document 1... mini thesis final 2
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FOREIGN DIRECT INVESTMENT AND ITS IMPACT ON EMPLOYMENT
Literature
Foreign direct investment (FDI) refers to long term participation by country A into
country B. It usually involves participation in
management, joint-venture, transfer of technology and expertise. There are two types of
FDI: inward foreign direct investment
and outward foreign direct investment, resulting in a net FDI History
Foreign direct investment (FDI) is a measure of foreign ownership of productive assets,
such as factories, mines and land.
Increasing foreign investment can be used as one measure of growing economic
globalization. Figure below shows net inflows
of foreign direct investment. The largest flows of foreign investment occur between the
industrialized countries (North America,
Western Europe and Japan). But flows to non-industrialized countries are increasing
sharply.
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US International Direct Investment Flows:[1]
Period FDI Outflow FDI Inflows Net
1960-69 $ 42.18 bn $ 5.13 bn + $ 37.04 bn
1970-79 $ 122.72 bn $ 40.79 bn + $ 81.93 bn
1980-89 $ 206.27 bn $ 329.23 bn - $ 122.96 bn
1990-99 $ 950.47 bn $ 907.34 bn + $ 43.13 bn
2000-07 $ 1,629.05 bn $ 1,421.31 bn + $ 207.74 bn
Total $ 2,950.69 bn $ 2,703.81 bn + $ 246.88 bn
A foreign direct investor may be classified in any sector of the economy and could be any
one of the following:[citation
needed
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an individual;
a group of related individuals;
an incorporated or unincorporated entity;
a public company or private company;
a group of related enterprises;
a government body;
an estate (law), trust or other societal organisation; or
any combination of the above.
The foreign direct investor may acquire 10% or more of the voting power of an enterprise
in an economy through any of the
following methods:
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by incorporating a wholly owned subsidiary or company
by acquiring shares in an associated enterprise
through a merger or an acquisition of an unrelated enterprise
participating in an equity joint venture with another investor or enterprise
Foreign direct investment incentives may take the following forms:citation
needed
low corporate tax and income tax rates
tax holidays
other types of tax concessions
preferential tariffs
special economic zones
EPZ - Export Processing Zones
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Some countries have put restrictions on FDI in certain sectors. India, with its restriction
on FDI in the retail sector is an
example.In a country like India, the walmartization of the country could have
significant negative effects on the overall
economy by reducing the number of people employed in the retail sector (currently thesecond largest employment sector
nationally) and depressing the income of people involved in the agriculture sector
(currently the largest employment sector
nationally).
Foreign direct investment in the United States
"Invest in America" is an initiative of the Commerce department and aimed to promote
the arrival of foreigners investors to the
country.
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The Invest in America policy is focused on:
Facilitating investor queries.
Carrying out maneuvers to aid foreign investors.
Provide support both at local and state levels.
Address concerns related to the business environment by helping as an ombudsman inWashington Dc for the international
venture community.
Offering policy guidelines and helping getting access to the legal system.
The United States is the worlds largest recipient of FDI. More than $325.3 billion in FDI
flowed into the United States in 2008,
which is a 37 percent increase from 2007. The $2.1 trillion stock of FDI in the United
States at the end of 2008 is the
equivalent of approximately 16 percent of U.S. gross domestic product (GDP).55
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Benefits of FDI in America: In the last 6 years, over 4000 new projects and 630,000 new
jobs have been created by foreign
companies, resulting in close to $314 billion in investment.[citation needed] Unarguably,
US affiliates of foreign companies
have a history of paying higher wages than US corporations.[citation needed] Foreign
companies have in the past supported
an annual US payroll of $364 billion with an average annual compensation of $68,000
per employee: citation needed
Increased US exports through the use of multinational distribution networks. FDI has
resulted in 30% of jobs for Americans in
the manufacturing sector, which accounts for 12% of all manufacturing jobs in the US.[5]
Affiliates of foreign corporations spent more than $34 billions on research and
development in 2006 and continue to support
many national projects. Inward FDI has led to higher productivity through increased
capital, which in turn has led to high living
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standards.
