Foreign Direct Investment Inflow and Outflow - Essay Example

Foreign Direct Investment Inflow and Outflow Introduction Foreign Direct Investment (FDI) reflects an international investment. The FDI inflows entail all the inward direct investments that are made by the non-resident investors within a reporting economy. This includes the intra-company loans and reinvested earnings, loan repayment and net repatriation of capital (Yeaple 2003, p. 726). The FDI outflows comprise of outward direct investments that are made by residents within the reporting economy to the external economies. These are expressed as GDP shares. While some countries remain important recipients of the FDI flows, others have occupied themselves in overseas investments. According to the literature on international business, FDI level is dependent on the effects of location of the business environment within a country. Due to uneven distribution of resources in a certain country, the firms will have different advantages in different countries (Hufbauer 2013, p. 1). Studies carried out on determinants of inflow FDI reflects a positive correlation between the economic performance and FDI. Location factors explain the differences in foreign penetration between countries. According to Pentecost and Miner (1996), competitive advantage within the host economies, levels of protection and the size of the reporting market affects the distribution of FDI positively. Studies also show that FDI is significantly affected by the policy measures directed at FDI (Lee 2001, p. 100). The current paper uses a range of relevant theories and data as illustrated in Tables 1 and 2 to critically evaluate variation over time between and within countries in their inflow and outflow of FDI activity. In this case, FDI flows as a percentage of the GDP. These indicators are a representation of the provision of the external financing resources in terms of direct investments within a reporting economy derived from foreign investors and external economies as derived by the domestic investors. The negative FDI values of net inflows within a certain country is a reflection of the disinvestment value from foreign investors being higher than capital value of investments within the reporting country. The negative value for the net outflows indicate that value derived from the direct investments from domestic investors to the external economies is less than the repatriated value of the direct investments from the external economies (Rutten and Boekema 2007, p. 39). FDI Inflows Most countries use FDI for evaluation of their economic development processes. The contribution of FDI to national output and improvement of economic efficiency act as the focal point of reassurance of FDI being a viable choice for the reporting country. An increase in FDI encourages efficient utilization and allocation of resources, and reflects a higher growth in output. Trends in FDI inflows indicate the feasibility of a certain country to international investors as an attractive investment destination (Simone and Miriam 2012, p. 600). For Australia, the FDI inflows have been varying inconsistently. The FDI inflow declined from 2008 to 2009 by 1.9 percent from 4.5 percent, increased by 0.1 percent in 2010, increased by 1.5 percent in 2011 and decreased by 0.6 percent in 2012. The decline in FDI inflow is a reflection of the general slowdown in capital flow to Australia. The other countries with similar trends are Germany, South Africa, UK, US, China, and Russia. Notwithstanding this trend, magnitude of total inflows attracted by these countries remains relatively meager. In contrast, Belgium and Luxembourg received higher FDI inflows. Within the case countries presented, Luxembourg has increasingly accounted for the bulk of the FDI inflows, though it experienced considerable decline in FDI inflows in 2011 and 2014. In 2008, Belgium had the highest FDI inflow of 38.2 percent, followed by Luxembourg at 20.4 percent, with Germany having the lowest percentage of 0.2. In 2009, Luxembourg had the highest FDI of 41.3 percent, followed by Belgium at 12.9%, Saudi Arabia at 9.7 percent, through to Germany at the lowest FDI of 0.7 percent. In 2010, Luxembourg had the highest FDI of 52.4 percent, followed by Belgium at 18.2 percent through to South Africa with the lowest percentage of 0.3 percent. In 2011, Luxembourg was still leading in FDI inflow at 24.3%, followed by Belgium at 20.1 percent, through to Germany at lowest value of 1.4 percent. In 2012, Luxembourg had the highest FDI inflow of 14.1 percent, then Australia at 3.6 percent, followed by China at 3.1 percent, Belgium at 2.9 percent through to Germany that had the lowest FDI inflow of 0.2 percent. It can be observed that from 2011 to 2012, all countries, except UK, had a drastic reduction in FDI. A general trend can be observed of reduction Germany having the lowest FDI, followed