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MGT520 - International Business - Lecture Handout 35

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FOREIGN DIRECT INVESTMENT

Pragmatic Nationalism

  • Having nor a radical neither a free trade market.
  • FDI has both benefits and disadvantages to a country.
  • Some Pragmatic nationalist are thinking in terms of resources taken out by MNE in the repatriation resulted from FDI.
  • Japan, Korea, Latin American Countries are the Examples.
  • But recent years have seen a major increase in FDI.

Growth and Employment Effects:

In contrast to the balance-of-payments effects, the effects of FDI on economic growth and employment should not be a zero-sum game because MNEs may use resources that were either underemployed or unemployed. The argument that both home and host countries can gain from FDI rests on two assumptions: (i) resources are not fully employed and (ii) capital and technology cannot be easily transferred from one activity to another.

  • Home Country Losses: As manufacturers seek lower-cost foreign production sites, home countries claim that FDI outflows create jobs abroad at the expense of jobs in the home country.
  • Host Country Gains: Host countries gain through the transfer of capital, technology, and managerial expertise, as well as the creation of new jobs.
  • Host Country Losses: Critics argue that FDI inflows often displace domestic investment and drive up local labor costs. They claim that MNEs have access to lower-cost funds than local competitors do and that MNEs can spend more on promotion activities. In addition, while it is true that MNEs often source inputs locally, critics claim that they also destroy local entrepreneurship. Further, as MNEs gain valuable knowledge in their foreign operations that can be shared across their entire organizations, critics fear that local firms subsequently suffer a
    competitive disadvantage.

Obtain Resources and Benefits

Access to Technology:

Nations encourage FDI in technology because it increases productivity and competitiveness.

Management Skills and Employment:

FDI allows talented foreign managers to train local managers in how to operate the local facilities—this is important for former communist nations that lack skilled managerial talent. Some of these managers will also go on to establish their own businesses.

Reasons for Home Nation Intervention:

There are fewer concerns regarding the outflow of FDI among home nations because they tend to be prosperous, industrialized nations.

Reasons for discouraging outward FDI

  • Investing in other nations sends resources out of the home country and can lessen investment at home.
  • Outgoing FDI may damage a nation’s balance of payments by reducing exports otherwise sent to international markets.
  • Jobs resulting from outgoing investments may replace jobs at home.

Reasons for promoting outgoing FDI

  • Outward FDI can increase long-run competitiveness (e.g., Japanese use FDI and partnering as learning opportunities).
  • Nations may encourage FDI in “sunset” industries, those that use outdated and obsolete technologies or employ low-wage workers with few skills.

Host Countries: Promotion:

Financial Incentives:

  • Host governments commonly offer tax incentives and/or low-interest loans to attract investment.
  • However, incentives can create bidding wars between locations vying for investment; the cost to taxpayers of snaring FDI can be more than what the actual jobs pay.

Infrastructure Improvements:

  • Lasting benefits for communities surrounding the investment location can result from local infrastructure improvements—better seaports for containerized shipping, improved roads, and increased telecommunications systems.
  • Example: $40 billion Multimedia Super Corridor (MSC) being constructed in Malaysia in forested surroundings.

Host Countries: Restriction:

Ownership Restrictions:

  • Governments impose ownership restrictions that prohibit non-domestic companies from investing in certain industries or owning certain types of business (e.g., Western investment is controversial in the Middle East).
  • Another restriction is a requirement that non-domestic investors hold less than a 50% stake in local firms. Nations are eliminating such restrictions because companies can choose another location.

Performance Demands:

  • Performance demands influence how international companies operate in the host nation. Some performance demands dictate the portion of a product’s content that originates locally, stipulates the portion of output that must be exported, or requires that certain technologies be transferred to local businesses

Home Countries: Promotion

To encourage outbound FDI, home countries can:

  • Offer insurance to cover the risks of investments abroad.
  • Grant loans to firms wishing to increase their investments abroad.
  • Offer tax breaks on profits earned abroad or negotiate special tax treaties.
  • Apply political pressure on other nations to get them to relax their restrictions on inbound investments

Home Countries: Restriction

To limit the negative effects of outgoing FDI, home governments can:

  • Impose differential tax rates that charge income from earnings abroad at a higher rate than domestic earnings.
  • Impose sanctions that prohibit domestic firms from making investments in certain nations.

Shifting Ideology:

Radical thinking adherence by many countries .Though pure free market is sometimes criticized by pragmatic nationalists like Japn , Korea,Italy, Span and most latin American countries. But on the other hand we can see a dramatic change and increase in FDi.

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