Foreign direct investment in China
FDI in China has been one of the major successes of the past 3 decades. [citation needed]
Starting from a baseline of less
than $19 billion just 20 years ago, FDI in China has grown to over $300 billion in the
first 10 years. China has continued its
massive growth and is the leader among all developing nations in terms of FDI. [citation
needed] Even though there was a
slight dip in FDI in 2009 as a result of the global slowdown, 2010 has again seen
investments increase. [citation needed] The
Chinese continue to steam roll with expectations of an economic growth of a 10% this
year.
Types of Foreign Direct Investment: An Overview
FDI or Foreign Direct Investment is any form of investment that earns interest in
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enterprises which function outside of the
domestic territory of the investor.
FDIs require a business relationship between a parent company and its foreign subsidiary.
Foreign direct business
relationships give rise to multinational corporations. For an investment to be regarded as
an FDI, the parent firm needs to
have at least 10% of the ordinary shares of its foreign affiliates. The investing firm may
also qualify for an FDI if it owns
voting power in a business enterprise operating in a foreign country.
FDIs can be broadly classified into two types: outward FDIs and inward FDIs. This
classification is based on the types
of restrictions imposed, and the various prerequisites required for these investments.
An outward-bound FDI is backed by the government against all types of associated risks.
This form of FDI is subject to
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tax incentives as well as disincentives of various forms. Risk coverage provided to the
domestic industries and subsidies
granted to the local firms stand in the way of outward FDIs, which are also known as
'direct investments abroad.'
Different economic factors encourage inward FDIs. These include interest loans, tax
breaks, grants, subsidies, and the
removal of restrictions and limitations. Factors detrimental to the growth of FDIs include
necessities of differential
performance and limitations related with ownership patterns.
Other categorizations of FDI exist as well. Vertical Foreign Direct Investment takes place
when a multinational
corporation owns some shares of a foreign enterprise, which supplies input for it or uses
the output produced by the
MNC.
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Horizontal foreign direct investments happen when a multinational company carries out a
similar business operation in
different nations.
Foreign Direct Investment is guided by different motives. FDIs that are undertaken to
strengthen the existing market
structure or explore the opportunities of new markets can be called 'market-seeking FDIs.'
'Resource-seeking FDIs' are
aimed at factors of production which have more operational efficiency than those
available in the home country of the
investor.
Some foreign direct investments involve the transfer of strategic assets. FDI activities
may also be carried out to ensure
optimization of available opportunities and economies of scale. In this case, the foreign
direct investment is termed as
'efficiency-seeking.'
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Introduction
Declaration. In the FDI Council, she led the governance task force from 2003 to 2004 and
became President-Elect in 2003 and President in 2005.
Maurice Kugler is a Colombian economist born in 1967. He received his Ph.D. in
Economics from UC Berkeley in 2000, as well as a M.Sc.(Econ) and a B.Sc. (Econ) both
from the London School of Economics. He was named in 2007 to the inaugural CIGI
Chair in International Public Policy by the Laurier School of Business and Economics. In2008, CIGI, the Centre for International Governance Innovation, is jointly with
University of Waterloo and Wilfrid Laurier University launching the Balsillie School for
International Affairs, under the sponsorship of the entrepreneur and philanthropist Jim
Balsillie.In his work on spillovers from foreign direct investment (FDI), Kugler has
shown that the presence of multinational corporation affiliates (MNC) can yield
technological opportunities for host country producers in upstream sectors, especially
when the MNC subsdiary is an exporter and the potential spillover recipient firm has
absorptive capacity to adopt new technology. When subsidiaries and local firms are
connected through the production chain, then FDI generates transmission of
technological knowhow as input suppliers are the recipients of information from their
clients.
A study on the link between labor migration and FDI shows them to be complementary
rather than substitutes as standard trade theory would suggest. In a neoclassical model,
for the capital-labor ratios to equalize, in the presence of factor mobility, either jobs flow
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to workers in the form of capital inflows or workers flow to jobs in the form of migration,
in countries with relatively low capital-labor ratios. In this context, migration and FDI
would be substitutes. However, if migration leads to information flows about investment
opportunities in the origin country of workers entering the labor force in their destination
country, there can be a dynamic complementarity between migration and subsequent
FDI.
