Impact of Fdi on Home Country
Impact of Fdi on Home Country
The term “Foreign Direct Investment” or “FDI” encompasses two related but different sets of topics or activities, explained by different theories and by different branches of economics. The first might be referred to as the international finance, or macro, view. The second might be referred to as the industrial organization, or micro, view. The macro view sees FDI as a particular form of the flow of capital across national borders, from home countries to host countries, measured in Balance of Payments Statistics.
Those flows give rise to a particular form of stocks of capital in host countries, namely the value of home country investment in entities, typically corporations, controlled by a home country owner, or in which a home country owner holds a certain share of voting rights. The variables of interest are the flow of financial capital, the value of the stock of capital that is accumulated by the investing firms, and the flows of income from the investments.
The micro view tries to explain the motivations for investment in controlled foreign operations, from the viewpoint of the investor. It also examines the consequences to the investor, and to home and host countries, of the operations of the multinationals or of the affiliates created by these investments, rather than the size of the flows or the value of the investment stocks or investment position. These consequences arise from their trade, employment, production, and their flows and stocks of intellectual capital, unmeasured by the capital flows and stocks in the balance of payments, although some proxies for the flow of intellectual capital are part of the current account. These motivations and consequences are intrinsically related to the investing firms’ control of the affiliates and the ability of the multinationals to coordinate the activities of parents and affiliates.
The micro view is the older one, preceding interest in direct investment as a form of capital flow. It was reflected in concerns about the consequences of foreign control for the host economy, represented by book titles such as The American Invaders, (1901), or The America Invasion (1902), two of the earliest titles listed by Wilkins (1970). It was also reflected in one of the earliest research studies of U.S. direct investment, which attempted to explain the motivations behind firms’ expansion into foreign countries (Southard, 1931).
a. Foreign Direct Investment:
-According to IMF (Balance of Payment Manual, 6th Edition, page 100): Foreign Direct investment is a category of cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise that is resident in another economy.
-According to OECD (OECD Benchmark Definition of Foreign Direct investment, 4th Edition, page 234): Foreign direct investment reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investment. The lasting interest implies the existence of long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on management of the enterprise. b. Home country:
The home country refers to the country from which the funds originate for onward investment in another foreign country. c. Host country:
The host country refers to the foreign country where the direct investment is made.
4. Trends of FDI:
Flow of Foreign Direct Investment has grown faster over recent past. The chart above describes obviously the FDI trend from years to years (1980-2009), in the early 1980s, it began once again to increase. During the years 1986 to 1989 annual FDI flows increased at a phenomenal rate, multiplying fourfold in four years. In the second half of this four-year burst of activity, the global total was given a further boost. From 1990s on, FDI stock grew fast at an incredible speed and then reached a peak of 2.600.000 million dollars in 2009.
Higher flow of Foreign Direct Investment over the world always reflects a better economic environment in the presence of economic reforms and investment-oriented policies. Higher FDI inflows to a country largely generate employment in the nation. For the year 2006, countries such as Luxembourg, Hong Kong, Suriname, Iceland and Singapore ranked in the top of Inward Performance Index Ranking of the UNCTAD.
Because FDI generally comes from companies with longer-term horizons than fund managers, and because it goes into solid assets like factories, it is less likely to be withdrawn in a crisis. However, as our chart of the week (below the page break) shows, FDI in emerging markets did drop sharply in 2009 – and even a rebound predicted for this year will still leave it below 2007-8 levels.
The chart shows the total value of net direct investments flows into emerging regions, using IMF forecasts for 2010 and 2011. It shows how the global financial crisis interrupted a multi-year trend of rising FDI, which was boosted by improved economic growth and terms of trade (the strength of countries’ export prices relative to import prices).FDI rose from less than 1 per cent of emerging markets’ GDP in the 1990s, to an average of 3 per cent in the following decade (eastern Europe and sub-Saharan Africa received more, central Asia less).
Then, in 2009, with tighter credit conditions in rich countries (the major source of FDI), flows to emerging markets fell 40 per cent from 2007 levels. Asia and central and eastern Europe had the biggest drops, with FDI falling by over 50 per cent, while flows to Latin America and the Middle East were down around 30 per cent.
