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Foreign Investments

Foreign Investments. Types of Investment. FDI FPI. Advantages Expertise Foreign Exchange Job Creation Increase of Exports/ decrease in Imports. Disadvantages Monopoly National Sovereignty Exploitation Transfer Pricing Threat to Small business. Advantages and Disadvantages of FDI.

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Foreign Investments

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  1. Foreign Investments

  2. Types of Investment • FDI • FPI

  3. Advantages Expertise Foreign Exchange Job Creation Increase of Exports/ decrease in Imports Disadvantages Monopoly National Sovereignty Exploitation Transfer Pricing Threat to Small business Advantages and Disadvantages of FDI

  4. Foreign Direct Investment • The surge in flows of FDI in the last 2 decades has had important effects on global value chains of production, on developing countries (DCs), and on attitudes towards such investment. • Attitudes towards FDI and experiences with it in DCs affect host economy policies, which in turn affect subsequent experiences. • Both FDI policies and experiences, as well as their perceived feedback, influence attitudes toward negotiating a multilateral framework for investment (MFI).

  5. Recent Trends and Effects • Very rapid growth in global FDI 1999-2007. • Especially rapid growth (general opening up) and ( Asian crisis LatAm privatizations). • In most years, FDI grew faster than global trade and GDP.

  6. Index of World Exports, FDI Outflows, and Output, 1990-2002 (1990=100) Source: Exports & GDP – WEO Database; FDI Outflows – UNCTAD FDI database.

  7. FDI Top 10 in Developing Asia

  8. Domestic Policy Changes • Host country policy framework plays a critical role in determining the effects of FDI on a recipient country. • A key argument concerns the nexus between trade and FDI liberalization. Trade reform alters the incentive of production for the domestic market relative to exports, resulting in a fundamental shift in the behaviour of MNEs and in the FDI cost-benefit calculus from ‘rent-seeking’ to ‘efficiency-seeking’ FDI.

  9. FDI Regimes • Dual policy regimes • FDI regimes have become more open but considerable selectivity across sectors and firms. Typically a mix of both ‘rent-seeking’ and ‘efficiency-seeking’ FDI, reflecting partial reform of trade regimes, and the political economy of dispensing patronage, e.g. • FDI policy may differ between regions. • Large inter-industry differences in protection, and thus incentives. • SOEs typically receive preferential treatment, especially in PRC, India and Viet Nam, and their MNE joint venture partners. • Most countries offer fiscal or financial incentives. These vary by sales orientation, the technology introduced by the foreign investor, location of investment, and other factors. • The regulatory regime frequently offers more than one entry option.

  10. The Commercial Environment • As economies open up, governments have to make the transition from protectionist/regulatory regimes to an emphasis on promotion and efficiency. • The ‘three I’s’: incentives, infrastructure, and institutions. • Note too that domestic investors are invariably the key players in any economy.

  11. THE RISE OF THE MULTINATIONALCORPORATION • I. The MNC • A. Definition • a company with production and distribution facilities in more than one country.

  12. THE RISE OF THE MULTINATIONALCORPORATION • 2. MNC supercedes theory: • a. mobility of factors • b. different costs/skills • between nations • c. prime transmitter of • competitive forces

  13. THE RISE OF THE MULTINATIONALCORPORATION • C. EVOLUTION OF THE MNC • Reasons to Go Global: • 1. raw materials • 2. more markets • 3. minimize costs of production

  14. THE RISE OF THE MULTINATIONALCORPORATION • 1. RAW MATERIAL SEEKERS • exploit markets in other countries • historically first to appear • modern-day counterparts • Anaconda Copper • Standard Oil

  15. THE RISE OF THE MULTINATIONALCORPORATION • 2. MARKET SEEKERS • produce and sell in foreign markets • heavy foreign direct investors • representative firms: • IBM • Nestle • Levi Strauss

  16. THE RISE OF THE MULTINATIONALCORPORATION • 3. COST MINIMIZERS • seek lower-cost production abroad • motive: to remain cost competitive • representative firms: • Texas Instruments • Atari • Zenith

  17. THE RISE OF THE MULTINATIONALCORPORATION • D. THE MNC: A BEHAVIORAL VIEW • 1. State of mind: • committed to producing, • undertaking investment and marketing, and financing globally.

  18. THE RISE OF THE MULTINATIONALCORPORATION • E. THE GLOBAL MANAGER • 1. Understands political and • economic differences; • 2. Searches for most cost- • effective suppliers; • 3. Evaluates changes on value of the firm.

  19. MNCs • I. THE MULTINATIONAL FINANCIAL SYSTEM • A. Main Objective of MNC: • Maximize shareholder wealth • B. Other Objectives Reflect Ability to Link: • Via Affiliate transfer mechanisms

  20. C. Mode of Transfer • Reflects freedom to select a variety of financial channels. • D. Timing Flexibility • Most MNC have some flexibility • in timing of fund flows.

  21. E. Value • The ability to avoid national taxes has led to controversy.

  22. II. FUNCTIONS OF FINANCIAL • MANAGEMENT • A. Two Basic Functions: • 1. Financing • 2. Investing

  23. Issues • Transfer Pricing • Exploitation • Creates Monopoly

  24. B. Additional Factors Facing the MNC Executive • 1. Political risk • 2. Economic risk

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