The shutdown of an FDI enterprise established for natural resources exploration
The recommendation in paragraph 383 of BPM5 is that "expenditures of direct
investment enterprises established for exploration of minerals and other natural resources
in an economy are treated as capital expenditures (fixed capital formation)." In addition,
the text stipulates that "if the exploration proves unsuccessful and results in a shutdown
of the enterprise, no further balance of payments entries are recorded. Rather, a negative
stock adjustment is made in the direct investment position of the direct investor in the
host economy, and an equal reduction is made in the liability position of that economy tothat of the direct investor. (Both adjustments fall under the heading other adjustments in
the international investment position.)" Paragraph 60 of the OECD Benchmark Definition
of Foreign Direct Investment (Benchmark) uses similar language.
However, some balance of payments compilers have argued that a stream of negative
reinvested earnings flows should be recorded in the current account of the host economy
over a number of years until the stock of fixed capital corresponding to the total
exploration expenditures of the direct investment enterprise has been fully amortised as
consumption of fixed capital, with corresponding entries recorded for the investing
economy. Such treatment would be consistent with the System of National Accounts 1993
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recommends that the capitalized exploration costs should be amortized as consumption of
fixed capital over the average service lives of such exploration assets. According to that
argument, the direct investment enterprise continues to exist and the equity value remains
until it is fully amortized. Each year, the direct investment enterprise will have negative
reinvested earnings equivalent to the amortization of the exploration asset. If the
amortization approach is not adopted, there is an asymmetric treatment of unsuccessful
expenditures in natural resources exploration in the host economy's national balance
sheets, as such expenditures of "national" enterprises would be amortized whereas those
of direct investment enterprises would be written-off.
It is important to note that this last recommendation overturns the practice described in
the BOP Textbook , which excludes from the FDI data transactions between nonfinancial
FDI enterprises and affiliated SPEs with the sole purpose of financial intermediation. The
effect of the recommendation is that there will no longer be any difference in the
treatment of SPEs that have the sole purpose of financial intermediation and SPEs that
have the primary purpose of financial intermediationthe FDI data are to include both
(i) transactions between nonfinancial FDI enterprises and affiliated SPEs with the sole
purpose of financial intermediation, and (ii) transactions between nonfinancial FDI
enterprises and affiliated SPEs with the primary purpose of financial intermediation.
The Committee also agreed that, in light of concerns expressed by some members of the
OECD and ECB groups, the decision about the inclusion in the FDI data of financial
transactions between units that are not financial intermediaries and affiliated financial
SPEs abroad would be re-examined in the context of the next revision of the Balance of
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Payments Manual. In the meantime, countries that exclude such transactions from the
direct investment data are encouraged to explain their practices and if possible to publish
memorandum items to facilitate international comparability.
Payments associated with the acquisition of a right to undertake a direct investment
In many developing or transition economies, the government requires the payment of a
fixed amount of money by direct investors for the right to undertake a direct investment
in the host economy. Often, but not always, these operating or concession rights are
related to the extraction of natural resources. In transition economies, compilers refer to
these payments as "bonuses". They are legal transactions and should not be associated
with poor governance. The issue was to determine whether or not such bonuses constitute
direct investment transactions and to recommend a common recording practice for such
transactions.
Data
VisionPLUS is a transaction processing software application from First Data
International (FDI). Originally developed by the Paysys Research and Development
Group, this application is mainly used for credit card transaction processing by
multinational banks and transaction processing companies. Banks use this application to
store and process credit card accounts and process transactions (Visa, Mastercard,
American Express, Europay, private label transactions). The rough estimate of number of
cards processed on different versions of this application software around the world is 350
million.
Modules
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VisionPLUS is an account processing system. VisionPLUS consists of modules that work
together to manage a companys credit processing environment. The main modules of
Visionplus include:
* Credit Management System (CMS) - account processing module
* Collections Tracking Analysis (CTA) - delinquent collections module
* Account Services Management (ASM) - customer services module
* Financial Authorisation System (FAS) - financial authorisations module
* Letters tracking System (LTS) - letter generation module* Security Sub System (SSC) - user access control module
* Interchange Tracking System (ITS) - dispute tracking module
* Transaction Management System (TRAMS) - front-end processor
* Merchant BankCard System (MBS) - merchant acquiring system
* VisionPLUS Messaging eXchange (VMx) - XML messaging gateway to
VisionPLUS
* Hierarchy company system (HCS) supports commercial card clients
* Loyalty Management System (LMS) - Managing of loyalty points based on
transactions done.
