Foreign Direct Investment
Foreign Direct Investment
Today, the traits of foreign investment have change than it was for two decades. Then it was mainly followed by the “multinational” companies to build their image. Foreign investment was never deemed as an autonomous “economic activity”, in fact I was always conceived to be a procedure to assist in trade related activities. However, one can not perceive “foreign direct investment” as an assistant to trading activities. It is necessary for the growth and development of capital that the resources should be efficiently distributed and apportioned. Nowadays, the flow of capital is against the expectations, as most of the capital moves towards the “developed countries”. (Konrad, 2000)
The fact is that excessive flows of capital must have been initiative in the “developing countries”. These have the dire need of direct capital investments for development and reconstruction. Although, developing countries do have room for these types of investments, the presence of high “risks” there discourages high foreign investments. Hence, one can say that today the largest piece of work is to introduce reforms in the process of capital distribution.
Being a new concept all the “large and small” countries adopted “foreign direct investment” with great “concern” and doubts. Today it is a part of the aims of the companies to facilitated and sustain foreign direct investment. Large enterprises go for external investments. However, the availability of “mutual fund” has facilitated foreign investment to the “small investors”. (Konrad, 2000)
Today, most of the developing countries are experiencing high capital flows. In other wards one can say that foreign direct investment is the major source of capital availability in the developing countries. It has even taken over the funds provided by the government and “multinational” banks for development and reconstruction of the developing countries. About one third of the investments in developing countries are actually done by the international investors. Recently, the flows of capital form the “developed” to the developing countries have spiked causing the positive outcome of the investments from the OECD to the “non-OECD” countries. (Konrad, 2000)
The increasing importance of the “foreign direct investment” has increased the demand for the creation of an international investment platform. Investment is actually functioning of economics that enjoy high social importance. It also assists in the achievement of maintenance and growth of the countries. The role of policies in the sustainability of investment in the develop countries helps to form “Market disciplines”. It is for this reason that most of the “policy-makers” rely upon it in the development of the policies. (Konrad, 2000)
The lust of making money has many dire implications. The US government’s stances to raise the investment prospects resulted in high reception of taxes during 1992-1998. This increase in the “value” of investment areas termed quite profitable for the US. It got the chance to overcome its “budget deficit”, to build an appreciable budget for defense purpose; it also helped the US government to make certain national and international investments. That ultimately led to its development and strong economic presence in the world. However, the situation is opposite in the “developing countries”. There the “policy makes” are facing many difficulties in the investment and development of society mainly because of the availability of limited capital inflows. (Konrad, 2000)
The greater increase of Foreign Direct investment among OECD countries-“Organization for Economic Co-operation and Development”- show that the OECD do have some stake in such type of investments. In fact the most of the foreign direct investment in developing countries is actually a result of the investment done by the OECD countries. Notwithstanding, yet OECD countries have not adopted a “multilateral agreement” for such type of investment.
These types of investments can only be facilitated and practice by following the “guidelines” set by the United Nations. The policies adopted by the European Union for the implementation of foreign direct investment are totally different from other countries. Most of the “treaties” and policies followed by the EU member states preserve “foreign direct investment” in them. The EU countries cannot sign or “negotiate” any “multilateral” investment proposal individually. However they can form a “bilateral” investment proposal individually. (Konrad, 2000)
The well known matter of foreign direct investment is “home state”. This principle refers to a country’s ability to hold the investment made by its investors in some other country. This principle have stake in the foreign investment even after completely depending upon the “state responsibility principles” and the involvement of diplomats. This principle proves that both investments and trades have different implications. (Konrad, 2000)
Foreign direct investment is in many ways necessary for attaining “development” which can be maintained for a longer period of time. Unfortunately. most of the current investment policies and the framework are not properly maintained. A proper “investment” is required to take over them.