Amazingly enough, FDI to sub-Saharan Africa was actually higher in 2009 than in 2007, thanks to natural resources investments and new players such as China. Now FDI is slowly recovering. The picture is uneven across regions: Latin America is set to receive record FDI in 2011, while flows to developing Asia are recovering more slowly. But is an uptick unqualified good news? There are caveats. First, FDI includes, for example, real estate purchases – many of which may be speculative, or at least do little to improve productivity. Second, FDI flows remain concentrated in large-ish, middle-income countries, epitomised by the Brics. That may be because of political risk, which has overtaken weak government institutions as investors’ primary concern, according to a recent World Bank survey.
Latin America is seen as increasingly stable and investor friendly (with the exception of Venezuela) so it is no coincidence that it has seen strong FDI inflows. As macroeconomic concerns recede, countries need to assure investors that taxes and regulations are stable. Third, FDI cannot compensate for the effects of low domestic savings. Last year, it represented just over 20 per cent of gross fixed capital formation in sub-Saharan Africa, 17 per cent in the Middle East and North Africa, 10 per cent in Latin America, and less than 4 per cent in east Asia and the Pacific, according to the World Bank. If countries wish to finance future development while avoiding dangerously-wide current account deficits, they need to promote domestic investment alongside FDI.
So, what about the FDI flows in ASIA?
Many governments in Asia have clearly taken a very positive attitude toward OFDI and have taken notable steps to liberalize capital account transactions, foreign ownership policies and foreign exchange policies and related regulations as a means of facilitating the international expansion of firms in their countries. Consequently intra-Asian FDI flows are no longer a North–South phenomenon but increasingly a South–South one as well, and a substantial portion of FDI from Asia is intraregional in nature. However, much of the discussion surrounding intra-Asian FDI flows has been anecdotal and qualitative in nature (largely based on case studies), and most existing quantitative studies have only considered FDI from OECD sources to Asia.
The data indicates around 35 percent of FDI flows to developing Asia between 1990 and 2005 has come from within the region, with over 90 percent of the flows originating from Hong Kong, China, Singapore, and Taiwan. Clearly some of these flows are overstated as they involve recycling or round-tripping of funds (especially between China and Hong Kong). Against this, trans-shipping from offshore financial centers have not been included, implying a degree of understating. While the intra-Asian flows are substantial, two issues stand out. First, a large portion of these flows pertains to bilateral flows between Hong Kong and Mainland China. Second, the data do not indicate that intra-Asian flows are necessarily intensifying. Given that developing Asia is investing aggressively overseas, what this suggests is that relatively more investments are being made outside developing Asia.
III. Positive impacts of FDI on home country:
1. Improve both economic and political power of home country:
FDI is not only beneficial to recipient countries but also brings home
countries economic benefits which depend on the effectiveness in operation of firms that they have influence on management. Moreover, firms in host country have to depend on home country so home countries can have political power over host countries.
2. Increase profits thanks to the location advantages of the recipient country: Firstly, you should bear in mind that: large market size, proximity to home market, low-cost labor and favorable tax treatment in the recipient country are all considered as location advantages. Due to tariffs and other forms of barriers, the firm has to relocate production to the host country where it had previously served by exporting. By doing so, they, moreover, can better serve a local market by local production and conveniently deliver the products to customer located at different part of the world.
Besides, other infrastructural facilities such as distribution, supply chain and logistic become extremely efficient and fast, so that the transportation cost will be minimized to the fullest. Let’s take the USA as an example, throughout history, companies in the United States have always had much to gain from trading and doing business with the wider world. In the present economic climate there are many advantages for U.S. companies to spread their wings, cross borders and do business internationally. With new technologies, it has never been easier to either seek out new markets or use the labor and expertise found abroad to pursue opportunities that domestic trading cannot match.
As you can easily see on the graph that cross-border direct investment gains the largest quantity of income for United States. 3. Enter new market, extend the product life cycle:
Global companies also have access to new markets in new parts of the world. This can be important for a company that is aggressively seeking to expand its business or one that has seen a stagnation of its sales in its home country. A company that is facing stiff competition can open a new operation in a foreign country where there is high demand for its products and services.
