Factors Determining the Location of Foreign Direct Investment - Coursework Example

?FDI Final Report Contents Introduction 3 Company Profile 3 FDI Literature 4 Factors Determining the location of FDI 5 Argentina 6 Chile 7 Brazil 9 The country to choose: Justification 10 Conclusion 12 Reference List 13 Introduction When the developed countries of the west were facing the heat of the financial downturn, Latin America and the Caribbean islands were experiencing a surge in the flow of the Foreign Direct Investment which has greatly contributed in the financial and the industrial development of the nation. The figures were however lower than that in the previous year but the growth has been formidable. The region had experienced the greatest outward flow of foreign direct investment in the recent times (United Nations, 2008). A time has come when the world economic flow of FDI has shrunk by 15%. This implies the robust performance of the country in the complexity of the financial crisis. The factor which has been responsible for the growth in the FDI flows is the rise in the price of the commodities and has attracted further investment in the field of the natural resources (OECD, 1999). This paper will analyze in details the FDI inflows in three of the major Latin American countries namely Argentina, Brazil and Chile. The primary objective is to compare the environment of FDI in these three countries which can aid the prosperity of business in Latin America. This paper chooses the British retail giant, Tesco and captures the benefits that it can achieve, if it follows the FDI trails and makes its presence felt in the prospering economies of Latin America (Yapp and Paulo, 2011). For this purpose, the competitive advantage of the FDI flows of the countries will be discussed in details and the decision of choosing the country will be established. Company Profile Tesco is a British multinational department store selling grocery with its headquarters at Chestnut. It is one of the major players in its genre, ranking only second to Wal-Mart in terms of profit and third in terms of revenues after Wal-Mart and Carrefour. Presently, it operates in three of the continents, Asia, Europe and North America. The company has over the years diversified its portfolio to include a variety of services like, telecom, clothing, electronics, financial services and software. Considering the business boom that it had experienced in the recent years, it would be interesting to observe the benefits that it can derive from tapping the FDI inflows in the developing economies of Latin America. FDI Literature In Foreign Direct Investment, a firm invests in the manufacturing or service facility or any other type of its assets in a foreign country and retains effective control on it (Sagepublications, 2007). FDI implies a high level of commitment as the firm which chooses to enter has to remain in the foreign country for a long time, investing high quantity of resources (Froot, 2008). FDI can be done in two different ways which include mergers or acquisition and Greenfield investment. Recent times have seen a surge in the former type. There can be two different types of integration in FDI. One in which the firm invests in the same products in the foreign country that it produces in its own country and the other type, where it chooses to invest in the value chain of the firm (Ramondo, Rappoport and Ruhl, 2013). The nature of ownership also varies in the FDI. There can be partial acquisition of the existing firm or wholly-owned investment, in which the investor owns the foreign assets or equity joint ventures, in which both the parent firms come together to create a new legal entity by investing assets and share the ownership and profits (Hauswald and Hege, 2009). This process benefits the multinational organizations immensely as they can utilize the advantages of location and learn from each other’s structural differences. They can also leverage their learning and enhance their capabilities (Blonigen, 2005). There can be three different motives for following an FDI scheme which are market seeking motives, resource seeking motives or efficiency seeking motives (Bartels, Buckley and Mariano, 2009). Foreign Direct Investment is an integral recipe of success for economic development in the recent era of globalization. National policies and international investments play a very significant role in the attraction of FDI to the developing countries, which is primarily the reason why certain sectors or countries are highly successful in attracting the FDI and few others lack behind (OECD, 2002). The environment of the host country, the policy taken by the authority and the legal and the regulatory environment are the factors fuelling FDI in the host country. The transparency of attitude of the host country is the major determinant of bringing net inflows of FDI. (Navaretti, 2004). In