Interna'onal

 Business  –  
Government  &  Influence  on  FDI  

S.V.Prasad  
Chime  Consul'ng  
 Govt  &  Influence  on  FDI  

•  The  Poli'cal  Dimension  of  FDI    

•  Poli'cal  Ideology  &  FDI  
•  The  Benefits  of  FDI  to  Host  Countries  
•  Govt.  Policy  Instruments  &  FDI    
•  Focus  on  Managerial  Implica'ons  

S.V.Prasad,  Chime  Consul'ng   2  

 Govt  &  Influence  on  FDI  

The  Poli)cal  Dimension  of  FDI  

•  Through  choice  of  policies,  rules,  regula'ons,  laws,  even  

statements  on  ac'ons,  Governments  can  encourage  as  well  
as  restrict  FDI  
•  Host  countries  via  incen'ves  can  encourage  &  by  laws,  
policies  etc  restrict  or  discourage  FDI  
•  Home  countries  can  encourage  or  restrict  FDI  by  domes'c  
firms:    
•  Japan  encouraged  it  as  a  subs'tute  for  expor'ng,  esp.  when  it  
had  BOP  surpluses  
•  US,  for  poli'cal  reasons,  from  'me  to  'me  discouraged  it  (for  
example,  to  Cuba,  Iran  &  South  Africa  due  to  apartheid)  

S.V.Prasad,  Chime  Consul'ng   3  

 Govt  &  Influence  on  FDI  

Poli)cal  Ideology  &  FDI  

•  The  Radical  View  

•  The  Free  Market  View  
•  Pragma'c  Na'onalism  

S.V.Prasad,  Chime  Consul'ng   4  

 Govt  &  Influence  on  FDI  
The  Radical  View  
•  Goes  back  to  Marxist  poli'cal  &  economic  theory  
•  MNC  viewed  as  instrument  of  imperialist  domina'on:  
exploit  to  the  exclusive  benefit  of  their  capitalist-­‐
imperialist  home  countries,  key  technology  'ghtly  
controlled,  important  jobs  to  home-­‐country  na'onals  
•  Keep  LDCs  rela'vely  backward  &  dependent  for  
investments,  jobs,  technology  
•  MNCs  never  instruments  of  economic  development  &  
only  economic  domina'on  
•  Already  exis'ng  MNCs  should  be  na'onalized  
S.V.Prasad,  Chime  Consul'ng   5  
 Govt  &  Influence  on  FDI  
The  Radical  View  
•  From  ‘45  'll  ’80s,  this  view  influen'al  in  the  world  
economy  &  changed  acer  the  collapse  of  communism  
between  ‘89  &  ‘91  
•  Eastern  European  countries,  China,  Cambodia,  Cuba  were  
all  opposed  to  the  principle  of  FDI;  in  prac)ce  China  
started  allowing  FDI  in  the  ‘70s!  
•  Socialist  countries,  especially  in  Africa,  na'onalized  MNC  
subsidiaries;  even  countries  with  strong  na'onalis'c  
ideology  embraced  the  radical  posi'on,  with  restric'on  
on  FDI  &  na'onaliza'on  (Iran,  India)  

S.V.Prasad,  Chime  Consul'ng   6  

 Govt  &  Influence  on  FDI  
The  Radical  View  
•  By  the  end  of  the  ’80s,  major  retreat  almost  
everywhere:  
•  The  collapse  of  communism  in  Eastern  Europe  
•  Generally,  abysmal  economic  performance  of  na'ons  
which  embraced  the  radical  posi'on  
•  Growing  belief  in  those  countries  that  FDI  important  
source  of  tech,  jobs,  growth  
•  Strong  economic  performance  of  those  developing  
countries  that  embraced  capitalism  (Singapore,  HK,  
Taiwan)  

S.V.Prasad,  Chime  Consul'ng   7  

 Govt  &  Influence  on  FDI  
The  Free  Market  View  
•  Roots  traced  to  classical  economists  Adam  Smith  
&  David  Ricardo  
•  Interna'onal  case  strengthened  by  the  market  
imperfec'ons  explana'on  of  horizontal  &  ver'cal  
FDI  
•  Interna'onal  produc'on  to  be  distributed  among  
countries  as  per  theory  of  compara've  advantage  
•  MNCs  increase  the  overall  efficiency  of  the  world  
economy  

S.V.Prasad,  Chime  Consul'ng   8  

 Govt  &  Influence  on  FDI  
The  Free  Market  View  
•  Frees  resources  of  the  MNC  to  focus  on  key  
ac'vi'es  in  the  home  country  
•  For  eg.,  US  IT,  mobile  company  etc  get  
assembly  of  computers/mobile  in  Asian  
countries  &  focus  in  the  US  on  basic  R  &  D,  the  
design  of  socware,  manufacture  of  high  value  
added  components  such  as  microprocessors  
etc  