In essence, a company in a developed country that created a product as a local innovation to satisfy customers’ need tries to generate further profits by selling its technological breakthrough abroad. To summarize, the international product life cycle says that international strategies extend the regular product life cycle. 4. Overcome trade barriers and enjoy investment promotion:
Nowadays, a number of countries impose import quotas and high tariff rates on the importers. Import quotas allow for a limited amount of the product to reach the market and restrict the supply of the product. As an alternative these companies often choose to build their production units inside the country itself to avoid the import restrictions. Similarly, the tariffs are taxes on imports that a government may impose to raise revenue or to discourage imports. Companies again have the alternative to invest directly in these countries to avoid tariffs.
For instance, many Japanese manufacturers moved the production of such items as textiles, watches, television sets, cameras, and calculators to facilities in Malaysia, Indonesia, Thailand, Singapore, and the Philippines in response to the restrictive trade practices of some of their major markets. Japanese automakers also are producing cars in the U.S. on a large scale.
This approach provides the Japanese firms direct access to the markets of the local economies in which they produce and minimizes their exposure to adverse policies by the host government. It also permits them to export to markets in other nations that maintain barriers against products made in their home territory. For instance, Honda sells cars to Taiwan, South Korea, and Israel from its manufacturing plant in Ohio. Those three countries traditionally have prohibited the importation of automobiles directly from Japan.
6. Enhance diversification when the political situation at home is unstable: MNCs prefer to have exposure to many countries. An MNC by definition is a company which operates in many countries, so carrying out operations in other countries help them get exposure to such country related economic cycles. The reason to get this exposure can also be attributed to the fact that as the number of countries the company operates in, that much more it becomes diversified, so diversification leads to the company having minimized its operational risks, meaning say that if an MNC operates in 20 countries, say during the course of the financial year due to some region-specific risk, 4 countries suffer heavy losses, the company will not suffer much as the profits from the other 16 countries may more than offset the losses from these 4 countries, thus this diversification helps protect the interests of the shareholders of the foreign investing entity.
For example, Toyota is a Japanese automobile company that has expanded the most among all other Asian motor companies. As of the beginning of 2010, a fact sheet by the company indicates Toyota has 51 manufacturing centers around the world with 170 distributors. This spread of production and trade makes the company diversified so that Toyota can eliminate risks if Japan, its home country faces any problems in politics or natural disasters. 7. Improve market structure and toward better international labor diversification:
FDI benefits the home country with the creation of employment. It also assists in ensuring the workers are paid better salaries. This allows them to have an access to an improved lifestyle as well as more facilities. The manufacturing and production sector is greatly developed in the home country due to FDI investment. This increase in new industries is beneficial creating new employment and improving market structure.
8. Improve in the balance of payments as a result of the inward flow of foreign earnings ( repatriation or profits ): Balance of payment is accounting of a country’s economic transactions with foreign countries in a stated period of time, normally one year. The balance of payments for any country is divided into two broad categories: the current account representing import and export trade, plus income from tourism, profits earned overseas, and interest payments; and the capital account, representing the sum of bank deposits, investments by private investors, and debt securities sold by a central bank or official government agencies.
The current account of the home country’ s balance of payment will also profit if MNE requires its home country to exports capital equipment, intermediate goods, complementary products, etc. FDI in the balance of payments accounts appears in two ways: + The initial outflow of FDI is entered as an outflow (debit) on the capital account. + The resulting investment income is entered as an inflow (credit) on the current account. Example: One benefit to Japan from Toyota’s investment in France are the earnings that are subsequently repatriated to Japan from France.
9. FDI positively affects home-country export performance through direct effects on trade as well as indirect effects through various channels: The direct effects depend to a large extent on the type of FDI. Vertical FDI could enhance the home country’s exports of intermediate products (parts and components) required for assembling. This intra-firm trade is called a complementary effect of exports. Horizontal FDI may lead to an increase in exports of capital goods and intermediate products in the short run, but its long-term impact turns out to be export reduction (so-called substitution effects).
Empirical evidence from developed countries (e.g., the United States, Japan, and Sweden) indicates the FDI-export link to be one of complements at country and industry levels, but of ‘‘substitution’’ at the product level (Blonigen 2001). When activities of foreign affiliates can be classified as vertical and horizontal, evidence is consistent with the theoretical prediction that vertical FDI complements exports and horizontal FDI substitutes for exports.
