The University of Economics in Katowice/Poland

FOREIGN DIRECT INVESTMENTS

in Turkey FDI

The University of Economics in Katowice/Poland

Part OneForeign direct investment

– theoretical aspects

Intensive Programe Seminar of teachers and students1st-13th May 2006 HONIM / Brussels

The University of Economicsin Katowice/Poland

Authors: Anna Brzęska Anna Gandor

Edyta Tyc Artur Barski

Sławomir Czech

Session led by: PhD Joanna Czech-Rogosz

WHAT IS FDI ?

FOREIGN DIRECT

INVESTMENTSin Turkey

Some definitions

• an investment in one country by firms owned in another country.

• a flow of lending to, or purchase of ownership in, a foreign enterprise that is largely owned (at least 10 percent ownership) by residents of the investing country.

• the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. (Thus it is distinct from portfolio investment which may cross borders, but does not offer such control )

continued ....

•a firm based in one country (the 'home country') owning 10 percent or more of the stock of a company located in a foreign country (the 'host country') -- this amount of stock is generally enough to give the home country firm significant control rights over the host country firm. Most FDI is in wholly-owned or nearly wholly-owned subsidiaries. Other nonequity forms of FDI include: subcontracting, management contracts, franchising, and licensing and product sharing

•a long term commitment to marketing in a foreign nation through direct ownership of a foreign subsidiary or division

FDI is an activity in which an

investor resident in one country obtains a lasting interest in,

and a significant influence on the

management of, an entity resident in

another country

•creating an entirely new enterprise

•changing the ownership of existing enterprises

•reinvesting the earnings of the FDI enterprise

•other capital transfers

this may

involve

...and so on

A COUNTRY

AN INVESTOR

What can I offer?

What do I look for?

Will I take any advantages of the

investment?

Will I take any advantages of the

locatin?

FDI – the basic FDI – the basic questionsquestions

+/-

Foreign direct investment:

Greenfield Investments

Mergers and Acquisitions

Main tMain types of ypes of FDIFDI

What are the profits, and What are the profits, and what is the risk connected what is the risk connected with with Greenfield Greenfield InvestmentsInvestments

Greenfield Greenfield InvestmentsInvestments

other words, direct investment in new facilities or the expansion of existing facilities.

•they create new production capacity and jobs

•they transfer technology and know-how

•they can lead to linkages to the global marketplace

On one hand, they are the

primary target of a host nation’s

promotional efforts because:

On the other hand, there is a risk connected with greenfield

investments because:

• they crowd out local industry, multinationals are able to produce goods more cheaply and usurp resources

•profits from production do not feed back into the local economy, but instead to the multinational's home economy

Mergers and Mergers and AcquisitionsAcquisitionsoccur when a transfer of existing assets from local firms to

foreign firms takes place, this is the primary type of FDI..

Cross-border mergers

occur when the assets and operation of firms from different countries are combined to establish a new legal entity.

Cross-border acquisitions

occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company.

Unlike greenfield investment, acquisitions provide no long term

benefits to the local economy

How to measure How to measure FDIFDI

financial investment real activity of foreign flows and stocks, affiliates in host countries

2 ways:

FDI takes place when three sets of determining factors exist

simultaneously:

Ownership Ownership specific specific

advantagesadvantages

Location Location specific specific

advantagesadvantages

InternalizationInternalization incentive incentive

advantagesadvantages

for the host for the host

countrycountry

for the for the

investorinvestor

The Advantages and

Disadvantages of FDI can be:

What are the advantages and disadvantages of FDI for the investor?

For an investorADVANTAGES DISADVANTAGES

•Jumping the tariff wall (and other non- tariff barriers)

•Securing access to minerals located in the host country

•Lower wage in host developing countries for labor.

•Protection of market shares in exports if MNE's competitors also have established plants

•Travel/communications costs more abroad.

•Investor doesn`t have a close familiarity with local business scene in general

•The MNEs face risks such as exchange rate changes, expropriation by the government etc. can be taken against them.

•Language and culture are different

•Higher wages/benefits must be paid to the personnel going abroad.

What are the advantages What are the advantages and disadvantages of FDI and disadvantages of FDI for the host country?for the host country?

For the host country ADVANTAGES DISADVANTAGES

• Increased productivity: due to technology transfer, or due to improved managerial, technical skills.

• Relieving unemployment in the host country.

• Possibility of earning foreign exchange with sale/export of FDI produced goods abroad.

• Weakening the power of domestic monopolies at home.

• Some MNEs are larger/more powerful than the countries they invest in--the danger of a foreign monopoly power

• Only low level skill develop in the host country

• Profits of MNEs are repatriated.

What detWhat deteermines rmines FDI in the host FDI in the host country ?country ?

The The key key determinandeterminants of FDI for ts of FDI for the host the host country country are:are:

• Economic Economic

conditions conditions

MarketsMarkets

ResourcesResources

CompetitivenesCompetitivenesss

• Host Host

country country

policiespolicies

Macro policiesMacro policies

Private sectorPrivate sector

Trade and Trade and industryindustry

FDI policiesFDI policies

• MNEMNE

strategies strategies Risk perceptionRisk perception

Location, Location, sourcingsourcing

Economic Economic conditionsconditions

Markets:Markets:

Resources:Resources:

CompetitiveneCompetitivenesss:s:

--size; -income levels; -urbanization; -stability and growth prospects; -access to regional markets; -distribution and demand patterns.-natural resources; -location-labour availability, -cost, skills, train ability; -managerial, technical skills; -access to inputs; -physical infrastructure; -supplier base; -technology support.

Host country Host country policiespolicies Macro policies:Macro policies:

Trade & industry:Trade & industry:

FDI policies:FDI policies:

-promotion of private ownership; -clear and stable policies; -easy host country policies entry/exit policies; -efficient financial markets; other support

-ease of entry; -ownership, incentives; -access to inputs; -transparent and stable policies.

Private sector:Private sector:

-trade strategy; -regional integration and access to markets; -ownership controls; -competition policies;

-management of crucial macro variables; -ease of remittance; -access to foreign exchange.

MNE strategiesMNE strategiesRisk perceptionRisk perception

Location & sourcingLocation & sourcing

•macro management, •labour•policy stability. •perceptions of country risk, based on political factors,

•company strategies on location, •sourcing of products/inputs, •integration of affiliates, •training, •technology transfer.

What determines FDI for the investor?, what are the strategic motives for FDI?

Market seeking

•Skilled labor•Quality education and research institutes•Innovativeness capacity•High level of R&D

•Market size •Market growth•Access to other markets•Consumer preferences•Structure of markets•Strength of domestic business•Cost of resources and assets depended on

labor productivity•Other costs like transportation or intermediate products•Membership of integration area – availability of economies of scale

Efficiency seeking

Resource seeking

•Abundance of raw materials •Low costs•Unskilled labor

Asset seeking

Strategic motives for FDIStrategic motives for FDI

Literature:

1. World Investment Report 2005.Transnational Corporations and the Internationalization of R&D United Nations, New York and Geneva 2005

2. M. Frenkel, G. Stadtmann: Foreign Direct Investment: Theory, Empirical Evidence and Policy Implications. Verlag für Wissenschaft und Forschung, 2003

3. W. J. Jansen, A. Stokman: Foreign direct investment and international business cycle comovement. European Central Bank, Frankfurt am Main 2004

Thank you for your attention!!

Have a nice day!