By definition foreign direct investment is the acquisition of tangible assets such as machinery, land and factories; this type of investment are often between two companies- usually multinationals from different countries. FDI is one of the benefits of globalisation as it has a direct impact on aggregate demand having a follow on effect on technology, job opportunities and increased intellectual property owned by countries. In this essay I will discuss some of the factors that affect a country’s disposition to gaining foreign direct investment.
One of the many factors that may make a country more attractive to foreign direct investment is the level of corporation tax within the country. For example, if a firm wishes to expand in another country, they will have to assess the profitability of the investment where corporation tax is a huge factor when judging the profitability (HM Revenues & Customs, 2013). However, FDI does not only mean expanding into another country, whereas it may just be an investment into the infrastructure where the level of corporation of tax is meaningless. Therefore, if the level of corporation tax is high, then the investment decision may be reprimanded, only if firms are setting up production in other countries. This then suggests that some countries may attract more FDI than other countries depending on the level of corporation tax, where expanding multi-nationals are able to minimise corporation tax payments.
However it could be argued that levels of corporation tax may not play a huge factor in investor’s decisions when deciding to invest in foreign countries as multi-national companies have the ability to declare their profits in tax havens such as Luxembourg and Ireland as Eicke (2009) suggests. Thi...
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...a lot of FDI is because of its abundance of natural resources.
Another reason why some countries may attract more FDI than others may be due to the quality of infrastructure that resides in the economy. Not only is infrastructure a key determinant for foreign investors but it also helps improve the competitiveness between domestic firms. Moreover Rehman (2011) suggests that poor infrastructure causes unnecessary transactions costs such as communication and transportation costs. Also improvements in infrastructure can exert an advantage to the economy’s export capacity. For example, if a country builds another airport, a firm can increase its exports to foreign countries which attracts more FDI as they are able to expand their output thus leading to increased net profits. Furthermore poor infrastructure may hinder foreign investment as they will be expecting to have
...argaining advantage that allows them to request to override these legislations and exploit the most out of the host economy. Desperately requiring FDI to boost the local economy, these countries provides tax breaks and subsidies, and slacken environmental regulations to create an attractive atmosphere for TNCs investments. As for more mature NIEs and RIEs, they have more efficient governments and stronger bargaining power which enable them to reap off greater benefits from the investments of TNCs and at the same time protect the local industries.
I believe that one of the best investments I could make would be an FPI (foreign portfolio investment) into state-owned industries in China. Announced on April 23rd, the government has opened 8 state-controlled industries to investment. I’d recommend FPI (as opposed to FDI) in this venture because, while China is opening these industries up, they are not opening them up for control. Still, companies like Sinopec Ltd., a large oil company, are up to selling about 30% of the SBU that controls its filling stations, a unit valued at over $20 billion. As the middle class continues to grow and be able to purchase more items (like cars), the huge population’s demand for necessary products like these will continue to grow. Companies like Sinopec are adamant that they will not give up any control, and that’s why FPI would be preferable to FDI when it comes to these industries. Another significant reason that I’d prefer FPI over FDI in China is due to risk (political, socioeconomic, etc.) These companies say the reason they won’t lose control is because they don’t want to have to change their operational practices. With FPI, these companies won’t get paranoid that investors are trying to change them. The previous reasons are very specific, but China has general policies, procedures, and trends in place (good or bad) that make it plain for investors to see that they are wanted, and business is a priority. China has an autocratic government, which is very efficient in getting things done, so it is more conducive for companies to work in. China also has very low wage costs ($1.74 per hour). Also, China has some of the least progressive environmental regulations laws, which lowers costs. China’s GDP growth rate is still at 7.5% (14th in the wor...
Off-shoring is the establishment of business operations outside national boundaries. The process of moving business outside these boundaries is to garner an advantage either through tax breaks, lower wages, lower transportation cost and/or relaxed regulations ("Offshore definition," 2014). Many firms either branch out as a horizontal multinational or vertical multinational. Horizontal multinational’s produce the same good or services as abroad. This foreign direct investment (FDI) is done to strategically place production closer to the target market. Doing this provides advantages surrounding transportation cost while enhancing learning associated with local needs. A vertical multinational is one that fragments a portion of its good to take advantage of lower cost (i.e. cheap labor). Markusen and Maskus found horizontal multinational replaces trade whereas, a vertical multinational positively correlates with trade (Markusen & Maskus, 2001).