S.V.Prasad,  Chime  Consul'ng   9  

 Govt  &  Influence  on  FDI  
Pragma)c  Na)onalism  
•  In  prac'ce,  no  country  en'rely  either  
•  For  eg.,  even  US  &  UK  restrict  FDI:    
•  UK  prohibits  foreign  takeover  of  its  firms  “contrary  
to  na'onal  security  interests”  or  has  the  poten'al  
to  “reduce  compe''on”  
•  US  control  more  limited  &  largely  informal:  restrict  
outbound  FDI  to  some  countries  (Cuba,  Iran)  &  on  
inward  FDI  in  the  case  of  airlines  &  television  
network,  on  grounds  of  “na'onal  security”  
S.V.Prasad,  Chime  Consul'ng   10  
 Govt  &  Influence  on  FDI  

Pragma)c  Na)onalism  
•  FDI  has  both  benefits  &  costs  
•  For  host  country:  capital,  skills,  tech,  jobs  
•  Costs:  Profits  repatriated,  import  of  many  components  all  of  
which  affect  BOP  
•  FDI  to  be  allowed  only  if  benefits  outweigh  costs:  Japan  'll  the  
‘80s  feared  that  foreign  (aka  US)  firms  with  ample  managerial  
resources  into  the  Japanese  markets  could  hamper  the  
development  &  growth  of  its  own  industry  &  technology;  
Firms  with  important  technology  allowed  when  they  stood  
firm  &  refused  to  license  or  enter  into  a  JV  

S.V.Prasad,  Chime  Consul'ng   11  

 Govt  &  Influence  on  FDI  
Pragma)c  Na)onalism  
•  Aggressively  cour'ng  FDI  thru  subsidies,  tax  
breaks,  grants  
•  European  Union  countries  compete  with  each  
other  to  anract  US  &  Japanese  investments  
•  Britain  most  successful  in  anrac'ng  
investment  in  the  automobile  industry  

S.V.Prasad,  Chime  Consul'ng   12  

 Govt  &  Influence  on  FDI  

The  Benefits  of  FDI  to  Host  Countries  

•  Resource-­‐Transfer  
•  Employment  
•  BOP  balances  
•  Compe''on  &  Economic  Growth  

S.V.Prasad,  Chime  Consul'ng   13  

 Govt  &  Influence  on  FDI  
The  Benefits  of  FDI  to  Host  Countries:  Resource  
Transfer  
•  Capital  
•  Technology:  s'mulates  employment  &  
industrializa'on;  produc'on  process,  incorporate  
in  a  product,  R  &  D,  skills  development,  process  
technology  
•  FDI  results  in  MNCs  transferring  significant  
technology,  crea'ng  new  tech,  inves'ng  in  R  &  D,  
all  increasing  labor  &  factor  produc'vity    
S.V.Prasad,  Chime  Consul'ng   14  
 Govt  &  Influence  on  FDI  
The  Benefits  of  FDI  to  Host  Countries:  Resource  
Transfer  
•  Management  benefits  include  improvement  in  
efficiency  of  opera'ons  in  the  host  country  
(acquired  or  green  field)  
•  Training  of  local  personnel:  managerial,  financial,  
technical;  those  leaving,  help  local  firms!  
•  S'mulate  local  suppliers,  distributors  &  
compe'tors  
S.V.Prasad,  Chime  Consul'ng   15  
 Govt  &  Influence  on  FDI  
The  Benefits  of  FDI  to  Host  Countries:  
Employment  Effects  
•  Beneficial  impact  both  Direct  &  Indirect  
•  Indirect  benefit  via  jobs  created  in  local  
suppliers  as  well  as  increased  local  spending  
by  MNC  employees  
•  “New  jobs”  at  the  cost  of  jobs  lost  by  local  
compe''on  which  has  lost  market  share  

S.V.Prasad,  Chime  Consul'ng   16  

 Govt  &  Influence  on  FDI  
The  Benefits  of  FDI  to  Host  Countries:  
Employment  Effects  
•  In  the  case  of  M  &  A,  acer  ini'al  period  of  
restructuring,  MNCs  tend  to  growth  their  
employment  faster  than  domes'c  firms  
•  In  the  US,  foreign  firms  grew  workforce  by  
1.4%  p.a.  &  domes'c  firms  by  0.8%  p.a.  
•  In  UK  &  France,  it  was  1.7%  &  2.7%  
respec'vely  
S.V.Prasad,  Chime  Consul'ng   17  
 Govt  &  Influence  on  FDI  

