fdi umair farooq mughal

FOREIGN DIRECT

INVESTMENT [FDI]BY UMAIR FAROOQ MUGHALM-COM FROM PU

E-mail & Mobile no [email protected]

+92 331 3366205

Working as a Teacher & Banker in MCB Bank. Currently Teach International business & finance, Interpersonal skill, I to B, MBF, Economics, Computer, EOP, BCRW, Audit and B-Law in The house of accounting and New Stars College.

INVEST in YOURSELFYou can afford it, trust me.

‘’CHANGE YOUR FOCUS, FROM MAKING MONEY TO SERVING MORE PEOPLE, SERVING MORE PEOPLE MAKES THE

MONEY COME IN.’’

BY UMAIR FAROOQ MUGHAL


After studying this Slide, you should be able to: What is Foreign Direct Investment [FDI] FDI Definitions Structure of FDI Flow of FDI Types of FDI / Methods/ Strategies/ Entry Modes Determinants of FDI Benefits & Costs of FDI for Host Country Benefits & Costs of FDI for Home Country Government Policy Instruments and FDI / How Does

Government Influence FDI Political Ideology and FDI (What Are The Theoretical Approaches To FDI) Theories of FDI (Why Choose FDI?) Advantages of FDI

Learning Objectives

Introduction:Foreign direct investment (Direct Investment) means when we invest our money in other country market or product. Once a firm undertakes foreign direct investment it becomes multinational enterprises. FDI is not just a transfer of ownership as it usually involves the transfer of factors complementary to capital, Including management, technology and organizational skills. FDI is distinguished from portfolio foreign investment (Indirect investment) a passive investment in the securities of another country such as public stocks and bonds by the element of control

Examples: Motorola sets up a plant in China to manufacture cell phones. Starbuck purchases an existing UK firm, “British Coffee,” to sell coffee, tea

and desserts in the UK

What is Foreign Direct Investment


Definitions:‘’FDI accurse when a person directly invest in

facilities to produce or market a product in a foreign country.’’

‘’FDI includes mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans.’’

‘’ A foreign direct investment is a controlling ownership in a business enterprise in one country by an entity based in another country.’’


What is Foreign Direct Investment


Structure of FDI

FlowsInflow

Outflow

Entry Modes

Green Field Investment

Brown Field Investment

Horizontal

Vertical

Platform

Entry Route

Automatic

GovernmentForeign

Investment Promotion

Board[FIPB]


Flow of FDI:‘’Flow of FDI refers to the amount of FDI undertaken over a given time periodOutflows:

Outflows of FDI are the flows of FDI out of a country.Inflows:

Inflows of FDI are the flows of FDI into a country.Stock of FDI:

The stock of FDI refers to the total asset accumulated by a country into a foreign country.

Flow of Foreign Direct Investment


Green Field FDI Brown Field FDI Horizontal FDI Vertical FDI Platform FDI

Green Field FDI:‘’The establishment of a wholly new operation in a foreign country’’‘’Start newly business in foreign country is called green field FDI.’’

Brown Field FDI / Acquisition:‘’Invest in already existing business like acquisition, merger etc. in

other countries is called brown field FDI.’’‘’Acquisitions or mergers with existing firms in the foreign country’’

Types of Foreign Direct Investment/ Methods/ Strategies/Entry Modes


Horizontal FDI:‘’Investor invest in only one country is called horizontal

FDI.’’ Where the company carries out the same activities abroad as at home for example Toyota assembling cars in both japan and the UK

Vertical FDI:‘’Investor invest his money more than one country is called

vertical FDI.’’

Platform FDI:‘’FDI from a source country into a destination country for

the purpose of exporting to a third country’’

Types of Foreign Direct Investment/ Methods/ Strategies/ Entry Modes


Determinants of FDI Natural

Resources Physical

Infrastructure Financial

Infrastructure Technological

Infrastructure Investment

protection & Promotion

Culture Insurance

Facilities Low Interest

Loan Tax Concession Subsidies Productivity

Expense Economic

Development

Government Policies

Labor Cost Human Capital Urbanization Market Size Market Growth Excess to Market Openness to

International Trade

Determinants of Foreign Direct Investment


Benefits & Cost of FDI

Benefits & Costs of FDI for Host Country:Benefits Cost

Increase Employment Improve Technology Increase Foreign

Reserve Improve Labour Skill Good Infrastructure Effect Balance of

PaymentCompetition

Adverse Effect on Balance of Paymento After initial inflow of capital, subsequent outflow of capital

from the earnings of the FDIo FDI may import inputs from abroad

National Sovereignty and Autonomyo Key decisions that affect the host country’s economy may

be made by a foreign parent that has no real commitment to the host country

Adverse Effect on Competitiono MNEs may have “too much” power and kill off competition

Increase Labour Salary


Benefits & Costs of FDI for Home Country:

Benefits & Cost of FDI

Benefits Costs Low Labour Cost Increase Foreign Reserve

o Effect on the capital account of the home country balance of payments from the inward flow of foreign earnings

Learn Skillso MNEs may learn skills from exposure (Experience) to

foreign countries Employment Effect

o FDI may import intermediate goods or inputs for production from the home country, creating jobs

o Employment effect due to outward FDI Learning New Trends

Transfer Technology Resource Transfer Balance of Payment

o From the initial capital outflow required to finance the FDI

o Current account suffers if FDI is to serve home market from low-cost production location

Employment Effecto Employment may also be

negatively affected if the FDI is substitute for domestic production


Host Country Policies Home Country Policies

Government Policy Instruments and FDI / How Does Government Influence FDI

Host Country PoliciesEncouraging Inward FDI

Tax concessions Low-interest loans Grants Subsidies Offer Incentives

To encourage inward FDI, host countries usually offer incentives for investment like tax breaks, low interest loans, or subsidies. Why would countries offer these benefits to foreign firms? Because they want to gain the benefits of FDI that we talked about earlier! Kentucky for example, offered a $112 million package to Toyota to get it to build its U.S. plants in the state!

