... No. 031 ANDREAS JOHNSON Host Country Effects of Foreign Direct Investment The Case of Developing and Transition Economies This thesis consists of four individual essays and an introductory chapter. While independent from each other, these essays share some common properties. They are all empirical and focus on the interaction between inflows of foreign direct investment (FDI) and host country characteristics. The primary focus of the thesis lies in how inflows of FDI affect developing and transition economies. Macro-level data are used in all essays. The first essay analyses the FDI inflows that the transition economies of Eastern Europe have attracted and tries to find determinants of these inflows. The following two essays compare the effect of FDI between developing and developed economies. The second essay studies the relationship between corruption in the host country and the volume of FDI inflows. The third essay explores the effect of FDI inflows on host country economic growth. The fourth and final essay analyses the relationship between FDI and trade, focusing on the link between FDI flows and host country exports in eight East Asian economies. ISSN 1403-0470 ISBN 91-89164-64-4 ANDREAS JOHNSON Host Country Effects of Foreign Direct Investment The Case of Developing and Transition Economies Jönköping International Business School P.O. Box 1026 SE-551 11 Jönköping Tel.: +46 36 10 10 00 E-mail: info@jibs.hj.se www.jibs.se Host country effects of foreign...
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...Working Group on Development and Environment in the Americas Discussion Paper Number 11 The Impact of Foreign Direct Investment in Mexico Enrique Dussel Peters i April 2008 The Working Group on Development and Environment in the Americas, founded in 2004, brings together researchers from several countries in the Americas who have carried out empirical studies of the social and environmental impacts of economic liberalization. The goal of the Working Group Project is to contribute empirical research and policy analysis to the ongoing policy debates on national economic development strategies and international trade. The project also brings more prominently into U.S. policy debates the rich body of research carried out by Latin American experts, as well as their informed perspectives on trade and development policies. Hosted by Tufts' Global Development and Environment Institute, the Working Group Project has four initiatives. The Working Group’s web page is http://ase.tufts.edu/gdae/WGOverview.htm Enrique Dussel Peters did his BA and MA studies in Political Science at the Free University of Berlin (1989) and PhD in Economics at the University of Notre Dame (1996). Since 1993 he has worked as a full time professor at the Graduate School of Economics at Universidad Autónoma Nacional de México (UNAM). He has taught more than 90 courses at the BA, MA and PhD level in Mexico and internationally, and participated in more than 260 national and international seminars and conferences...
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...12 per cent of the world’s population, live in the 48 least developed countries (LDCs). These countries are the world’s poorest, with per capita GDP under $1,086,and with low levels of capital, human assets, exports and technological development. The Programme of Action of the Least Developed Countries for the Decade 2001-2010 adopted at the Third United Nations Conference of the Least Developed Countries in 2001 in Brussels stated that foreign direct investment (FDI) was an important source of capital formation, know-how, employment generation and trade opportunities for LDCs and called for accelerating FDI inflows into these countries. Since 2001, both LDC governments and their development partners have indeed pursued proactive FDI promotion policies. Although there was an abrupt interruption of the secular trend in 2009, FDI flows to LDCs grew at an annual rate of 15 per cent during 2001-2010 as a whole to reach an estimated $24 billion by 2010, compared with $7.1 billion in 2001, and their share in global FDI flows rose from 0.9 per cent to over 2 per cent. The Brussels Declaration contained 30 international development goals for LDCs, including the attainment of an investment to GDP ratio of 25 per cent and an annual GDP growth rate of at least 7 per cent in order to achieve sustainable development and poverty reduction in LDCs. The Brussels goal of 7 per cent growth is being achieved by LDCs as a group and by 15 LDCs individually (UNCTAD, 2010, p 5).1 However this improved...
