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International Investment & Financial Flows

Explore the two ways money is invested - Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI). Learn about the characteristics and impact of multinational corporations (MNCs) and discover where the money flows in terms of FDI. Dive into case studies of MNCs in Indonesia and Cambodia. Finally, explore the production strategies of MNCs, including outsourcing and reshoring.

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International Investment & Financial Flows

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  1. International Investment & Financial Flows

  2. Investment & Financial Flows • How $ is invested • MNCs • Where $ is invested • Evolution of MNCs

  3. How Money is Invested 2 ways 1) Foreign Portfolio Investment (FPI) • Stocks, bonds, etc. • Earn dividends • Short-term commitment 2) Foreign Direct Investment (FDI) • MNCs • Control assets $$$ • Policies, locations, products, product volume, personnel, etc. • Subsidiary branches and/or joint ventures • Long-term commitment • Higher yield than FPI ¤

  4. MNCs

  5. About MNCs • Characteristics • Product of post-WWII US hegemony • Gross Corporate Product (GCP) • Yearly total value of all goods & services revenues • Top MNC list • Top 500 80% GN • Top GCP MNCs • Top brands • # of MNCs outsideGN, EEs= 0 ¤

  6. Where the Money Flows

  7. http://worldinvestmentreport.unctad.org/ 2017 Where FDI Goes?

  8. Where FDI Goes? • FDI inflow • China at $243 B -$114 to HK • U.S. with $107 B (#2) • All of Africa = $55 B (2015) • FDI outflow • China • $317B - U.S. top investor v. $128 B out of China (2014, p.6) • China raised foreign ownership limit • For finance, was 30% 51%; 2020- 100% • For trade was 20%, now 30% • India • Tesco buys into Star Bazaar Indian grocery chain • 50% ownership • 1st foreign-owned supermarket • Walmart’s majority stake in Flipkart, largest online retailer ¤

  9. http://www.ritholtz.com/blog/2012/08/stratfor-chinese-investments-in-africa/http://www.ritholtz.com/blog/2012/08/stratfor-chinese-investments-in-africa/

  10. MNCs in Indonesia What is the investment appeal of Indonesia? • Surging domestic market • Auto sales • Indonesia = biggest SE Asia market • Large population • Sales in India, China on decline • 2008 global recession • Investment-grade credit rating • Young labor force = new consumers • New interest from US, EU ¤

  11. MNCs in Indonesia What issues do MNCs encounter? • Regulatory issues • Corruption • Ranked 114 (2016); 76 (2017) • Lack infrastructure • ↑ labor costs • Red tape • Licensing • WB rank 120 (2016); 72 (2017) *These factors slow growth • 6 % v. potential 10% ¤

  12. MNCs in Cambodia Why is Cambodia attracting MNCs? • Limit reliance on China • Increased wages • ↓ demand for factory jobs in China • Shrinking labor force • Aging population • Low-tech labor • Textiles ¤

  13. MNCs in Cambodia What challenges do MNCs face in Cambodia? • < of all that China can • Work force • Consumer potential • Electricity access • Limitations  ↓ pop. higher wages ¤

  14. MNCs in Cambodia How do Cambodians benefit from FDI? • Wages • Benefits • Medical, accident insurance, education allowances, free lunches • Greater leverage • Strikes in Taiwanese v. Japanese-owned factories • Housing ¤

  15. Evolution of MNC Production

  16. Historical Advantages of GN • Dutch East India Company • Precursor of MNCs • Others followed (British, French) • US pushed FDI after WWII • Needed ally growth • GS resisted • If you’re a GS leader, why would you resist? ¤

  17. GS Resistance to MNCs Initial resistance by GS • Newly independent • Little leverage • Unable to collectively act • Feared exploitation • Lacked skilled workers • Repatriation of earnings • Tried unilateral development ¤

  18. GS Embraces MNCs • First in 1960s - Asia & Central America • Export processing zones (EPZs) • Light industry • Late 1970s –Africa and China • In China, Special Economic Zones (SEZs) • 4 in 1980; now 6 • Model for others • Russia, India, Vietnam • EPZs = entice MNCs • Over 3,000 in over 120 ¤

  19. What do EPZs have to offer MNCs? • Skilled labor • Stable political environment • Authoritarian regimes: Pros & cons • Investment incentives, trade concessions • Exemption from domestic laws • Infrastructure • Roads, power supplies, transport facilities, low cost or rent buildings • Waive restrictions on foreign ownership • Waive repatriation restrictions ¤

  20. Africa’s FDI Challenges • Maputo, Mozambique • ↓Red Sea port, Jordan

  21. Africa’s FDI Challenges Issues • Inadequate infrastructure • Intra-Africa trade - 11% • Asia - 50% • Europe- 70% • Corruption • Political instability • Lack of competition • Poor management ¤

  22. MNC Production Strategies Outsourcing and offshoring • Foreign party • New int’l division of labor • Issues • Suppliers become competitors • Intra-firm trading • Race to the bottom • Diffuses responsibility Reshoring • Return to home country • GE in U.S. ¤ Rana Plaza disaster, April 2013

  23. Recap • How $ is invested • What impacts FDI decisions • GN early advanced = advantage • EPZs/SEZ • Outsourcing/offshoring issues • Reshoring ¤

  24. Soybeans

  25. Increasing Demand • Increasing population • Demand for meat, esp. in EEs • Analog products • Biofuel • Uses in industrial production ¤ http://www.themorningsun.com/article/MS/20161007/NEWS/161009730

  26. Brazil as Good FDI Destination • Natural resources • Arable land, labor supply, consumer mkt • Tropical climate • Multiple crops/yr= higher yield • Demand for ag inputs • Room for growth in food sector ¤ http://www.cherrycrestfarm.com/The-Amazing-Fun-Time-Blog/8-Fun-Facts-About-Soybeans/

  27. Brazil as Good FDI Destination (cont.) • Stable democracy • < fear of nationalization • Transparency • Ease of doing business • Financial incentives • Fiscal policies, tax incentives, low-risk • US, China access to EU mkt • Lax sewage laws ¤ http://www.cherrycrestfarm.com/The-Amazing-Fun-Time-Blog/8-Fun-Facts-About-Soybeans/

  28. Brazil v. US • Infrastructure • Streamlined v. scattered ¤ https://qz.com/124693/which-country-will-be-crowned-this-years-soybean-king-ask-mother-nature-and-china/

  29. Subsidies • Interfere with trade • Give GN advantage • US, EU, Japan • Crop insurance • MNCs benefit most • Overproduction in U.S. • ↑ value-added foods  changed diets ¤

  30. Concerns re: Brazil’s ↑ Soy Production • Environmental • Amazon v. cerrados • BR’s changes in 1990s • MNCs play to consumers • GMOs • Land ownership issues • Leasing • Outright sale • Land rights/reform ¤ https://www.extension.iastate.edu/agdm/articles/leibold/LeibSept01.htm

  31. Recap: Soy and II • What FDI involves • What MNCs look for as good destinations • Incentives states offer • Why EEs draw more FDI • Brazil • Big economy • Big population, esp. young • ↑ consumer class • Resource rich ¤

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