Therefore, a collective “international investment regime” is required to facilitated and make public foreign direct investment. Today, due to increase in the direct investment from foreign countries developed countries have a limited share in the investment GDP than they had during the “Environment and Development Conference” conducted by the UN. Today, countries like “Brazil, China, Chile, Argentina and Mexico” have a big share in the implications of foreign direct investment. However, it is not reliable for a country to totally rely upon this type of investment. Using such type of investment to develop funds ends finishes all its resources. (Konrad, 2000)
This may affect the ability of the country to invest for maintaining its development. In other words the outflow of capital should be directed towards the developing or underdeveloped countries. Up till now all the initiations to constitute an “international investment regime” have failed only because of the divergence of perspectives among the United Nations and the OECD. United Nation has mainly focused upon the duties of the “multinational corporations” however the OECD countries are concerned with the “Investors rights” to introduce reforms in their investment’s security. (Konrad, 2000)
Today, it is really necessary to differentiate between the “rights” and duties of the private and public sector investors. Unfortunately, none of the current international corporations are following this approach to attain compatible foreign direct investments for their country. It is necessary for most of the “international” corporations to build an equilibrium investment policy. Only then a capable foreign direct investment policy can be developed and implemented.
Moreover, “the relationship between the investor” and the country been invested in is different from the relationship between the exporting country and the importing country. It is obligatory upon the investors to attaint the investing rights of the country, he wishes to invest in. And it is for this reason the development of an international investment platform is necessary. (Konrad, 2000)
For the implementation of the foreign direct investment and the solution of wars it is necessary to have a publicaly legitimized system. It will assist in the proper functioning of the investment platform. Foreign direct investment will pave ways for the development of a platform where investment treaties could be building.
A pact have been designed properly can help to meet the policies of foreign investments. These pacts will make the aims of the “foreign direct investment” platform more clear and applicable. However, the outcome of these types of small and big agreements will be the formation of “regime” that would be easily accept and implement the changes in the foreign direct investment.
Up till now all the initiatives taken by “World Bank, WTO, and UN” to facilitate these investments have failed. In fact the difference of opinion among the policy makers resulted in the deadlock. Although the organization built for the just implementation of the foreign direct investment must be predictable and flexible for larger duration. (Konrad, 2000)
Foreign direct investment has shown subsequent increase during last 10 years. It is believed that many factors are responsible for this increase. To get increased capital flows from public and “private” sector and the formation of liberal “global financial system” helped in the “development and globalization” of product manufacturing. The cause for the raise in the flow of “long-term investments” towards the south is the growing interest of “public and private” investors in the region. Especially, most of the public departments and officials showed great interest for the international investments. These investments were supposed to assist in countries development and reconstruction.
Foreign investments usually undermine the domestic industry. Therefore, most of the “developing countries” build certain rules and regulation for the foreign investors. These initiatives were only taken to preserve and develop the “domestic industry”. Admittedly, increasing autonomy of finance and trade as well as the growing prospects of investments has resulted in the formation of “new” atmosphere that assists in the arrival of foreign investments. Notwithstanding, “global economy” has also played a great role to introduce new prospects in the spheres of foreign direct investments.
The increase in the “intra firm trade and internationalization of production” has been actually resulted form the growing competition among the “multinational corporations (MNC)”. With the globalization the multinational organizations are also growing. Foreign direct investments are necessary for the Multinational corporations so that they can raise their competitive popularity and explore their business to the “new markets”. All the factor relating to the “demand and supply” of the foreign investments are necessary for the development of foreign direct investments (FDI).
FDI involves less “risks” than other investment programs. It is for this reason that today the supply of investments and the process of “lending” are dominated by the FDIs. Although, most of the Asian countries were badly affect by the “financial crises” of 1990s, even then they enjoyed heavy “inflow” of foreign direct investments. Explicitly, most of the multinational corporations –that rely upon the exports- do not need inflow of capital for the “production” of their produce. However, the decreased in the value of “local” currency has resulted in the demand for foreign investment. It is for this reason that an environment for the foreign direct investments is progressing.