As GDP per capita grows, the country’s standard of living rises with it. This newfound wealthiness allows for nations to invest in infrastructure, such as roads and education, and establish socially-conscious institutions, such as the American EPA, FDA, and CDC. In addition to further increasing quality of life and working conditions, establishment of such infrastructre allows foreign investment to be absorbed even easier: “Findings in literature indicate that a country’s capacity to take advantage of FDI externalities might be limited by local conditions, such as the development of local financial markets or the educational level of the country, i.e., absorptive capacities.” As the citizens become more productive, the government has more funds to invest in its own economy, which further improves the productivity of its citizens. This positive feedback loop eventually produces the necessary infrastructure of the nation begins to support itself. It can then afford to employ more effective and safer means of production, and sweatshops are phased out, no longer necessary. From here, the downsides of sweatshops will be completely gone, and replaced with only net social
I found this article "Foreign direct investment: Companies rush in with the cash" on the financial times website (www.FT.com) published December 11, 2002 written by John Thornhill. The reason for choosing this article is my personal interest in the Chinese economy and its attractiveness to the foreign investors. Apart from the foreign direct investment this topic has also helped me in understanding the impact of Chinese economy on the global market.
A Multinational Corporation (MNC) can be defined as “a single entity that controls and manages group of goal-disparate and geographically dispersed productive subsidiaries” (Triandis and Wasti, 2008, p. 2). Multinational corporations are entities that make Foreign Direct Investment (FDI) and produce added value in countries other than the country in which they are headquartered. One of the key objectives of the MNC is to obtain capital where is it cheapest and to invest FDI and undertake production in areas that yield the highest rates of return (De Beule and Van Den Bulcke, 2009). However, many theories have been advanced to account for the decision-making process that MNCs undertake in relation to FDI. The purpose of this paper is to explain the two main theories – internalization theory and OLI eclectic paradigm theory – and to critique these in relation to some of the other conceptual models that have been advocated.
Some investors are wary about the process of investing internationally, carrying the concept that it is always to precarious and complex. While there are risks involved with international investing, there are also very beneficial and profitable reasons for doing so. Ev...
Political and legal considerations were given first priority in this analysis with primary emphasis given to whether a country's legal or political system prohibits or impedes foreign investment. If a country's political or legal system discouraged or prevented foreign investment, that country was disqualified from further consideration. Factors considered when assessing the political and legal environment:
Corporations have been moving to foreign countries for decades. Bermuda claims to be the first tax haven due to legislation passed in 1935 permitting offshore companies, however this claim to fame is debatable due to the similar legislation passed by Lichtenstein in 1926 to attract offshore capital. Switzerland also became a prominent tax haven after World War One. While other European countries had to raise their taxes to help pay off war debt, Switzerland, having been neutral in the war, had an influx of business. Originally tax havens were used to avoid personal taxation, but starting in the 1950’s companies have been moving to them because of new jurisdiction.
In the year 2007, China and India ranked first and second respectively in the list of ideal foreign direct investment (FDI) destinations, according to A T Kearney, a global strategic management consulting firm (The Press Trust of India Limited, 2007a). The two nations, because of their similarities in geopolitical, economic and demographic aspects, are often compared with each other. To determine which one is more attractive for businesses to expand to, this essay will examine the business environment of both countries from the following perspectives: political/legal, economic, socio-cultural and technological.
This is a documents required in case of import of goods. It is like shipping bill in case of exports. A bill of Entry is the document testifying the fact that goods of the stated value and description in specified quantity are entering into the country from abroad. The customs office supplies this foam which is prepared in triplicate. Three different colors are used to prepare bill of entry. One copy is retains by custom department, other is retained by port trust and the third is kept by the importer.
Economic risks faced by companies that want to expand their business globally are exchange controls, local content laws, import restrictions, tax controls, price controls, and labor problems (Cateora, Gilly & Graham, 2011). These risks can be just as harmful, in some cases, as the political risks faced. As implied by its title, import restrictions are limitations placed on certain goods being shipped in from another country. “There are especially tight import restrictions on goods with a potential to be hazardous” (Dugger, 2016). Many restrictions are placed on imports in order to protect and promote the domestic market within the host country. Tax controls are put into place primarily to generate revenue and operating funds. Unfortunately, many companies that attempt to expand their business overseas experience unreasonably high taxes. Elevated tax rates can also be seen as a form of protectionism in efforts to deter threatening foreign companies from entering their market, thus allowing domestic companies to
...MENT ENCOURAGEMENT OF GLOBAL BUSINESS FOREIGN GOVERNMENT ENCOURAGEMENT Governments also encourage foreign investment. The most important reason to encourage investment is to accelerate the development of an economy. An increasing number of countries are encouraging investments with specific guidelines toward economic goals. MNCs may be expected to create local employment, transfer technology, generate export sales, stimulate growth and development of the local industry. US GOVENRMENT ENCOURAEMENT The US government is motivated for economic as well as political reasons to encourage American firms to seek opportunities in the countries worldwide. It seeks to create a favorable climate for overseas business by providing the assistance by providing the assistance that helps minimize some of the troublesome politically motivated financial risks of doing business abroad.
Sukar, A., Ahmed, S., & Hassan, S. (n.d.). THE EFFECTS OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH. Southwestern Economic Review.
The country invests highly in its industrial base and it has a young, well educated workforce with full employment. In order to become more flexible and competitive the Government is helping to fund small and medium sized businesses and industries to set up in the country to improve the economic strength of the country.