* Direct Payment Utility (DPU) Tool for recurring and one-time payment,
which provides different payment options and allows for processing and managing
balance transfer.
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Litrature review
DPU is now included as part of CMS-Latoo
Visionplus offers banks the flexibility to have their own features and functionalities. Out
of the above modules CMS plays an important part, as all account related activities are
posted in the CMS module.
Literature review
The VisionPlus Software was introduced by Paysys International Inc. in 1996. In 2001,
FDI acquired Paysys and since then VisionPlus is an FDI product.[edit]Versions
1983 CardPac was released by CCS. Its main market was the bankcard industry (Visa and
MasterCard transaction processing only).
1988 Vision21 was released for the private label card market by CCSI
1991 VisionPLUS for both private label and bankcard market by CCSI
1998 VisionPLUS 2.5 was released by Paysys
2000 VisionPLUS 8.0 was released by Paysys
2006 VisionPLUS 8.01 was released by First Data
2007 VisionPLUS 8.15 was released by First Data
2008 VisionPLUS 8.17 was released by First Data
The current version is 8.34.
A 1997 review of countries' practices for compiling data on foreign direct investment
(FDI) transactions indicated that the treatment of three types of FDI transactions cause
confusion among compilers:
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Transactions with affiliated financial intermediaries
Payments associated with the acquisition of a right to undertake a direct investment
The shutdown of an FDI enterprise established for natural resources exploration
Methodology
Following consultations with the OECD and ECB groups, the Committee decided at its
October 2001 meeting that the recommended treatment of payments for the right to
undertake a direct investment is to be as follows:
The contra-entry to the payment of a rent (bonus) by a non-resident investor to the
government authorities should be recorded under direct investment when there is a
clear intention to establish a direct investment enterprise (such as in the case of a
contractual arrangement between the investor and the government).
The contra-entry to the payment of a rent by a non-resident enterprise, when no
direct investment enterprise is or will be established, should be recorded under
"income; investment income; other investment" until a "rent" sub-component of
income is included in the balance of payments manual. Rent would be paid by non-
resident enterprises when they make payments to exploit movable natural resources
such as in the case of tree cutting rights or fishing rights in a country's territorial
waters.
The New Economic Partnership for Africas Development (NEPAD) recorded that in the
1990s, regulatory and other reforms have been introduced by a number of governments to
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make their economies more attractive to foreign investors. Today, these regulatory
conditions are on a par with those in other developing countries. For example, many more
countries now allow profits to be repatriated freely or offer tax incentives and similar
inducements to foreign investors. Many African countries have investment promotion
agencies (IPAs), to assist these investors. And yet, no FDI has come to Africa (in fact,
capital has flown out of Africa see below). A former Minister of Finance of an African
country said: We have removed our shirt and trousers to attract FDI; what more do they
expect us to do?
As for South Africa that has rapidly liberalised its trade and investment regimes since
independence, capital has left the country rather than coming in. As the London
Economist, in a special survey of South Africa in 2001, recorded:
And by the standards of other countries, South Africa has lured relatively little
foreign direct investment: $32 per head in 1994-99, compared with $106 for Brazil,
$252 for Argentina, $333 for Chile. At the same time, money has been leaving
South Africa: the $9.8 billion it invested abroad in 1994-99 exceeded the inward
flow by about $1.6 billion. And its big companies, long confined by apartheid's
isolation, are now anxious to seek stock-exchange listings abroad. So in the past
few years, Anglo American (mining), Billiton (mining), Old Mutual (insurance),
South African Breweries and Dimension Data (a hugely successful information-
technology company) have all sought primary listings elsewhere.
Results
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he panel presentation titled South-South FDI vs. North-South FDI: Southern
Perspectives explored the hypothesis that South-South FDI differs from North-South
FDI in two main respects: (i) because the investing firms are less risk-averse given their
familiarity (in their home country) with similar operating environments to that of the
receiving country; and (ii) because the efficiency, technology, skill, product quality, etc.
'gaps' between investor and receiving country are smaller. IDRCproject participants in
the panel included Stephen Gelb (Edge Institute, South Africa), Nguyen Thang (Vietnam
Academy of Social Sciences), and Rajiv Kumar (Indian Council for Research on
International Economic Relations).
