Foreign Direct Investment and the World Economy

Florin Bonciu, Ph.D., 2010

Foreign Direct Investment

International investment:
FDI; Portfolio investment.

IMF definition: FDI represent a category of international investment that reflects the purpose of an entity resident in a country to obtain a long lasting interest in a company from another country.

Content of FDI what kind of capital is invested

Shares, social parts, in kind capital; Intra-company loans; Reinvested profits. Why they represent FDI ?

Portfolio investment
Include shares, bonds, instruments of monetary market. The investor is interested only in preserving and increasing his capital without getting involved in the management of the company.

FDI main indicators

FDI flows:
Inflows; Outflows.

FDI stocks:
Inward stocks; Outward stocks.

FDI and the World Economy _Summary

In 2007:
World GDP: World Exports: Sales of foreign affiliates: FDI stocks: FDI flows: 65.61 trillion $; 13.9 trillion $; 31 trillion $; 15 trillion $; 1,97 trillion $.

FDI and the World Economy

Some comments:
World sales of foreign affiliates is more than double world exports; World sales of foreign affiliates represents about 50 % of world GDP; Gross Product of foreign affiliates represents 11 % of world GDP; Exports from foreign affiliates represents about 1/3 of world exports;

FDI and TNCs in figures

In 2008:
82,000 TNCs with over 810,000 affiliates; Direct jobs created: over 80 million; Direct and indirect jobs created: over 400 million;

FDI why so important ?

Most dynamic economic phenomenon for a long time: Between 1982 2000 a 22.4 times increase; Represent the main source of financing for developing countries; Its the main form of manifestation of globalization.

Direction and Source of FDI

Most FDI flows have been to developed countries from developed countries FDI flows increased to developing countries since 85
Much to Asian and Latin America economies
Africa lagging

Since late 90s some developing countries became foreign investors themselves (China, India)

Home country measures - HCM

HCM when home countries support their companies to invest in certain other countries. HCM they are unilateral legal acts (similar to donations) The receiving countries cannot influence the existence and content of HCM HCM are mentioned in bilateral, regional or multilateral treaties.

Types of HCM
Supply of information and technical assistance for investing in certain countries. Financial support for investing in certain countries. Fiscal incentives (avoidance of double taxation). Guarantees for non-commercial risks. Measures for supporting market access. Promotion of technology transfer.

Possible negative implications of FDI

The need of an economic policy in the host country. Why ? The possibility of economic distorsions. Risk of economic concentration. Private vs. public monopolies. Dependance on foreign capital. External control of economy.

Possible negative implications of FDI

Attracting qualified workers from local companies. Elimination/limitation of local companies. Reduction of qualification of workforce. Why and when ? Some extreme cases: breaking the law.

Political implications of FDI

Usually not present. Some examples are: For host countries when deciding to adopt a FDI promotion policy. In case of major investment projects (nuclear plants, airports, etc.). In case of major privatizations (banks, large companies). In case of investment projects with geostrategical implications.

Economic criteria in FDI decision making

Existence of natural resources. Geographical location of investment. Cost of labor. Existence of suppliers. Taxation level. Development level of infrastructure. Business environment. Environment protection regulations.

Information sources for FDI decision making

Official sources. Private sources (chambers of commerce, etc). Existing foreign investors. Consulting companies. Rating agencies (Fitch, Moodys, Standard & Poors, etc). Opacity Index. What is that ?

Types of FDI supporting policies in host countries

FDI supporting policy: a set of principles, strategies and means by which FDI, as an economic factor, are used for a given purpose (economic growth and development). 3 components:
Strategy; Legal & institutional framework; Economic instruments.

Types of FDI supporting policies

According to their content these policies can be:
Minimal policies; Promotion policies; Attraction policies; Maintaining policies; Mixed policies.

Types of FDI supporting policies

According to the stage of development of host country these policies can be classified into 3 generations of FDI policies:
1st generation: liberalize FDI regime, national treatment, positive attitude. 2nd generation: FDI related marketing programs, IPA. 3rd generation: create a very positive business environment that attract by itself.

National treatment for foreign investors

National treatment. What is ? Advantages (for host country, for foreign investors, for general perception). How to use it with a promotion policy ? Is there any contradiction between NT and incentives for foreign investors ?