment called the “Brownfield

Investment”. It was introduced in 1992 which implies that the company clears an old area used for



activities such as mining, oil rigs etc. this area is then taken and converted into area that can be used for

commercial establishment like residential or office working environment.

FDI has become an attraction for many developed countries in order to invest in developing and

underdeveloped countries and conquer the market share and establish itself as an MNC (Multinational

Corporation). The flow of global FDI has reached to $ 1306 billion in 2006 which accounts to 38%growth when compared to other year. Increase in FDI has mainly come from cross border investments

through mergers acquisitions. Countries like Iceland, Singapore, and china were ranked as the top

inward best performers. FDI lay’s a platform for countries to participate in international business where

global MNC’s cone forward and share their interests and experiences through the standards they

established.

(Source: http://www.economywatch.com/foreign-direct-investment/)



FDI has advantages and disadvantages for the Home and Host countries, staring with the advantages for

Host country: Resources which are transferred from Home to Host prove to be beneficial for the Host

country. As known to us resources for any organization include knowledge, managerial skills, technology

and capital. Thus, it’s evident that when an MNC enters a Host country it brings about the systemfollowed in its home to Host, which propagates better technical and theoretical knowledge and capital

inputs to the Host country which contributes towards improvisation of its economic growth as MNC’s

have international contacts and access to heavy financial capital. There is an Employment growth when

an MNC enters a country, the job opportunities grow as the requirement of human capital and skilled

labor is a key focus of any MNC. Else high opportunities of jobs are difficult to attain specially during

recession and other times as well. This is one of the key advantages of FDI which helps the Host country

benefit and reduces the unemployment rate. Tax revenue could be explained when profits which are

generated through FDI by the MNC’s contribute towards the income of the Host country through taxes

which are paid. This helps the Host country’s GDP high and promotes economic growth.

Competition which is another important segment plays a major role between the MNC’s and local firms

as they drive the local firms to absorb knowledge and technology from the MNC’s and adapt in their

processes. MNC’s help local firms stand up for the competition which in other way helps to develop new

production systems, investments in R&D, stimulates income through capital. The above mentioned

content can create a “spillover effect” which states the advantage a local firm can have by having an

MNC in their country and adapting their knowledge without any price. A very significant example that

could explain the advancement of FDI in Host-Countries could be that of Toyota. In recent news they

have planned to build a plant in Brazil to manufacture small economic cars with an investment of nearly

$600 million which is estimated to be completed by 2012. This not only increased the job opportunities

in the country but by introducing new technology there has also been transfer of technology andresources from the home country to the host country. Wal-Mart entered Mexico in 1990’s as the size

and market potential of Mexico was vulnerable and competitors were less. It laid a base as one of the

best retail stores and eventually has spread to 234 stores within Mexico as a result of which

employment and job opportunities were created and economic growth was promoted. Advantages for

the Home country have been discussed below

When an MNC from home country establishes itself in Host country it adapts the techniques and

valuable skills of the Host country through a reverse transfer of skills. Where Home country benefits and

gains a different aspect of business which can help the MNC improvise and work on their processes in an

efficient manner. It provides the Home country with wide markets with efficient potential, cheaper

labor, skills, channels which can reduce the cost of establishments for the Home country and save the

funds. For example: Toyota established itself in Thailand in 1960’s for its cheap source of production,

labor and raw materials. Technological skills have been transferred from Toyota to Thailand which

helped Thailand’s economic growth and sales of automobile industry rose to 8% from 2.3%.Home

country’s balance of payments proves to be beneficial as there is an inflow of cash from the earnings of

the firms. It can also benefit if there is a demand for subsidiary goods, complementary products as it’s a

result of exports and earnings. Investment in different countries can be a driving essence of capital



inputs and can help the GDP of the country rise. When talking about technological transfer best example

would be “Huawei”, a Chinese company manufacturing telecommunication tools like modems, routers

for access. Over the years this firm has gone global and captured the markets of Gulf, Malaysia, India,

Thailand and transferred the technology of 3G for improving the technology in Host country and gain

profits for Home country. Today it’s one the leading entities whose tools and products are much in

demand and investment proposals for other countries are in progress. Disadvantages of FDI for host and

home country have been discussed ahead.