The session, chaired by David Kaplan of University of Cape Town, focused on two
questions: are southern firms more willing to invest in other developing countries, and do
they provide more potential for positive spillovers and benefits to host countries? Dr.
Gelb noted that analysis of inward FDI inflows (investment coming into a country by
foreign firms) in Kenya, Uganda and South Africa does not support an affirmative
response to either question. Similarly, Dr. Thangs analysis of inward FDI inflows into
Vietnam does not provide clear evidence on the technology spillover advantages,
although familiarity with the region and with the culture seem to have played a vital role
in shaping the FDI landscape in Vietnam.
The session featured preliminary results of the following IDRC supported projects:
1) Foreign Direct Investment Behaviour in Low and Middle Income Countries , and
2) South-South Links: Third World Multinationals and Development in South Africa,
http://www.idrc.ca/ggp/ev-97587-201-1-DO_TOPIC.htmlhttp://www.idrc.ca/ggp/ev-89664-201-1-DO_TOPIC.htmlhttp://www.idrc.ca/ggp/ev-89664-201-1-DO_TOPIC.htmlhttp://www.idrc.ca/ggp/ev-97587-201-1-DO_TOPIC.html -
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East Africa and India (for an overview on the work of these projects, click on the links
above).
The panel was held on June 10 in Cape Town as part of the Annual Bank Conference on
Development Economics (ABCDE). The ABCDE conference as a whole was on the
overarching theme of People, Politics & Globalization and combined plenary sessions
with over 20 parallel sessions on a wide range of topics.
Conclusion
The reigning orthodoxy in neo-liberal economics
The reigning orthodoxy in neo-liberal economics on FDI boils down to five canonical
truths:
FDI is necessary for the development of the Third World.
Without FDI there will be no growth.
FDI brings inter alia efficient management of resources, technology, a culture of competition, and access to global markets.
Nobody is forcing the South to seek FDI; the governments themselves want it.
The private sector is the engine of growth; hence countries in the South must deregulate
their economies, and privatise state assets as fast as possible.
More than 90% of literature, and third world government policies, are dominated by this
view. In a brief paper, it is not necessary to repeat the arguments. The principal argument,
simply stated, is the following: Aid and loans in the 1960s and 70s created aid
dependency and the debt crisis in the 1980s and 90s. FDI is the best source of
development finance, on the grounds, among other, that it is self-liquidating since foreign
http://www.idrc.ca/ggp/ev-89664-201-1-DO_TOPIC.htmlhttp://www.idrc.ca/ggp/ev-89664-201-1-DO_TOPIC.html -
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investors have to show profits for the host country as well as for themselves; and it does
not lead to debt overhang.
b) FDI is neither good nor bad; it all depends on how you deal with it
A more qualified proposition is made (e.g. in the Oxfam Briefing paper) that properly
regulated FDI can bring growth, jobs, technology, skills, market a
ccess and development; that its negative effects must be balanced with its good effects; or
that FDI must be "sequenced", or be subject to some kind of Tobin Tax. FDI is neither
good nor bad; it all depends on how you deal with it. This view is now becoming popular
in many circles, including some reformed neo-liberal economists, especially after the
East Asian and Argentina crises of 1997 2001.
c) Aid Created Debt Crisis; FDI Will Create An Even Greater Crisis Of
Development
More recent empirical evidence suggests a completely different picture. Analysts like
David Woodard argue that if aid created the debt crisis, FDI will create an even greater
crisis of development, looming not in too distant future. This view challenges both the
reigning neo-liberal orthodoxy, and the above stated more qualified perspective. The
view is further explored below in the next section.
d) FDI is Not a Development Tool at all; it is a Response to Systemic Crisis of the
Developed Countries
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A more radical alternative view is presented in a separate SEATINI Fact Sheet (What is
FDI? ). It argues that FDI, essentially, is a tool (one among many) in the economic
arsenal of the developed industrialised countries in their overall strategy to control the
resources and markets of the South. This control is necessary in order for Western
corporations to counter against the downward pressure that is continually exerted by
workers on Corporate profitability. FDI is a means to resolve the Wests own systemic
contradictions. Contrary to its claim, it is not a means to assist the developing countries.
