the political economy of foreign direct investment

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The Political Economy 

of Foreign Direct Investment 

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USMAN

SOHAIL

GOHAR 

SHOAIB

 WAQAS

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Political Ideology and FDI

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The Radical View

Marxist view:MNE’s exploit less-developed host countries.

1. Extract profits.

2. Give nothing of value in exchange

 3. Instrument of domination, not development.

4. Keep less-developed countries relatively backward and dependent on capitalist nationsfor investment, jobs, and technology.

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The Radical View 

By the end of the 1980s radical view was inretreat. 

1. Collapse of communism.

2.Bad economic performance of countries thatembraced the radical view.

 3.Strong economic performance of countries whoembraced capitalism rather than the radical view.

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The Free Market View Nations specialize in goods

and services that they canproduce most efficiently.

Resource transfers benefitand strengthen the hostcountry.

Positive changes in lawsand growth of bilateralagreements attest to

strength of free market view.

 All countries impose some

restrictions on FDI.

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Trinidad and Tobago, a recipient of substantial FDI

inflows in its natural gas. 

Lou Anne A. Barclay 

FDI inflows in its natural gas industry for thelast decade.

FDI-assisted development only occurs when

governments in less-developed economiespursue credible, selective intervention policies.

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Pragmatic Nationalism

FDI has benefits and costs.

 Allow FDI if benefits outweigh costs. 

Block FDI that harms indigenousindustry 

Court FDI that is in national interest  Tax breaks Subsidies

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FDI: Home Country Benefits Improve Balance of Payment

Create Demand Employment opportunity 

Example:

 Japes VS. Europe

Increase Knowledge from operating in foreignenvironment

Example:

General Motors VS. Ford

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FDI: Cost of Home Country  Out flow of capital

Trade Balance

Employment effect Example

U.S. VS. Mexico China

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FDI: Benefits to the Host Country 

Resource Transfer Effects

 Employment Effects

 Balance of Payment Effects

 Effect on Competition

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Resource Transfer Effects

Capital Technology Management

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Employment Effects

Direct: hire host-country citizens

Indirect: jobs created by local suppliers

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Balance of Payment Effects 

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Initial Capital Inflow

 When a company invests in a foreign country, it bringscapital into that country 

Substitute for Imports To the extent that the goods/services produced by the

FDI substitute for imported goods/services, there is apositive effect on B-of-P

Inflow of payments from export of goods andservices

To the extent that the goods/services produced by theFDI are exported to another country, there is a positiveeffect on the host country’s B-of-P

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Effect on Competition and Economic Growth

FDI can increase competition which stimulatescapital investment by domestic firms resulting inincreased:

consumer choices and lower prices

growth in productivity growth

product and process innovations

economic growth

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Costs of FDI to Host Countries

 Adverse effects on competition

 Adverse effects on B-O-P

National Sovereignty and Autonomy 

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 Adverse effects on competition 

MNEs may have “too much” power and kill of competition

Example:

Hindustan Lever Ltd & Tata Oil mills & Ice Cream Co.

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 Adverse effects on B-O-P 

 After initial flow of capital subsequently out flow of capital from earning of FDI.

FDI may import input from abroad

Example:

 Japans Auto Company & U.S.

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National Sovereignty and Autonomy 

Key Decision that effect the host country economy’smay be made by foreign parent that has no realcompetent to host country.

Example:

France & U.S.

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HOME COUNTRY POLICIES

HOST COUNTRY POLICIES

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HOME COUNTRY POLICES

• ENCOURAGING OUTWARD FDI

• RESTRICTING OUTWARD FDI

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HOME COUNTRY POLICIES

Encourage Outward FDI

Govt backed insurable programs

Special funds or bank loans

Eliminate double taxation

Political influence to relax restriction

Toys “R ” Us (Japan & US) 

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HOME COUNTRY POLICIES

Restrict Outward FDI Limit capital outflows & Balance of payment

Manipulate tax rules for local firms

Restrict on political reasons

Iran & Cuba & South Africa

Example:

Britain used exchanged control regulations

Make difficult for local firms to FDI Cooperation tax system on British companies

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HOST COUNTRY POLICES

• ENCOURAGING INWARD FDI

• RESTRICTING INWARD FDI

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HOST COUNTRY POLICIES

Encourage Inward FDI

Incentives (Tax , loan, grants or subsidies)

To gain resource transfer and Employment

To capture away from other countries

Example:

Toyota(Britain , France)

US States Govts to FDI Kentucky offer Packages

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HOST COUNTRY POLICIES

Restrict Inward FDI

Ownership restraints

Excluded from specific fields

Significant proportion of equity of subsidiary 

Example: Us airline , India media business

Resource transfer & employment

Performance requirements

Related to local content ,exports ,participation

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INTERNATIONAL INSTITUTIONS AND THE

LIBERALIZATION OF FDI• WTO

• Push liberalization of regulations governing FDI

• Two MNA reached to trade in telecommunication &

financial services• Malaysia India rejects efforts

• OECD

• Wealthy nations

•

Share experience, discuss problems, seek solutions• EU countries

• MAI

• US refused restrict foreign TV programs, Music

• Environmental and Labor groups

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