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...FDI policy – Indian Perspective 11th September 2007 Macro-economic Overview Sustained Economic growth • Growth of over 8.0% during last 3 years • Fourth largest economy in the world in PPP terms Services account for over 50% of GDP Manufacturing sector growing annually at over 9% (17.4% in GDP) Foreign exchange reserve of over US $ 200 billion FDI inflows grew by 72% in 2005-06: the growth in 200607 was 184%. FDI inflows continue to be impressive this year as well with US$ 4.9 billion already recorded for the first quarter of 2007-08 India- Advantages as a destination for FDI Young Demographic Profile- 54% population below 25 years Abundant availability of Skilled Human Resources Adequate natural resources and raw materials Large and growing domestic market Established rule of law and a vibrant three tiered democracy Economic Reforms Industrial Policy Reforms • Compulsory licensing limited to only 5 sectors: on security, public health & safety considerations and where items are reserved for the SSI sector • FDI policy liberalisation since 1991calibrated progressive liberalisation followed • Technology collaboration liberalised Liberalization of FDI Policy New sectors opened FDI up to 100% allowed in most sectors FDI up to 100% allowed in some sectors FDI up to 74/51/50% allowed In 111 sectors Only a small negative list FDI limits Increased Procedures Further simplified Automatic Route introduced FDI up to 51% Allowed In 35 priority sectors FDI Allowed...
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...Introduction of Foreign Direct Investment Foreign Direct Investment (FDI) is known as the long term participation by country A into country B. It usually involves participation in management, joint-venture, transfer of technology and expertise. In other words, foreign direct investment is the cross-border corporate governance mechanism through which a company gains productive assets in another country. FDI is different from other major forms of foreign investment in that it is motivated largely by the long-term profit prospects in production activities that investor directly control (Wong, 2005). Wong also says that almost most of the developing and least developed countries worldwide equally participated in the process of direct investment activities. Over a long period of time, foreign direct investment (FDI) forms a major part of investment in most industrial and some developing countries. Besides that, he did explain that some FDI is intended to utilize local natural resources. Sometimes it is to employ relatively cheap labour, and sometimes to produce goods near to markets. Moreover, foreign direct investment can be a significant driver of development in poor nations. According to Katerina, John and Athanasios (2004), it provides an inflow of foreign capital and funds, in addition to an increase in the transfer of skills, technology, and job opportunities. Furthermore, they said it would be difficult to generate this capital through domestic savings, and even if it were...
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...following and both empirical studies and researches showed that the low and inadequate levels of foreign direct investment in Turkey has no effect on economic growth. 1. INTRODUCTION In simplest economic terms, investment is what makes the economy grow in terms of inputs of production, technology and other instruments causing the production process to occur. An in a globalized worlds of ours, the investment could be foreign or domestic whether the economy is not eligible to support their own, open to trade or highly geopolitical. Foreign investment may bring foreign currency, technology transfer, skilled labor etc. and all of those are crucial for a country to grow in both financial and real terms. In other words, in today’s world, for most of the countries, attracting and getting foreign direct investment is very important. There are economies that have almost 20-25% of their GDP’s as foreign investment. The types of this foreign investment may be direct, long term or short term. Direct investments include long term investments made by foreigners having more than 10% effect over the entity and not the financial derivatives or instruments. Direct investment has two parts called inflow and outflow. To exemplify, if a German company is buying the majority of the stakes of the Turkish household goods company; that will be an outflow for Germany and...
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...INTRODUCTION Unprecedented globalizations have witnessed double digit economic growth resulting in fierce competition and accelerated pace of innovation. As a result inflow of Foreign Direct investments has become a striking measure of economic development in both developed and developing countries. FDI and FII thus have become instruments of international economic integration and stimulation. Fast growing economies like Singapore, China, Korea etc have registered incredible growth at onset of FDI. Though US captures most of the FDI inflows, developing countries still account for significant growth of FDI and rise in FII. FDI not only gives access to foreign capital but also provides domestic counties with cutting edge technology, desired skill sets, tools of innovation and other complementary skills. Apart from helping in creating additional economic activity and generating employment, foreign investment also facilitates flow of sophisticated technology into the country and helps the industry to march into advanced technology. A favorable business environment fostered Indian economy after 1991, when the government of India opened the door for foreign capital in the way of direct investment and through foreign institutional investors. The policies drafted to stimulate the flow of foreign capital in to India provided much needed impetus for India to emerge as an attractive destination for foreign investors. Consequently, the international capital inflows have been...
