Lesson 2: International Investment

Foreign InvestmentWhat is foreign investment?“Flows of capital from one nation to another in exchange for significant ownership stakes in domestic companies or other domestic assets.” (Investopia.com) Foreign investment is both a cause and effect of financial globalization!

Finances more globally integrated

More international investment choices

Four Categories of Foreign Investment1) Commercial loans: bank loans issued

to foreign businesses or governments2) Official loans: development

assistance that developed nations give to developing ones

3) Foreign Direct Investment: international investment in which the investor obtains a lasting interest in an enterprise in another country

4) Foreign Portfolio Investment: investments that are more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise

Why Companies Invest OverseasMarket-seeking: new

market, more people to buy the goods/services

Resource-seeking: wants access to natural resources, such as oil or minerals

Strategic Asset-seeking: wants access to foreign brainpower (knowledge)

Efficiency-seeking: wants access to cheaper labor (for example) Call Center

Where Does Foreign Investment Take Place?Foreign investments mainly

originate in developed countries and end up in developed countries.

China, U.S. and India are top recipient countries of foreign direct investment

U.S., Canada and Spain are top countries of origin for foreign direct investment

Foreign Direct Investment Net Flow

Why has Foreign Investment Increased Dramatically?Technology Lure of higher profitThe end of the Cold WarFinancial liberalization

Governments can actively promote inward

foreign investment through economic policies such as favorable tax rates. It can restrict foreign investments through policies such as banning foreign investment in strategically important sectors.

Positive and Negative Effects of Foreign InvestmentPositive

Negative

Capital inflowsEmployment generationsProduction advantage

(including technology transfer)

Financial volatilityContagion effectLoss of national sovereigntyJob loss due to off-shoring

Honda Plant in Ohio

Abandoned factory in Tennessee

Foreign Investment and International Trade Trade helps economies grow and facilitates the most

efficient production of goods and services across the globe. Free trade involves decreasing the barriers to trade (such as tariffs).

Roughly one-third of the world’s volume of trade occurs within the same company’s affiliates across borders.

A company that wishes to sell its goods and services in a foreign market often ask itself whether its goals are best achieved by manufacturing in its home country and exporting its products, or by relocating production to the foreign market.

Is it better for your economy to produce goods at home, or is it preferable to move production overseas so that consumers may pay lower prices? What is the effect on developing countries of these shifts in production? Is it better for to create jobs in these areas? How should concerns about labor and environmental standards be taken into account?