There if a possibility that the MNC; s may establish itself as a monopoly and dictate the price which

would lead to an inflation. This would affect the living of the country and decrease the economic growth

substantially. Secondly, Domestic firms may suffer as they are not global and efficient like the MNC’s

which would lead to decrease in competitiveness of the local firms as the MNC’s are global in nature and

execute latest technology and managerial skills which the local firms may lack, this would lead to a

decrease in growth of the local firms as a result the country may suffer with low growth rate. Some of

the MNC’s focus on one particular industry which would be beneficial for a temporary period of time but

always would hold a risk as other industries would lack the progress with regard to technology, latest

production processes which would lead to decrease in capital inputs. MNC’s may force the government

impose regulations which would be in favor of them and would serve injustice to the local firms, in

certain cases the local firms may not seem happy with the performance of the MNC’s and their direction

as it prohibits the growth of the domestic firms and are not appreciated by the workers of the Host

country. Exploitation of resources could be notices in certain cases as MNC’s hold a target before they

chose to invest, resources may not be used efficiently to the extent it is supposed to be used as MNC’S

may aim at temporary profits and gains and exploit the resources. A popular scenario is that of

European Company Normandy, formally known as Euro gold that were established in 1989 found gold inIzmir, Turkey where the gold reserve reported was estimated to be around 24 tons. The project was

stopped due to legal action in 1997. This was due to use of cyanide which proved to be very harmful to

the public. They were later give a 1 year trial period to try out in 2001 which made them follow the

proper environmental norms. This was done by order of the prime minister. MNC’s do not follow

environmental norms at times which are 1 of the reasons why MNC’s find it difficult to cope up with CSR

(Corporate Social Responsibility).Another example is that of that of Volkswagen. Quoted by Kristian

Ehinger (1999) ” Volkswagen requires that plants producing the four components of the basic vehicle

platform (engines, axles, chassis, and gear boxes), which the parent manufactures separately from

assembly sites in Brazil, Mexico, Argentina, and Eastern Europe, be designed to receive simultaneous

engineering improvements online within 16 hours of each other.” This increased jobs opportunities fornearly 3000 people in Mexico. It also reduced the basic production cost, since it was done at a cheaper

rate. This can be considered as exploitation of resources. Disadvantages to the home country are:

MNC’s often invest in Host countries in order to gain capital inputs and strengthen their standards; they

hire employees from Host country which would cause slight unemployment in Home country. Some of

the MNC’s lay their production base in countries where they find cheap labor and raw material which

would affect Home country’s economic growth. Technology which would be brought by MNC’s may



prove to be a disadvantage to the Home country as Host country’s domestic firms may adapt the

technology and imitate them in order to gain control over the market which would reduce the efficiency

of MNC’s and reduce the level of competition and advantage which they have. Countries whose reserves

(foreign) are limited in nature may prevent outflow of investment profits which can drain the profits in

Host country and affect the GDP of Home country , this is done in order to save their foreign exchange.

FDI is a costly process and can involve high risk when investing into a Host country. Investments should

be made into industries with effective research and knowledge as it involves huge communication,

travel and process expenses from the Home country. Certain parts of the world have political and

economic instability due to recession and less capital inputs, therefore a foreign Investor should always

look into such areas and countries and warn themselves as investments being a costly affair may affect

the Home country’s GDP rate if it undergoes loss.



Conclusion:

The above discussion about FDI (foreign direct investment) clearly states its importance in today’s global

environment. It provides a firm with new potential markets, efficient labor, new resources, and capital

and explores the investment to make high profits. Thus, investments should be encouraged at an

average rate in order to serve host country new adapting technology, provide employment and priorbeing to expand the firm’s control and market share. FDI promotes globalization and is one of the key

factors for a country’s GDP growth; it helps expand its contacts and integrate with the world which can

be useful for adaptation of cultures and policies for trading. Competition is one of the driving forces for

the countries with regard to investments in order to keep up the standards of the entity. FDI should be

encouraged in developing nations like Malaysia, Indonesia and India as developing nations should soon

be developed and firm to take up the challenges of FDI. Pros and cons are to be considered before any

investments in order to keep safe.

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