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...Successful FDI Brenda’s Fine Furniture is a very successful and becoming a household name around the Unites States and in foreign countries because of the innovative and creative structure that suits families and businesses. The furniture gives customers the ability to be elaborate in small dwellings as well as large ones. Many European countries are impressed with the western styles. It has been determined by this company that it would be beneficial to become global. In order to Brenda’s Fine Furniture can enter the Europe market through FDI. The multinational enterprise can invest directly in the production or other facilities in Europe over which has effective control. Manufacturing FDI requires an establishment of production facilities in Europe. Horizontal FDI approach would be use because the same product (furniture) produce in the U.S. will be produce in Europe. This represents a geographical diversification of the MNE domestic product line. Sharing experiences, resources, and knowledge can be shared to reduce risk and cost. Horizontal FDI enables a MNE to quickly establish its competitive advantage in the host country because a company’s key competencies are more transferable. According to Journal of US-China Public Administration (2010), there are relatively specific advantages within given industries between developed countries are exchanged in horizontal or intra-industry. Most FDI is horizontal. In order for the new MNE furniture to benefit...
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...in the WIR 2014, the reason that developing and emerging economies have attracted FDI, and why will SDGs have a significant resource implication for future investment decisions of MNEs. 2. The recent trends discussed in the WIR 2014 1. Global FDI flows Global FDI flows increased by 9 percent in 2013 to $1.45 trillion, up from $1.33 trillion in 2012. Although the share of developed economies in total global FDI flows remained low, it is expected to rise over the next three years to 52 per cent. Global inward FDI stock rose by 9 per cent, reaching $25.5 trillion. It reflects the rise of FDI inflows and strong performance of the stock markets in many parts of the world. 2. FDI inflows FDI inflows rose 9 percent in 2013 revealed a moderate pickup in global economic growth and some large cross-border M&A transactions. The increase of FDI inflows was widespread in all major economic groupings − developed, developing, and transition economies. Developed countries’ FDI inflows grew by 9 percent, reaching $566 billion. Developing economies reached a new high of $778 billion, accounting for 54 percent of global inflows. Developing Asia remained the world’s largest recipient region of FDI flows, and China remained the recipient of the second largest flows in the world. In 2013, APEC absorbed half of global flows, similar to the G-20, while the BRICS received more than one fifth. Besides, FDI flows to Latin America and the Caribbean registered a 14 percent increase....
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...FDI Vs. Portfolio investment Capital is a vital ingredient for economic growth, but since most nations cannot meet their total capital requirements from internal resources alone, they turn to foreign investors to supply capital. Foreign direct investment (FDI) and foreign portfolio investment (FPI) are two of the most common routes for overseas investors to invest in an economy. FDI implies investment by foreign investors directly in the productive assets of another nation. FPI means investing by investors in financial assets such as stocks and bonds of entities located in another country. FDI and FPI are similar in some respects but very different in others. As retail investors increasingly invest overseas, they should be clearly aware of the differences between FDI and FPI, since nations with a high level of FPI can encounter heightened market volatility and currency turmoil during times of uncertainty Examples of FDI and FPI Imagine that you are a multi-millionaire based in the U.S. and are looking for your next investment opportunity. You are trying to decide between (a) acquiring a company that makes industrial machinery, and (b) buying a large stake in a company or companies that makes such machinery. The former is an example of direct investment, while the latter is an example of portfolio investment. Now, if the machinery maker were located in a foreign jurisdiction, say Mexico, and if you did invest in it, your investment would be considered as FDI. As well, if the companies...
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...Introduction Foreign Direct Investments (FDIs) have been found to be important aspects of economic development of host countries, and crucial, in building technological capabilities of local companies in developing countries. It is a channel for international diffusion of technology, having the potential to transfer technological, organizational and managerial practices to developing countries, which may, in the long run, lead to higher technological capabilities, and innovation, resulting in economic growth in these countries. For Tanzania specifically, FDI is a type of investment which is relatively infant as the government had opted for a socialist path of economic development from 1967 to around mid 1980s, following the Arusha Declaration. In mid 1980s, the government initiated and implemented deliberate economic liberalization policies. These resulted into the rise of FDI in Tanzania. For instance, FDI inflows increased from USD 2,418.7 million in 1999 to USD 3,776.6 million in 2001. Such investments were concentrated in the sectors of manufacturing (33.4%), mining and quarrying (28%) as well as agricultural (6.7%) (TIC, BoT and NBS, 2004: 23-24)4. 2.2 Foreign Direct Investment (FDI): Definition and Characteristics 2.2.1 Defining FDI Several FDI definitions have been given in the literature and these are more or less similar. A more representative definition of FDI is that by Rutherford (1992: 178; 1995: 178-179) who defines FDI as business investment in another country...