Restricting Inward FDI Ownership restraints

Why do so? To protect national interest (defense,

etc.) To facilitate resource-transfer

Performance requirements Local content, exports, technology

transfer, and local participation in top management

When a country wants to restrict FDI, it will usually implement ownership restraints or performance requirements. In Sweden for example, foreign companies aren’t allowed to invest in the tobacco industry.


Home Country PoliciesEncouraging Outward FDI

Insurance programs to cover major types of foreign investment risks

Special funds or banks to make government

loans

Political influence to encourage host countries to relax restrictions on incoming FDI

Some countries have also developed special loan programs for companies investing in developing countries, created tax incentives, and encouraged host nations to relax their restrictions on inward FDI.

Restricting Outward FDI Limit capital outflows

Manipulate tax rules to encourage

investment at home

countries may restrict firms from investing in certain nations for political reasons

To discourage outward FDI, countries regulate the amount of capital that can be taken out of a country, use tax incentives to keep investments at home, and actually forbid investments in certain countries like the U.S. has done for companies trying (annoying) to invest in Cuba and Iran.

Government Policy Instruments and FDI / How Does Government Influence

FDI


Radical View Free Market View Pragmatic Nationalism

Political Ideology and FDI(What Are The Theoretical Approaches To

FDI)

Radical View:Don’t give value to host

country. They argue that MNEs [Multinational Enterprises] extract profits form the host country and take them to their home country, giving nothing of value to the host country in exchange. They note for example that key technology is tightly controlled by the MNE, and that important jobs in the foreign subsidiaries of MNEs go to home country nationals rather than to citizens of the host country. In 1980s the radical view was very influential in the world economy. The radical view was in retreat everywhere by the end of the 1990s.


Free Market View:Give value to host country. Free market view argues that FDI is a benefit to

both the source country and the host country. In the free market view argues that international production should be distributed among countries according to the theory of comparative advantage. Consider a well-publicized decision by IBM in the mid-1980s to move assembly operations for many of its personal computers from the United States to Mexico. IBM invested about $90 million in an assembly facility with the capacity to produce 100,000 PCs per year, 75% of which were exported back to the United States. According to the free market view, moves such as this can be seen as increasing the overall efficiency of resource utilization in the world economy. Mexico due to its low labor costs has a comparative advantage in the assembly of PCs. According to the free market view by moving the production of PCs from the United States to Mexico, IBM frees US resources for use in activities in which the United States has a comparative advantage e.g., the design of computer software, the manufacture of high value added components such as microprocessors. Due to this the cost of PCs reduces and both country get benefit due to low cost.

Political Ideology and FDI(What Are The Theoretical Approaches To FDI)


Pragmatic Nationalism:Benefits and Cons for Both

Countries. FDI has both benefits (Inflow of capital, technology, skills and jobs) and costs (return of profits to the home country and a negative balance of payments effect.

Political Ideology and FDI(What Are The Theoretical Approaches To FDI)


Exporting Licensing Internalization

Theory

Theories of FDI (Why Choose FDI?)

Exporting:‘’Producing goods at home and then shipping them

to the receiving country for sale’’

• Exports can be limited by transportation costs and trade barriers

• FDI is more common as compare to export. In FDI we directly invest in other countries and start manufacturing activities in other country. Due to we chose FDI as compare to export because we bear more expense in export like transportation, trade barriers etc.


Licensing:‘’written contract under which the owner

of copyright, know how, patent, service mark, trademark, or other intellectual property, allows a licensee to use, make, or sell copies of the original.’’

While licensing agreements are mainly used in commercialization of a technology, they are also used by franchisers to promote sales of goods and services.



Internalization Theory:Internalization theory suggests that licensing has

many drawbacks as compare to FDI • Lower income• Loss of control of the licensee manufacture and

marketing operations and practices leading to loss of quality

• Foreign partner also can become a competitor by selling its production in places where the parent company has a presence.

• Transfer technology



Economic development Create jobs Resource transfer Exchange of knowledge Transfer skill and technology Increase productivity Consumer benefit Increase saving and investment

Advantages of FDI


Country Wise FDI Inflows ($ Million)

Foreign Investment inflows in

Pakistan($Millions)

COUNTRY 2013-2014 2014-15 [JUNE]USA 212.1 175.7

UK 157.0 77.5

UAE (78.1) 163.3

JAPAN 30.1 51.1

Hong Kong 228.5 72.4

Switzerland 209.8 (3.4)

Saudi Arabia (40.1) (95.5)

China 695.8 178.3

Others 255.4 92.7

fdi umair farooq mughal

Education