However, FDI is well marketed by the West through development literature and
through institutions such as the IMF, the World Bank, the WTO, and even the UNCTAD.
2. Does FDI Bring Development ? The Experience of Mexico, East Asia and
Argentina
Mexico, Thailand, Indonesia, the Philippines, Malaysia and Argentina are among the
countries often cited by the World Bank, the IMF and mainstream economists as model
countries that opened their doors to free trade and free flow of capital on the assumption
that these would bring development to them. What has been their experience?
In 1995, Mexico faced a payments crisis, and there was a run on the banks. The economy
took a downward spin, and the middle classes took the brunt of the crisis. As for the
distressed American banks, they were baled out by the US Treasury. The tequilafactor reverberated disconcertingly for several months in the region. Since 1995, Mexico
liberalised further its trade and investment regimes. It is now facing massive
deindustrialisation and joblessness.
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debt crisis, arise because of capital inflows are insufficient to cover current account
deficits. When this is reached, capital inflows fell sharply, compounding the problem....
(However) vulnerability to financial crisis is primarily associated with large current
account deficits, the associated accumulation of foreign exchange liabilities (which in
turn add to the deficits), and a resulting acute dependence on foreign capital to finance
the deficits.
The truth about FDI is that, like drug addiction, it creates dependency the more FDI a
developing country secures, the more it needs to service it and keep the system going.
Woodward writes:
Simplistically, FDI flows may be seen as equivalent to borrowing at an interest rate of
16-18% p.a. for developing countries as a whole, and 24-30% in sub-Saharan Africa, so
that net outward resource transfers can only be avoided by allowing inward FDI stocks to
grow at this rate. This implies a rapid expansion relative to the ability to meet the foreign
exchange costs.
Drawing from the experience of Malaysia, Woodward reckons that when the FDI stocks
(as opposed to flow) in a developing country reaches 48% of GDP (which in many
African countries it has), then it is in the crisis zone. Indeed, the danger point for
other developing countries may be significantly below 48%
Woodward, at the time of his study, had not considered the case of Argentina, which it
turns out, proves his point. Argentina has long been modelled by the IMF/WB experts as
the paragon of the Washington Consensus, an exemplary country that had abolished trade
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barriers, had opened itself up to the free inflow and outflow of capital, had tied its
currency to the US dollar (the Currency Board Automatic Adjustment Mechanism), had
privatised practically everything, from banks to malls, to attract FDI. In December 2001
the model collapsed like a pack of cards. The country simply disintegrated in a morass
of economic, social and political chaos following the default on $155 billion of debt - the
largest in history.
If the developing countries do not take heed of the evidence before their very eyes, and
their leaders continue to peddle the idea that somehow FDI will get their countries out of
the poverty trap, then one of two conclusions follow. Either they are persuaded by the
incessant misinformation by Bretton Woods institutions and neo-liberal economists
among their own ranks, or they are too desperate, and cannot think of any alternative way
out of their poverty trap.
3. The Truth About FDI in Africa
There is an argument that Africa has fallen behind other countries because it does not
have conditions adequate to attract FDI.
The truth is that Africa has done more to oblige overseas investors than almost any other
continent, and yet investments have gone to other continents. In Africa, it has gone
primarily to countries like Angola - because of its oil and in spite of over three decades of
instability. Nothing has come to those countries, such as Zambia, that have almost fully
liberalised their investment regimes far more than say China or India.
References
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^ Sridhar, V., and Vijay Prashad. 2007. Wal-Mart with Indian Characteristics.
CONNECTICUT LAW REVIEW 39 (4):1785-1803.
^ Sridhar, V., and Vijay Prashad. 2007. Wal-Mart with Indian Characteristics.
CONNECTICUT LAW REVIEW 39 (4):1785-1803.
^ U.S. Reforms Promote Openness Retrieved on 2010-03-10
^ Foreign Direct Investment Facts and Myths Retrieved on 2010-03-10
^ Benefits of FDI The International Trade Administration. Retrieved on 2010-03-10
^ Foreign direct investment in China jumps 32% CBC Canada. Retrieved on 2010-
03-10
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Appendix
1. Litrature
2. Introduction
3. Literature Review
4. Data
5. Methodology
6. Conclusion
7. References