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...“The effects of FDI on the Indian Insurance Industry” Abstract Chapter-1 1.1 Introduction In the world of increased competition and rapid technological changes, globalization has played a complimentary role over the past years. Globalization has encouraged more and more multinationals to adopt FDI. According to Charles W.L. Hill (1998) “FDI occurs when a firm invests directly in facilities to produce and market a product in a foreign country”. The growth of FDI is more than the growth of world trade and world output so role played by FDI in world economics is very vital. Patterson, N. and Montanjees, M. (2004) say that FDI is the most favoured form of external finance for the reason that it is non-debt creating, non- volatile and the outcome depends upon the projects performance initiated by investors. FDI is advantageous because it facilitates international trade and transfer of technology, knowledge and skills. The purpose of this study is to investigate factors that attract FDI. De Mello (1999) asserts that scope for business in a country, opportunities for expansion, market size etc are some of the factors that attract FDI. Growth rate of a company or an industry leads to magnetism of more and more investment as investors know that their investment is safe enough. According to Dunning, J. (1981) Availability of valuable and unique resources in an industry such as cheap production capacity, cheap skilled labour and advanced technology which are necessary for running...
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...POTENTIALITY OF FDI INFLOW IN BANGLADESH 1. INTRODUCTION Foreign Direct Investment (FDI) is considered as one of the crucial ingredients for fostering economic development of a developing country. Countries that are lagging behind to attract FDI are formulating and implementing new policies for attracting more investment. Even compared to other South Asian countries, FDI inflow to Bangladesh has traditionally been lower. Foreign direct investment (FDI) is investment directly into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. 2. TYPES OF FDI As a part of the national accounts of a country FDI refers to the net inflows of investment. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative). Inward FDI occurs when foreign capital is invested in local resources. The factors propelling the growth of inward FDI include...
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...Foreign Direct Investment Learning objectives • Be familiar with current trends regarding FDI in the world economy. • Understand the different theories of foreign direct investment. • Appreciate how political ideology shapes a government’s attitudes towards FDI. • Understand the benefits and costs of FDI to home and host countries. • Be able to discuss the range of policy instruments that governments use to influence FDI. • Articulate the implications for management practice of theory and government policies associated with FDI. The focus of this chapter is foreign direct investment (FDI). The growth of foreign direct investment in the last 25 years has been phenomenal. FDI can take the form of a foreign firm buying a firm in a different country, or deciding to invest in a different country by building operations there. With FDI, a firm has a significant ownership in a foreign operation and the potential to affect managerial decisions of the operation. The goal of our coverage of FDI is to understand the pattern of FDI that occurs between countries, and why firms undertake FDI and become multinational in their operations as well as why firms undertake FDI rather than simply exporting products or licensing their know-how. The opening case describes the international growth of Starbucks. The closing case explores Cemex’s foreign investments. OUTLINE OF CHAPTER 7: FOREIGN DIRECT INVESTMENT Opening Case: Starbucks’...
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...FDI IN INSURANCE & PENSION ECONOMIC ANALYSIS OF INDIAN SCENARIO PROJECT SYNOPSIS Leading Newspaper The Times of India reported on October 4th, 2012, “Big Bang reforms: Cabinet approves 49% FDI in insurance, 26% in pension sector”. This has indeed been a big bang reform announcement post FDI in multi brand retail by the Gov. of India. In light of this our group has tried to weigh the topic in Economic terms. The synopsis of our project on this topic has been discussed henceforth in the document. INTRODUCTION The Gov. of India has allowed 49% FDI in Insurance and 26% in Pension sector. This move permits foreign shareholding in insurance companies to the extent of 49% and to 26% in pension companies with an aim to provide better insurance coverage and to augment the flow of long term resources for financing infrastructure. The Insurance sector was opened up for private sector in 2000 after the enactment of the Insurance Regulatory and Development Authority Act, 1999 (IRDA Act, 1999). The industry has been demanding for long to increase the FDI limit for adequate funds for expansion of the sector. IRDA Chairman J Hari Narayan recently favored up to 49 per cent foreign investment in the sector. SIGNIFICANCE When a firm controls (or have a strong say in) another firm located abroad, e.g. by owing more than 10% of its equity, the former is said "parent enterprise" (or "investor") and the latter "foreign affiliate". Foreign Direct Investment (FDI) is the financial investment...
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