FDI from high-income developing economies (e.g., Hong Kong, Korea, Singapore, and Taiwan) to other developing countries (e.g., China) has been found to be a contributory factor for expanding home-country exports (UNCTAD 2002). In the long run, FDI may indirectly affect home country exports by improving the competitiveness of parent companies; upgrading industrial structure; and creating spillovers to the rest of the home economy.
10. Positive employment effects when the foreign subsidiary creates demand for home-country exports: As with the balance of payments, positive employment effects arise when the foreign subsidiary creates demand for home-country exports of capital equipment, intermediate goods, complementary products, and the like. Example:
+ Thus, Toyota’s investment in auto assembly operations in Europe has benefited both the Japanese balance-of-payments position and employment in Japan, because Toyota imports some component parts for its European-based auto assembly operations directly from Japan. + Outward investment from Estonia ( mainly to Latvia and Lithuania ) affect home country employment positively + table 7/ page 35 file PDF. 11. Benefits from a reverse resource-transfer effect:
A reverse resource-transfer effect arises when the foreign subsidiary learns valuable skills abroad that can be transferred back to the home country. Through its exposure to a foreign market, an MNE can learn about superior management techniques and superior product and process technologies. These resources can then be transferred back to the home country, contributing to the home country’s economic growth rate. Example: For example, one reason General Motors and Ford invested in Japanese automobile companies (GM owns part of Isuzu, and Ford owns part of Mazda) was to learn about their production processes.
If GM and Ford are successful in transferring this know-how back to their US operations, the result may be a net gain for the US economy.
12. The outward FDI also leads to creation of new job market with great expertise and necessary skills: Investors directly influence operation of firms in host countries so they can use their labor resources in the management of firms in different countries. This brings a more various job market for people in home country.
13. The home country is exposed to create new market share and it is liable to create many in the future: FDI helps home country reach new market abroad and get market share from host country.
From the initial investment, home country can extend and spread the activities of the firms they invested and has advantages in creating more new branches in the same market. 14. Protect market share in competition with other MNEs (multinational enterprises): FDI extends the scope of business activities of MNE in home country. Having more different enterprises in different markets is an advantage of home country over other MNEs in reaching customers and potential markets. Example: EU outward FDI has made a positive and significant contribution to EU ‘s firms’ competiveness in the form of higher productivity so they can strongly protect their market.
V. Negative impacts of FDI on home country:
In accordance with inevitable benefits that one home country can get from FDI, there are certain costs or disadvantages that the country may suffer from investing to foreign countries. Here are the costs that our group wants to present and discuss: 1. Brain drain and technology leakages:
One of the compelled procedures in FDI is technology transfer from home to host countries. With the advanced technology received from the home countries, companies in host countries can significantly improve its efficiency and products’ quality. Thus, obviously, this can greatly raise the effectiveness of the investment and guarantee higher rate of return. However, this procedure includes not only such easy benefits and advantages but also potential risks and threats to the home country. First of all, along with transferring technology, human resources are also brought to host countries. This fact can result in a phenomenon that can be damaging to the home countries: brain drain. Brain drain is the emigration of skilled and professional workers from a country.
These people emigrate legally, become residents or even citizens of a new country, and stay there with no intention of returning to the home country. Brain drain can have dynamic effects on the home country’s economy. Brain drain means that the country is losing human capital. Since human capital is an important growth factor, brain drain can adversely affect economic growth. Moreover, because skilled workers tend to earn high wages before their departure, they usually have saving rates higher than the average rate in the economy.
Thus the outflow of some of these high-income workers could pull down the average saving rate of the remaining population, and this means that the local investment rate and thus economic growth will be hurt. In addition to brain drain, technology leakages can also be counted as one the costs of FDI for home country. Some certain technologies are of high-tech and advanced innovation that required large investment in research and development process. There for, getting them leaked unintentionally will be costly and threatening to the reputation and position of the home country.
One example that we can mention is Apple manufacturing factories in China. When Apple invests in building headquarters and factories in China, the host country receive abundant advanced technology in telecommunication and mechanics. However, copy-cat problem in this country leads to leaking confidential technologies and counterfeit products are widespread. Not only does this cause Apple to lose their reputation but sales turnover. 2. Problems related to capital management:
Since host countries enjoy capital inflow because of FDI, home countries naturally suffer from some capital outflow. In generating capital for foreign investment, domestic investors may have illegal methodologies, such as corruption or illicit business. This severely results in capital loss, which the Government can hardly control. Suppose a country ‘A’ decides to invest in country ‘B’, using its capital and technology there will be an addition of financial position to the host country than home country. Even in future, if the country ‘A’ wants to make any advancement, much focus will be given to the company in country ‘B’ and implement changes.
