Foreign Direct Investment Essay
Foreign Direct Investment
There has been a rise tide of Foreign Direct Investment (FDI) in the world’s economy. In the past decade businesses have become global due to the increased liberalization, changing capital markets and changing technology. With easy and effective communication systems investment of companies in foreign countries has been made easy. Foreign direct investment benefits the two countries, the host and the company investing. A high percentage of investment made through FDI involves building and fixtures or machinery and equipment. (www. oecd. org) Growing trade has caused an increase in FDI.
Globalization has resulted to broadened markets that call for increased production of goods and services to match the demand. Production levels across the globe have also risen precipitating large corporations to invest in foreign countries. Corporations have the capital and resources to move their production bases to foreign countries. The service sector has also expanded. With technology advancement, skills and expertise have been developed. Corporations have adopted strategies that will increase active global investment and this is evident in the recent cross-border mergers.
Strong corporate profitability has enabled corporates invests in the developing countries promoting FDI. Low interest rates and high real estate prices have also led to the underpinning of FDI. With the low US dollar value investors with other currencies gained the comparative advantage in investing in foreign countries. General macroeconomic growth in major economies has been reason behind increased FDI. (www. oecd. org) Countries prefer FDI as a strategy for entering foreign markets to exports and granting foreign entities the right to produce their products under license.
Patent disclosure can occur when a local firm is given the product under license. It could give important information about invention and imitation could occur. The MNC’s could lose their workers to imitation product companies. Through FDI, the MNC’s can access larger market and can produce at reduced costs. These will ensure that their profitability levels are higher. FDI provide grounds under which future trade barriers can be countered. Exportation is constrained by transportation costs and trade barriers like tariffs and quotas.
Licensing hinders the company from direct control and this creates loopholes that lead to reduced profitability. (Kreinin M. and Plummer M, 2002) Firms based in the same industry can undertake foreign direct investment at the same time when the local demand in the new area can support local supply. They can also locate such firms when there is price competition and cost pressure. Some areas have a comparative advantage over others and this makes them more favorable. They could be endowed with resources that the investors exploit using their technological and managerial capabilities.
They reduce their costs as regional manufacturing plants serve regional markets. Political ideology influences government policy towards FDI. Some countries view MNC’s as tools of imperialist domination out to exploit their resources. MNC’s exploits the developing countries and creates dependency in terms of jobs and technology. They contribute to their continued backwardness, as they do not give back valuable output in return to the resources they exploit. Developing countries provide cheap labor and raw materials. Another view is the comparative advantage where countries benefit from FDI.
This view is beneficial as host countries allow FDI and gain from it. They acquire products they do not produce and at lower costs. In this view countries produce what they can at least cost. Governments can restrict or promote FDI. If a government protects its domestic industries producing the same output as a foreign corporation, FDI will be discouraged. (Anderson K. and Blackhurst R, 1993) Governments can make policies on the location of multinational corporations (MNCs) that are favorable and that would increase FDI’S.
They can also promote or put in place proper infrastructure like good transportation systems, education and transparency all of which works to encourage FDI. Peace and stability are very important factors in influencing FDI. Government must therefore ensure that they maintain law, and order political unrest deters FDI. Grants subsidies and tax concessions encourage inward FDI. There are economic and political agreements that favor regional economic integration like EU, NAFTA and MERCOSUR all of which have implications for business.
Economic integration between nations could be though preferential trade area (PTA) where countries are offered tariff reduction and discrimination is reduced to member countries. Free trade area (FTA) could also be offered where countries eliminate tariffs between themselves but maintain their own external tariff on imports. Custom unions eliminate tariffs between themselves but set a common external tariff for instance the EU. Countries could also adopt a common market, economic union or monetary union level. (Kreinin M.
and Plummer M, 2002) Economic arguments for economic integration. There is increased trade as countries produce what they have comparative advantage in. Foreign supply is reduced and trade diversity is promoted leading to economic growth. Member countries enjoy the economies of scale Political argument for economic integration is that it promotes peace and stability among member countries. Arguments against economic integration. Dumping of products can occur due to the eradication of barriers. Some countries tend to benefit more than others.
Countries may feel as they are losing their sovereignty, which is their sense of pride. (Hoekman B. and Schiff M, 2002. ) The European Union is an economic union where member countries permit free movement of good, services and people and it uses a common currency it was initially known as the European Economic Community or common market. The North America Free Trade Agreement is a free trade agreement of Canada, US and Mexico. It eliminates barriers to trade and promotes fair competition and increased investment opportunities. MERCOSUR- comprises of Argentina, Brazil, Paraguay and Uruguay.
It transformed from a custom union to a common market in 2006. The Asia pacific economic cooperation comprises 21 members. It was formed in 1989 through informal dialogue it promotes trade and investment and economic co-operation. The future of this great economic integration is promising. Businesses that are inherent in regional economic integration agreements will thrive if conditions in their regions are favorable. They will respond to the forces of demand and supply. Competition will be high and this will ensure that quality products are produced.
References: Peter M. Suranovic. Trends and recent developments in FDI. Retrieved on 22nd January 2008 from http://www. oecd. org/dataoecd/62/43/38818788. pdf. Anderson K. and Blackhurst R. 1993. Regional Integration and the Global Trading System, London and New York, Harvester Wheat sheafs. Hoekman B. and Schiff M. 2002. Benefiting from regional integration. In Hoekman B. , Mattoo A. & English P. Development, Trade, and the WTO: A Handbook, Washington, DC. World Bank. Kreinin M. and Plummer M. 2002. Economic Integration and Development: Has Regionalism Delivered for Developing Countries? Cheltenham, Edward Elgar.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 1 December 2016
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