by US and South Africa at second and third positions respectively. Table 1: FDI Inflows Country 2008 2009 2010 2011 2012 Australia 4.5% 2.6% 2.7% 4.2% 3.6% Belgium 38.2% 12.9% 18.2% 20.1% 2.9% Germany 0.2% 0.7% 1.7% 1.4% 0.2% Luxembourg 20.4% 41.3% 52.4% 24.3% 14.1% UK 3.3% 3.5% 2.2% 2.1% 2.6% US 2.2% 1.1% 1.4% 1.5% 1.1% China 3.8% 2.6% 4.1% 3.8% 3.1% Russia 4.6% 2.3% 2.1% 2.0% 1.5% Saudi Arabia 8.3% 9.7% 6.4% 2.7% 1.9% South Africa 3.3% 2.0% 0.3% 1.5% 1.2% Despite this growth, the FDI as a proportion of GDP for the countries in Europe (Luxembourg and Belgium) remain relatively high. For instance, in 2008, 2009, 2010 and 2011, the growth in these two countries outstripped the sum total of the FDI inflows from other countries. Germany and UK have arguably the lowest in terms of FDI inflows. The disincentives created by policy regime remains a major factor for the poor performance of these countries in terms of FDI inflows. The protectionist policies on trade and the inherent anti-export bias involved therewith was the major contributor to low export-oriented FDI (Lensink and Oliver 2001, p. 54). This was also exacerbated by other various indirect and direct regulatory barriers that increased the cost of investment many foreign firms. Additionally, where domestic market can be considered appropriate enough to attract tariff hoping, as may have been the case with Germany, the disincentives from regulatory barriers are strengthened by the perception that government and several other political forces and hostile to FDI. However, it is noteworthy that assessment for the general climate regarding foreign investments indicates relatively minor differences between UK and countries like Belgium. Given the huge differences between Luxembourg and Germany in attracting inward FDI flows, perhaps this is an indication of major importance of the trade policies and other several factors. To a greater extent, FDI is inhibited by political instability and implied policy instability (Sawhney and Matthew 2011, p. 145). Strong positive responses to the FDI flows to liberalization of investment and trade in 2011 and 2012 tapered off with subsequent escalation of the political instability. Countries like South Africa and Saudi Arabia are limited in terms of infrastructure. This puts other countries like Luxembourg at a higher advantage for FDI inflows due to elaborate and modern infrastructure. Therefore, it can be said that the mechanism, which enhances integration of both the local and regional economies into the global production chains, are continuously improving. As a result, the globalization processes influence all the territorial levels globally. This leads to the creation of economic organization within the economies for arrangement resulting from globalization. Globalization is attributable to economic transformation process with the differentiated impacts in those regions (Kessler and Frank 2009, p. 720). All the other differences in FDI inflows can relate to geographic position of a country. Generally speaking, the high regional differences in FDI inflow as illustrated in the current case, the more obvious is globalization process within the development process of the country in a certain region. Dependence on the world market by regional economies grows through establishing sub-contractor relations. As a result, FDI inflow is an indicator of the success realized by economic competitiveness and development within the corresponding region. Successful exports prove ability of a country or a region to succeed in its international competitiveness, and this continually expands as a result of globalization (Markusen 2002, p. 38). FDI Outflows Most developed countries are the major source of outflow FDI, though the transition and developing countries have made remarkable progress since the 1990s in their capital outflows. Many countries have increasingly undertaken activities in cross-border investment activities using FDI. Studies reflect an overall increase in FDI between 2008 and 2011, with 2010 being the peak. From a theoretical perspective, effects of FDI outflows on the reporting country can take place through product marketers and financial markets. Under imperfect financial market conditions, the domestic interest rates can increase as the funds shift out of reporting country making it hard for domestic firms to borrow funds (Bajo-Rubio 2002, p. 85). Additionally, the firms, that seek overseas investments by shifting the production processes abroad, may be instrumental in reducing domestic exports. Such outflows divert domestic investment. Nevertheless, when FDI outflows complement the exports in the home country through forward and backward production linkages, such FDI outflows complement the domestic investment (Arbatli 2011, p. 65). The Table 2 below presents the FDI outflows for various countries from 2008 to 2011. Table 2: FDI Outflows Country 