As a result the production in home country decreases and it sometimes result in shutting down all its operations and completely concentrate on the host country. This badly affects the home country’s capital funds and foundation. Additionally, without understanding or research about conditions in host countries and management capability, operational efficiency, the investors from home countries might undergoes dramatic losses from sacrificing capital invested. 3. Balance of payment:
In particular, there were expectations that FDI flows would have an impact on the balance-of-payments and the terms-of trade (Hufbauer and Adler 1968). Apart from analyses of the transfer process (i.e. the demand and spending effects of a transfer of one dollar from the home country to a foreign country), the analyses focused on the time dimension of effects: the initial capital outflow was expected to be offset by subsequent inflows of repatriated profits, but it was not clear how long this process would take. One consequence was that many government imposed restrictions on capital outflows.
For instance, the US Foreign Direct Investment Program (1968-1974) restricted outflows of FDI in the absence of offsetting borrowing abroad, and Sweden maintained restrictions on domestic borrowing to finance investment abroad until the 1980s. Another issue discussed in some detail was exchange rate risk, particularly the impact of changes in fixed rates (Kohlhagen 1977, Cushman 1985). Many of these concerns have diminished substantially since the 1970s, as a result of the integration of the international capital market and the increasing popularity of flexible exchange rates (or, as in the EU, the introduction of a common currency).
The most important concerns center around the balance-of-payments of outward FDI. The home country’s balance of payments may suffer in three ways. First, the capital account of the balance of payments suffers from the initial capital outflow required to finance the FDI. This effect, however, is usually more than offset by the subsequent inflow of foreign earnings. Second, the current account of the balance of payments suffers if the purpose of the foreign investment is to serve the home market from a low-cost production location. Third, the current account of the balance of payments suffers if the FDI is a substitute for direct exports. With regard to employment effects, the most serious concerns arise when FDI is seen as a substitute for domestic production.
This was the case with Toyota’s investments in Europe. One obvious result of such FDI is reduced home-country employment. If the labor market in the home country is already very tight, with little unemployment. A negative coefficient for FDI implies that foreign production substitutes for exports, whereas a positive sign suggests that complementary- the stimulus to home exports of intermediate and other related products is more important in aggregate. It can be noted that most early US studies of this type, including Horst (1974), Bergsten, Horst, and Moran (1978), Kravis and Lipsey (1988), and Lipsey and Weiss (1981 and 1984) concluded that the complementarities tended to outweigh the substitution effects. Later studies, like Brainard (1997), have reached similar overall conclusions.
Home countries of outward FDI have a multitude of firms from a variety of industries that invest at home and abroad. This implies that both positive and negative effects of FDI on employment may occur simultaneously. The net result will depend on a variety of factors, such as the type of industries, investment motives and the competitive context of the host economies as well as labor market and macroeconomic conditions. In both the theoretical and empirical literature, export substitution is one of the two main channels through which FDI may reduce employment in the home countries. If FDI effectively replaces home country production, there will be a negative effect on employment. Intra- firm imports cover goods and services produced abroad by foreign affiliates of parent firms and imported into the home country. Intra-firm imports are supposed to reduce actual or potential domestic production and employment.
This is the second main channel of employment reduction in home countries, and has attracted even greater attention than the export- substitution effect of FDI in the popular relocation. In addition, it is likely that increasing outward FDI from high-wage countries will have negative effects on unskilled home country labor. Most of the simple jobs are likely to be outsourced, and the jobs that remain at home will require substantially more skills than what the outsourced jobs did.
Restrictions on outward FDI in general are not likely to be good for the home country, for reasons discussed above. However, it may be desirable or even necessary to introduce policies targeting those groups that lose as a result of outward investment. Adult education and training programs, as well as programs to encourage SME development (since SMEs are often too small to outsource production activities) are examples of policy responses that do not obstruct globalization and internationalization, but rather support the adjustment to a more globalized economy.