Today, the competition in the “trade, transportation and telecommunication” sectors has rocketed globally. Therefore, in order to remain in the race most of the corporations have to depend upon the
“Relative factor cost”. Countries more anxious to attain foreign direct investment try to make their domestic product international and to make adjustment in their infrastructure globally. This approach usually adopted by the countries where there is expensive labor. Mostly, the ideology of “export and intra-firm trade” is linked with the “efficiency seeking” foreign direct investments. In most of “service sector” foreign direct investment is used for the formulation and implementation of “market-seeking and resource-seeking” plans. (Odele, 2001)
Mostly companies willing to explore “new markets” bring the FDIs in service sector. Major aspects of the foreign direct investment is the “geographical” closeness of the developing and “new” markets. This approach is usually adopted by the corporations, want to capture and attract “new consumers”.
Most the companies that want to attain “global” market adopt “cross-border” strategies for foreign investments. These strategies are based upon the “acquisition and merger (M& A)” of international firms. Mostly corporations in the “banking, telecommunications, pharmaceuticals and insurance” sector adopt M&A approach for FDI. In 1997 the merger and acquisition approach was considered the major cause of the “inflow” of the foreign direct investment in the industrial sectors.
According to survey conducted by UNCTAD “mergers and acquisition” cover “three-fifth” of the foreign direct investment in the global markets. This approach has also resulted in the concession of industries in the global market. Due to increase in foreign direct investments the “productions” in the foreign market raised to $3.5 trillion. However, “global sales” show that the “international productions” have risen to $9.5 trillion. This increase in production has resulted in the increase of the GDP to about 7%. Ultimately, it seems that today foreign investments account for “one-third” of worldly “exports”. (Odele, 2001)
As most of the alternatives of the inflows of capital form the foreign market decreased in 1980s, the demand for foreign direct investment surged. Initially, most of the “domestic industries” of the south countries was preserved by the “high tariffs” and restricted interference of investors form the international market. Up till now most of the “developing countries” have worked really hard to protect their “domestic” industries from the empowering of international firms. Different rules and regulation were implement in this regard e.g. heavy tariffs were demanded from foreign investors. They were allowed to invest in only limited sectors. Property rights were also denied to the foreign investors. (Odele, 2001)
However, it is amid 1998s that these countries realized the importance of FDIs. Therefore, they liberalized foreign direct investment to some extent; most of the autonomy was provided in the “export oriented” sector. So that it can be compete in the international market and bring heavy reserves in the country. Yet foreign direct investors were denied independence in the other “domestic” sector.
The “financial crises” of Asia was also a reason to liberalized FDIs. This crisis proved that investments for “long term” are more profitable than the “short-term investments”. The best example in this regard is of Mexico. Who faced great loss in for its “short-term” investment plans during the financial crises? (Odele, 2001)
According to “endogenous growth theory” foreign direct investments facilitates development of economy by providing “Scarce capital, technology and skills”. These three serve as elements for the creation of capital in a country. (Odele, 2001)
Initially FDI were concerned to be affects the economy of the “host” country positively. But the experiment in this regards have proved that it is difficult to maintain these positive impacts of FDI upon a country’s economy. It is for this reason the response of the “host governments” towards the FDI is ambiguous. The involvement of government and proper policies can help to bring positive results of FDI.
All the experiments towards the FDI are not positive but some researches have also proved negative impacts of FDI upon the domestic industry and economic growth of the country. Hence, many countries design their FDI policies with great concern. (Odele, 2001)
FDI is a crucial element in the “economic development” of developing and under developed countries. Though it is true that FDI helpful in the production of “new technologies”, providing employment opportunities, facilitates international market accessibility etc. it is also termed as a major cause for the downfall of environmental peace, it badly thwarts the equality of culture and society and disrupts the association with the local governments with the economy. (Annie et al, 2000)
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 29 September 2016
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