this context, this paper will focus on the FDI environment of the three Latin American countries of Argentina, Brazil and Chile and analyze the country with the most investor friendly environment, as that could determine the move made by TESCO to establish its business in any of these countries. Factors Determining the location of FDI Theoretical and empirical researches have shown that various factors contribute in attracting FDI to a country. They can be broadly classified as the market factors, political factors, legal and regulatory framework of the country, the infrastructure of the country and economic factors. These factors had been derived from Dunning’s OLI model (Dunning, 2002), which explains the ownership, location, and internationalization advantages that can be enjoyed by a firm. The location specific advantages have three different types of motives: market seeking motive, the one which focuses on strengthening existing market or exploit new markets. The tariffs and other type of trade barriers sometimes make the foreign firms relocate production to the host country and the market size and market growth of the host country are the major determinants in this case (market factors). The other motive in the location specific advantage is the resource-seeking motive where the firm invests to acquire resources from abroad because of the availability of cheap labour force or the rich endowment of the country in natural resources and raw materials (Benacek and Visek, 2000). In the efficiency-seeking motive the firm wants to derive economies of scale and scope by maintaining common governance for their worldwide activities. Policies directed to the establishment of regional corporate networks and high transportation costs favour this kind of investment (Kinoshita and Campos, 2002). Apart from this, the political factors including the attitude of the government and general economic factors of the country will be discussed that can affect a potential move by TESCO. Argentina Market: The retailing industry in Argentina is currently facing governmental controls because of the high rates of inflation. The artificial imports have been raised recently to protect the local workforce and local industry. The government is the main driver of consumption by following expansionary monetary policy (PWC, 2007). Argentina’s retail industry has experienced wide fluctuations in the recent years. The year 2010 saw Argentina slip from its position, but it is now at the 25th position in the retail industry. The high rates of inflation around 12% mark remains a concern. The retail market of the country had not experienced any significant changes in the recent times, with only two or three major retailers dominating the market (A.T. Kearney Global Retail Development Index, 2011). The Political Factor: The country hosts around 500 U.S. companies which employ hundreds of Argentineans. However, the political attitude followed by the government in the recent times have slowed down the investment flow from the foreign countries and made the entry of the new entrants quite difficult (Wharton University of Pennsylvania, 2013). The stability of the contractual rights and the controls on the regulatory environment reduces the attractiveness of Argentina for investors. The import licensing followed by the government is also acting as an impediment for the country’s business development (Bureau of Economic and Business Affairs, 2013a). Economic Factors: Argentina has been experiencing rapid growth in the GDP in the recent times. In 2010, the growth rate of GDP had reached the 9% mark. The country has developed an export-led growth strategy in its export sector in addition to a diversified industrial base. Argentina had undergone a dynamic series of changes from a period when its economy was one of the strongest in the world (CIA, 2013c). The crisis of 2001 had weakened the economy greatly, after which it had made a slow but consistent recovery. The economic crisis of 2008-09 saw the inward flows of FDI fall by 50%, till it made a partial recovery in 2010 (Bureau Of Economic And Business Affairs, 2013a). The endowment of resources in crops, livestock and minerals are the major factors that can attract FDI in the country. The lack of a transparent legal environment for foreign investment and unpredictable fiscal policies are the main factors behind the lacklustre entry records of new firms (Caballero, 2011). Chile Market: The retail sector of Chile had a spectacular performance in the recent years. The country’s estimated growth of the retail sector in 2010 is expected to be around 10%. Presently, the retail market in Chile is one of the most competitive and vibrant one. The main driver of this growth is the growth in the income of the middle-class and the higher share of the expenditure of the urban population for retail commodities. This can be a driving factor