the political economy of foreign direct investment

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The Political Economy

of Foreign Direct Investment



USMAN

SOHAIL

GOHAR

SHOAIB

WAQAS



Political Ideology and FDI



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.



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.



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.



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.



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



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



FDI: Cost of Home Country Out flow of capital

Trade Balance

Employment effect Example

U.S. VS. Mexico China



FDI: Benefits to the Host Country

Resource Transfer Effects

Employment Effects

Balance of Payment Effects

Effect on Competition



Resource Transfer Effects

Capital Technology Management



Employment Effects

Direct: hire host-country citizens

Indirect: jobs created by local suppliers



Balance of Payment Effects



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



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



Costs of FDI to Host Countries

Adverse effects on competition

Adverse effects on B-O-P

National Sovereignty and Autonomy



Adverse effects on competition

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

Example:

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



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.



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.



HOME COUNTRY POLICIES

HOST COUNTRY POLICIES



HOME COUNTRY POLICES

• ENCOURAGING OUTWARD FDI

• RESTRICTING OUTWARD FDI




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)




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



HOST COUNTRY POLICES

• ENCOURAGING INWARD FDI

• RESTRICTING INWARD FDI




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




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



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

the political economy of foreign direct investment

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