Foreign Direct Investment
Chapter 4
FOREIGN DIRECT INVESTMENT
FDI is the outcome of Mutual interest of MNC’s and host countries. The FDI refers to the investment of MNC'’ in host countries in the form of creating productive facilities and having ownership and control. On the other hand if MNC or a foreign organization or a foreign individual buys bonds issued by host country it is not FDI, as it has no attached management or controlling interest. Such investments are called Portfolio Investments.
In developing countries FDI is seen as a useful source of funds. LDC’s look upon FDI as a source to bridge their demand supply gap of funds. It represents an important source of non-debt inflow that often brings along with it new technology and management expertise. It is also an important vehicle of growth as it links international markets, and plays an important role in creating new employment and economic revitalization.
Why FDI?
FDI is risky and expensive/costly when compared with licensing. FDI is risky because of problems associated with doing business in another county with alien culture and legal environment. There are different rules of the game. The FDI is expensive because of the reason that the investing firm must bear the cost of establishing production facilities in a host country or bear the cost of acquiring a foreign firm.
There are at least six important reasons why FDI flows:
1) Transportation Costs
2) Market Imperfection
3) Competition
4) Product Life Cycle
5) Locational Advantages
6) Potential of Developing Countries.
1) Transportation Costs:
Goods may be having low value/weight ratio (ex. Soft Drink, Cement etc). Due to high cost of transportation in such cases, attractiveness to export decreases and establishing manufacturing facility in host country is preferred. It is also because MNC’s prefer a location to manufacture from where exporting to nearby regions becomes cheaper in terms of transportation costs.
2) Market
FOREIGN DIRECT INVESTMENT
FDI is the outcome of Mutual interest of MNC’s and host countries. The FDI refers to the investment of MNC'’ in host countries in the form of creating productive facilities and having ownership and control. On the other hand if MNC or a foreign organization or a foreign individual buys bonds issued by host country it is not FDI, as it has no attached management or controlling interest. Such investments are called Portfolio Investments.
In developing countries FDI is seen as a useful source of funds. LDC’s look upon FDI as a source to bridge their demand supply gap of funds. It represents an important source of non-debt inflow that often brings along with it new technology and management expertise. It is also an important vehicle of growth as it links international markets, and plays an important role in creating new employment and economic revitalization.
Why FDI?
FDI is risky and expensive/costly when compared with licensing. FDI is risky because of problems associated with doing business in another county with alien culture and legal environment. There are different rules of the game. The FDI is expensive because of the reason that the investing firm must bear the cost of establishing production facilities in a host country or bear the cost of acquiring a foreign firm.
There are at least six important reasons why FDI flows:
1) Transportation Costs
2) Market Imperfection
3) Competition
4) Product Life Cycle
5) Locational Advantages
6) Potential of Developing Countries.
1) Transportation Costs:
Goods may be having low value/weight ratio (ex. Soft Drink, Cement etc). Due to high cost of transportation in such cases, attractiveness to export decreases and establishing manufacturing facility in host country is preferred. It is also because MNC’s prefer a location to manufacture from where exporting to nearby regions becomes cheaper in terms of transportation costs.
2) Market