FDI targeted at natural resources and host markets can be expected to create net employment in home countries. This positive employment effect is likely to be greater than unemployment resulting from export substitution and re-imports of goods produced by the foreign affiliates. In contrast to natural resource and market-seeking FDI, efficiency-oriented outsourcing investments may displace more jobs through export substitution and re-imports than created through exports of inputs and final products that were not until then exported to the host countries in question.
However, the net unemployment impact of relocating FDI at the macroeconomic level is likely to remain smaller than the net employment effects of resource and market- seeking FDI, because the former generally account for a minor portion of total FDI. Furthermore, multinationals based in rich countries might allocate their more labor intensive production to their affiliates in poor countries, while concentrating their more capital intensive or skill intensive operations at home. Large differences in capita intensity between U.S. (home) operations and affiliates in developing countries were noted in Lipsey, Kravis, and Roldan (1982), but the response of capital intensity to labor costs was tested only among affiliates.
If multinationals tended to allocate their production in this way, larger affiliate out-put relative to parent output should be associated with lower labor intensity and higher skill intensity in home production. In a study based on 1982 data, that relationship for labor intensity, measured by numbers of workers per unit of output, was found fairly consistently among industries in Kravis and Lipsey (1988), and less consistently for skill intensity, as measured by hourly wages.
A similar calculation based on 1988 data (Lipsey 1995) found the same negative relation between affliate net sales and parent employment, given the level of parent output. When affiliate activity was divided between manufacturing and nonmanufacturing operations, it was the manufacturing operations that accounted for the negative relation to parent employment; higher net sales by nonmanufacturing affiliates were associated with higher parent employment, given the level of parent output.
In a later study covering the United States and Sweden, Blomström, Fors, and Lipsey (1997) found that larger production in developing countries by a U.S. ﬁrm was associated with lower labor intensity at home. In a further analysis of these data, Lipsey (2002) found that the effects on parent factor use across all types of countries were concentrated in the machinery and transport equipment industries. There were positive effects on parent employment per unit of output in the machinery sectors and negative effects in transport equipment.
The ratio of aﬃliate employment to the total of home and aﬃliate employment in an industry does not signiﬁcantly aﬀect the share of nonproduction worker wages in the total wage bill in the home country. However, once they move to a ﬁrm-level analysis, they do ﬁnd that a higher aﬃliate employment share in the multinational ﬁrm produces a higher nonproduction worker wage share in the parent ﬁrm.
That positive eﬀect is associated with aﬃliate employment in low-wage countries; more employment in the United States appears to have the opposite eﬀect. Thus, overseas production in low-wage countries seems to raise the parent ﬁrm’s demand for skilled workers at home relative to the demand for unskilled workers. Evidence on wage spillovers (i.e., eﬀects of foreign entry or participation on an industry or region, or industry within a region) on the wages paid by domestically owned ﬁrms, is sparse, and not conclusive as to direction.
However, there is more evidence that, whatever the extent and direction of spillovers to domestically owned plants, the eﬀect of foreign ﬁrms’ presence is to raise the average level of wages. The eﬀect may come simply from higher wages in the foreign-owned operations, even without any eﬀect on locally owned ones. It might come from positive spillovers to locally owned plants or from the eﬀects of the increased demand for labor, even if there is no diﬀerence in wage levels between foreign-owned and domestically owned plants.
VII. How to solve for negative impacts of FDI on home country:
1. Deal with technology leakages:
* Picking the Right Partners:
It is important to recognize at the outset that part of the motivation for the host company in a technology transfer is obtaining foreign technology and know-how. This fact is not a secret and should not be treated like one. Consequently, as a first step to protecting IP (Intellectual Property) in a technology transfer, it is important to choose the right partners at the outset. Essentially, the ideal partner will be complementary, but not well-positioned to directly compete with business.
However, in order to make an informed decision, there’s a need to take a closer look at your business as well as the potential partners by following these three-steps: + Step 1: Analyze what measures can be used to defend competitiveness (e.g. trade secrets, patents, new applications for technology requiring know-how, etc.)? Which IP assets can be transferred to third parties without losing competitiveness or market share in the mid- to long -term? + Step 2: Analyze the competitors and the host market.