for giant retailers to set up chains of shop in Chile (A.T. Kearney Global Retail Development Index, 2011). Political Factors: The Chile government has taken a transparent policy towards foreign trade that has heavily boosted the investment climate of the country (CIA, 2013b). The foreign entrants receive almost equal treatment compared to the local industries which provide a huge interest for the entrants. The main factor behind this robust performance is the straight forward policy followed by the Chilean government in the form of the codified law DL600 (Bureau of Economic, Energy and Business Affairs, 2011). The law has been into effect for more than forty years, providing a political stability regarding foreign investments. One interesting factor about Chile is, though the country has incorporated FDI-led growth strategies in its national policy, yet it never allows any special exemptions or rebates for attracting FDI. The straightforward policy is its main strength. Economic Factors: In the aftermath of the global financial crisis, the beginning of 2009 saw Chile experience a contraction in its economic growth. However, the country had managed to maintain a high level of GDP per capita growth. The Chilean economy is famous for its openness in trade (Poniachik, 2002). Chile has signed a host of trade agreements with other countries in the recent times which has improved its status of being a good trading partner. All this can provide incentives for the retailing giant, TESCO, to start its operations following the suit of a favourable trade environment. The political stability coupled with a high standard of living and favourable business environment has made Chile one of the most attractive FDI destinations for a host of goods and services. Brazil Market: The success story of Brazil is an incredible one. The country has undergone a roller-coaster ride in terms of global retail development. The country had risen from a poor rank of 30 to the top, from 2002 to the present period. The announcements of the 2014 FIFA World Cup and 2016 Olympic Games have been fuelling a steady flow of investments in the country. The increase in the purchasing power of the middle-class has hugely improved the spending on the consumption of retail commodities, which has resulted in the growth of the share of retail market (Bureau of Economic and Business Affairs, 2013b). Investments in the real estate market also have a multiplier effect on the retail investments. The retail sales through shopping malls accounts for one-fifth of the total retail sales and there has been a surge in the growth of shopping malls from 16 in 2010 to 30 in 2012 (Bureau Of Economic And Business Affairs, 2013b). Political Factors: The political environment in Brazil is highly investor-friendly, thereby making it the fifth most attractive destination for the investors. Among all the other Latin American countries, Brazil is the highest recipient of FDI. The government does not restrict FDI except for Aviation industry where a ceiling of 20% exists. The government considers the local and the foreigners to be alike regarding direct investment. The transparent political attitude followed by the government has been the driving force behind the growth of FDI. Economic Factors: After the global financial crisis, it took Brazil a period of two years to regain its normal pace (CIA, 2013a) and 2010 saw Brazil experience the highest growth, with GDP reaching 7.5% mark. In the recent years of 2011 and 2012, Brazil has again experienced a fall in its GDP growth because of high rates of inflation. However, Brazil holds the record of highest inflation rates which had been extremely successful in luring the foreign investors from other countries to flock the economy. The recent developments had adversely affected the competitiveness of the economy, thereby leading to a government intervention and raising the taxes on the FDI inflows. The country to choose: Justification In the previous section, the three countries have been discussed in details with special reference to the market structure in the retail industry along with the political environment and the economic factors that can influence the flow of FDI in the countries. In this section, the country that can be chosen for the business, along with the rationale for doing so, is to be discussed. The following graph shows the comparison of the country in terms of Global Retail Development Index. Figure 1: GRDI Index Performance (Source: A.T. Kearney Global Retail Development Index, 2011) The Y-Axis measures the economic and the political risks of conducting business in the country and the X-Axis shows the market potential of the country categorized in terms of ready-to-be considered(on the radar), to be considered and low priority. The size of the bubble indicates net retail sale. The analysis of the graph reveals that out of all the Latin American