The  Benefits  of  FDI  to  Host  Countries:  BOP  Effects  

•  Inward  FDI  by  foreign  MNCs  been  a  major  driver  

of  export-­‐led  economic  growth  in  a  number  of  
developing  &  developed  na'ons  
•  China  exports  went  up  10  'mes  in  15  years;  
foreign  subs  accoun'ng  for  50%  of  all  exports  
•  All  these  have  a  beneficial  impact  on  BOP  apart  
from  the  one  'me  benefit  arising  at  the  'me  of  
FDI  
S.V.Prasad,  Chime  Consul'ng   18  
 Govt  &  Influence  on  FDI  
The  Benefits  of  FDI  to  Host  Countries:  Effect  on  
Compe))on  &  Economic  Growth  
•  Improves  consumer  choice,  reduces  price,  more  choice,  
more  segments  created  
•  S'mulates  capex,  produc'vity  increase,  product  &  
process  innova'ons,  resul'ng  in  greater  eco.  growth  
•  Beneficial  impact  seen  in  telecommunica'ons,  retailing,  
financial  services  
•  Telecom  revolu'on  has  also  promoted  cross-­‐border  trade  
in  other  goods  &  services  
S.V.Prasad,  Chime  Consul'ng   19  
 Govt  &  Influence  on  FDI  

Benefits  of  FDI  to  the  Home  Country  

•  Repatria'on  of  dividends  
•  Posi've  employment  effects:  foreign  subs  creates  
demand  for  home-­‐country  exports  crea'ng  posi've  
employment  effects  
•  Valuable  skills  learnt  in  foreign  markets  useful  in  the  
home  country:  reverse  resource-­‐transfer  effect  

S.V.Prasad,  Chime  Consul'ng   20  

 Govt  &  Influence  on  FDI  
Costs  of  FDI  to  the  Home  Country  
•  BOP  impact  at  the  'me  of  investment;  &  
ongoing  if  the  purpose’s  to  serve  the  home  
market  from  a  low  cost  country  &  if  
subs'tutes  exports  
•  Nega)ve  Employment  Effect  of  outward  FDI:  
Subs'tute  for  domes'c  produc'on  
•  Interna)onal  Trade  Theory  suggests  
otherwise:  FDI  frees  home-­‐country  resources  
to  focus  on  ac'vi'es  with  compara've  
advantage  
S.V.Prasad,  Chime  Consul'ng   21  
 Govt  &  Influence  on  FDI  
Govt  Policy  Instruments  &  FDI  Behavior:  

Home-­‐Country  Policies  

•  Encouraging  Outward  FDI:  foreign  risk  insurance,  

capital  assistance,  tax  incen'ves,  poli'cal  pressure  
•  Restric)ng  Outward  FDI:  Exchange  control,  tax  rules,  
poli'cal  reasons  

S.V.Prasad,  Chime  Consul'ng   22  

 Govt  &  Influence  on  FDI  
Govt  Policy  Instruments  &  FDI  Behavior:  
Host-­‐Country  Policies  
•  Encouraging  Inward  of  FDI:  Tax  concessions,  
concessional  loans,  grants/subsidies,  state  spending  
on  infrastructure  
•  Restric)ng  Inward  FDI:  Ownership  restraints,  
performance  requirements  (local  content,  exports,  
tech  transfer  &  local  par'cipa'on  in  management),  
excluding  certain  industries  on  the  grounds  of  
na'onal  security  or  compe''on  

S.V.Prasad,  Chime  Consul'ng   23  

 Govt  &  Influence  on  FDI  

Interna)onal  Ins)tu)ons  &  the  Liberaliza)on  of  

FDI  
•  WTO  in  many  ways  seeks  to  govern  FDI  
•  While  WTO  embraces  the  promo'on  of  interna'onal  
trade  in  services,  many  services  cannot  be  exported  
•  Hence,  WTO  involved  in  regula'ons  governing  FDI,  
especially  liberaliza'on  thereof  
•  Two  landmark  global  agreements  reached  in  ‘97  to  
liberalize  trade  in  telecom  &  financial  services,  
opening  markets  for  inward  FDI  
S.V.Prasad,  Chime  Consul'ng   24  
 Govt  &  Influence  on  FDI  

Interna)onal  Ins)tu)ons  &  the  Liberaliza)on  of  

FDI  
•  WTO  less  successful  in  establishing  universal  set  of  
rules  for  promo'ng  liberaliza'on  of  FDI  
•  Anempt  by  OECD  to  introduce  MAI  (Mul'lateral  
agreement  on  Investments)  stymied  by  developing  
countries  &  later  by  the  US,  environment  &  labor  
groups  

S.V.Prasad,  Chime  Consul'ng   25  

 Govt  &  Influence  on  FDI  
Focus  on  Managerial  Implica)ons  
•  Where  to  locate  Foreign  Produc'on  Facili'es  
•  Where  to  make  an  FDI  
•  Centers  around  incen'ves  from  Host  countries  &  
MNC’s  commitment  
•  In  the  absence  of  MAI,  bilateral  nego'a'ons  
between  host  country  &  MNC,  apart  from  Regional  
Arrangements  (eg.,  NAFTA,  ASEAN,  EU)  
•  The  Nature  of  Nego'a'on  (both  art  &  science)  and  
who  has  the  Bargaining  Power  
S.V.Prasad,  Chime  Consul'ng   26