Who the competitors in the host country are? What are their strengths? What is their strategy? + Step 3: Design procedures when dealing with the host country. They need not only to be practical, but also to indicate where to draw the line when trading off IP protection for operational efficiency. * Structure regarding IP (Intellectual Properties):
Once the right partner has been selected, structuring technology transfer is critical to effectively protecting IP. The IP risk associated with a particular technology transfer will vary depending on whether the investors do licensing to prevent IP from being inadvertently leaked or intentionally misappropriated or misused by a related or unrelated party. *
In addition to structure, the other key to successfully protecting IP in technology transfers is to have all the relevant contracts in place and that they are airtight. It is recommended that companies use IP licenses with their partners; in addition to establishing each party’s rights, the IP license ensures that the technology transferred is documented in case issues arise later on. This is especially critical when the host country is also contributing technology and IP becomes difficult to identify or differentiate. * Confidentiality:
It is important to include strong confidentiality provisions in the technology transfer contract. Investing companies often go to great lengths to protect their confidential information, trade secrets and know-how, including using key-card access, closed-circuit TV, virtual data rooms, and sophisticated document tracking measures. While these measures may be expensive and difficult to administer, they should be seriously considered if critical IP is transferred. 2. Solution for currency imbalance:
– Take coordinated fiscal policy measures, rather than currency intervention, to support domestic demand, and thereby global demand, in the short run. This option is feasible as long as countries enter the recession with a sustainable fiscal position and therefore have some fiscal space to act. – Give a mandate to an international institution (primarily the IMF) to identify sources of global imbalances that may accompany an investment abroad and recommend coordinated measures (both by surplus and deficit countries) to reverse the imbalances.
While this would involve gradual exchange rate adjustments for countries with pegged currencies, countries with flexible exchange rates would rebalance domestic demand using fiscal policy measures. – Increase the depth and liquidity of financial markets as a prerequisite for a multi-currency reserve system, so that countries with large foreign reserve (the investors) could diversify their holdings. The goal is to prevent the concentration of trade imbalances on a country whose currency is subject to excessive reserve accumulation. As a by-product, a multi-currency reserve system could encourage more countries to adopt a flexible exchange rate regime and alleviate problems relating to foreign exchange risk and hedging of internationally active businesses.
– Apply insurance measures and instruments.
3. Deal with brain drain:
– Apply delay strategies involving some element of public service. A more sophisticated strategy is to incorporate delay within the training period, thus ensuring that certification follows rather than precedes a spell of public service. – Emigration can be inhibited either in the destination or source countries. The main constraints in the destination countries are the labor market and immigration policies, but at high skill levels another important consideration is the portability of qualifications. Increasingly, this inhibition is falling away as educational franchise operations and international certification expand.
– A relaxed, market-driven solution is to ignore the emigration of skilled workers and let a brain-drain from poorer countries replace lost skills.
– It might be possible to reduce the negative effects of the brain-drain by promoting links with skilled nationals and former nationals abroad. – Also, to discourage this movement, it will be more successful when there is co-operation between rich and poor countries. Poor countries should create a good working condition for their essential personnel as well as benefit for them such as large salaries, position in society and other benefits.
4. Deal with employment problems:
– Governments should become be agile in dealing with migration issues. Rather than being locked into one specific policy, migration experts hope that by working with a number of different scenarios, nations will be prepared to switch direction when a change happens.
– Immigration should be treated as an aspect of foreign policy and economic policy reflecting the interests of both source and destination countries rather than as a problem to be solved.
– Methods of accumulation and dissemination of information on available jobs and workers should be improved, in which job centers have a nationwide, integrated database of jobs, employers, and available employees.
– Countries of investors need to ensure that their welfare systems do not provide disincentives to work.
– Generalized income guarantees would at least ensure that no permanent resident would be without an entitlement to a base income. This provides some limited security for those facing unemployment and it provides an income floor below which no one falls without imposing a ceiling beyond which no one rises. It delivers an income floor without interfering with productivity.
There is little room for doubt about the importance of Foreign Direct Investment (FDI) in our international trade. From all of the key elements with clear explanations and helpful examples, our group hopes that we have shed lights on not only the positive but also the negative effects of FDI in home countries. Besides, some suggestions to tackle these negative problems are also given with the aim of providing a much deeper insight to this subject.
In one word, when a country decides to make a Foreign Direct Investment in the territory of another economy, it will certainly be able to enjoy many strengths and advantages from host country then gain profits. However, they also have to face many negative influences simultaneously, especially the welfare effects within home country.