countries, Brazil has the highest share of net sales of the retail products. Chile can be also considered for the investment but the proportion of sales in Chile is much less compared to the Brazil. This makes Brazil score more over Chile and Argentina has very low potential for the investment in terms of FDI (Bayer and Fleischer, 2011). The political environment of both Chile and Brazil favours investments; however, Brazil has been selected to be the venue for FIFA World Cup and Olympic games. Therefore, this will increase the investments in various related activities and the result is evident from the growth in the investments (Bureau of Economic and Business Affairs, 2013b). Few experiences can be shared from the recent developments in Brazil. The expansion of Magazine Luiza, one of the largest home appliance retail and Arrezo (women’s shoe retailer) bears testimony to the fact that Brazil is proving to be one of the most significant and attractive destinations for retail growth. The chief factor behind this has been the relatively stable market conditions compared to the other countries. This is coupled with the pro-market-led growth strategy of the government (Fritsch and Franco, 1991). As has been discussed, the real estate growth of the Brazilian economy has also been significant in the recent years. This implies that the investments in the retail sector will grow further and provide opportunities to TESCO to set up factories in Brazil and launch the chain of stores to tap the growth potential. Also, two certain global multinationals, Burberry and Uniqlo, have plans to enter Brazil. All this reasons make Brazil an important destination for the global giant, TESCO, to open up their stores as presently, the scene is dominated by only two market players, Wal-Mart and Carrefour. Conclusion This paper has discussed in details the various factors, which are important in determining the flow of FDI in the countries. The task was to choose the Latin American country, which could be the best destination for a retail company to set up business in Latin America. The paper had chosen the British retail giant, TESCO, if it were to expand its business to Latin America. The analysis of the countries has revealed that the best country to be considered for the proposition is Brazil compared to Argentina and Chile. The market along with its political and economic factors, which are important in determining the flow of FDI in the developing countries, have revealed that the conditions for investment via FDI are best suited in Brazil. The report from World Global Retail Development Index has also shown that Brazil is the top-ranking country in terms of retail in entire Latin America. Reference List A.T. Kearney Global Retail Development Index, 2011. Retail Global expansion a portfolio of opportunities. [pdf] A.T. Kearney. Available at: [Accessed 9 December 2013]. Bartels, F. L., Buckley, P. and Mariano, G. 2009. Multinational Enterprises’ Foreign Direct Investment Location Decisions within The Global Factory [pdf] United Nations Industrial Development Organization. Available at: [Accessed 9 December 2013]. Bayer, W. and Fleischer, D. V., 2011. The Economies of Argentina and Brazil: A comparative perspective. Cambarley: Edward Elgar Publishing. Benacek, V. and Visek, J.A., 2000. Determining Factors And Effects Of Foreign Direct Investment In An Economy In Transition: Evidence from Czech Manufacturing in 1991-97. [pdf] ICSEAD Conference on Transition. Available at: [Accessed 11 December 2013]. Blonigen, B. A., 2005. 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Foreign Direct Investment for Development Maximising Benefits, Minimising Costs. [pdf] OECD. Available at: [Accessed 11 December 2013]. Poniachik, K. 2002. Chile’s FDI Policy: Past Experience And Future Challenges. [pdf] OECD. Available at: < http://www.oecd.org/investment/investmentfordevelopment/2764423.pdf> [Accessed 11 December 2013]. PWC, 2007. Argentina. [pdf] PWC. Available at: [Accessed 11 December 2013]. Ramondo, N., Rappoport, V. and Ruhl, K. J., 2013. Horizontal versus Vertical Foreign Direct Investment: Evidence from U.S. Multinationals [pdf] London School of Economics. Available at: [Accessed 11 December 2013]. Sagepublications, 2007. Foreign Direct Theory and Application. [pdf] Sagepublications. Available at: [Accessed 11 December 2013]. United Nations, 2008. Foreign Direct Investment in Latin America and the Caribbean. [pdf] United Nations. Available at: < http://www.eclac.org/publicaciones/xml/4/36094/LCG2406i.pdf> [Accessed 11 December 2013]. Wharton University of Pennsylvania, 2013. Argentina’s Uncertain Economic Climate Takes a Toll on Investments. [online] Available at: [Accessed 11 December 2013]. Yapp, R. and Paulo, S., 2011. British retailers 'missing out on South American boom'. The Telegraph, [online] 7 June. Available at: [Accessed 11 December 2013]. Read More