2008 2009 2010 2011 2012 Australia 3.2% 1.7% 2.1% 0.9% 1.0% Belgium 43.5% 1.6% 9.3% 16.1% 5.7% Germany 2.0% 2.1% 3.7% 1.4% 2.0% Luxembourg 21.4% 13.4% 39.9% 15.2% 30.9% UK 6.9% 1.8% 1.7% 4.4% 3.1% US 2.3% 2.2% 2.1% 2.7% 2.5% China 1.3% 0.9% 1.0% 0.7% 0.8% Russia 3.4% 2.8% 2.8% 2.6% 1.4% Saudi Arabia 0.7% 0.6% 0.9% 0.6% 0.7% South Africa - 0.4% - 0.7% 1.1% Source: OECD Database It can be observed that in Australia, the FDI outflow decreased from 3.6 to 1.7 percent from 2008 to 2009, increased by 0.4 percent in 2010, decreased by 0.2 percent in 2011 and increased by 0.1 percent in 2012. In Belgium, the FDI outflow decreased significantly from 43.5 percent in 2008 to 1.6 percent in 2009, increased to 9.3 percent in 2010, increased to 16.1 percent in 2011, and decreased to 5.7 percent in 2012. Germany had the FDI outflows increased from 2008 to 2010 from 2, 2.1 to 3.7 percent respectively. However, this decreased in 2011 to 1.4 percent, after which it increased to 2 percent in 2012. Luxembourg had the bulk of FDI outflows, except in 2008 and 2011 when Belgium led. It can be observed that Saudi Arabia has the lowest FDI outflow from the list of countries provided, though this may not be conclusive as the values for South Africa are missing from the OECD statistics. Contrary to the results of the FDI inflow, where Germany and UK have the lowest values, the FDI outflow results show that UK and Germany are not badly off in terms of the FDI outflows. Belgium is seen to have reduced significantly in its FDI outflow, more than any other country represented. Luxembourg leads in both the FDI flows (Bevan and Estrin 2004, pp. 775). The increase in FDI flows is a reflection of improved corporate profits and increased globalization. The financial crisis in 2008 resulted into a drastic reduction of FDI flow values in 2009 and increase in subsequent years as shown in the Tables 1 and 2. This is because the crisis made many firms rationalize their corporate structures, as well as increase their efficiencies to relocating the business functions to locations that are cost-advantageous. As most developed countries like US are confronting the effects caused by the crisis, many firms in developing regions, such as Africa, are investing in emerging markets that have strong recovery and better economic outlook. This is evident from 2011 to 2012, where FDI outflow increased in developing economies and declined in developed ones. The FDI outflows for developed economies increased in 2010 over the previous year. Nevertheless, this equates to about half the value of average increment. Reflecting on the divergences of the economic situations, within the major economies in developed countries tabulated, trends in FDI outflows differ across countries and regions (Endo 2006, p. 600). From theory, this is mainly due to differences in reinvested earnings, equity investments and other types of capital flows, such as intra-company loans (Dunning and Gugler 2008, p. 67). It can be observed that the FDI outflows from Europe are considerably up despite the fall in some countries across the period of study; 2008 to 2012. The revival of the intra-company financing has played a major role in driving the outflows in many economies. For instance, in 2009, Germany experienced a massive intra-company loan of $24 billion and $19 billion in 2010. In contrast, in 2010, the outflows from UK, which is traditionally among the leading investor countries in the world, continued to suffer (Greeven and Geerten 2013, p. 366). Studies show that such a level had last been witnessed in 1993 after the parent firms withdrew from the country and were paid back loans gotten from their affiliates to enable them strengthen the balance at their homes (Hampl, Blažek and Žížalová 2008, p. 696). In United States, the outflows increased significantly in 2011 due to high equity investments abroad, which saw M&A cross-border deals by the firms in US doubling, and reinvested earnings. However, in Germany, Luxembourg, Russia, China and Saudi Arabia, the FDI outflows decreased in 2011 as the declining intra-company loans, as well as reinvested earnings overwhelmed the cross-border M&As. Among the major factors contributing to low FDI outflows is the continued depressed equity investment levels (Ateljevic 2004, p. 619). Normally, equity investments, intra-company loans, and reinvested earnings are directly related to the investment strategies in long-term. This involves direct acquisition and establishment of foreign affiliates. The low level demonstrates fragility of FDI recovery. On the other hand, the cross-border M&As have continued to react to the changes in the economy. This shows the level of growth of the assets in stock markets, as well as the increased financial capabilities for the potential buyers to conduct such operations. However, impending tightening of the fiscal policy, sovereign debt crises, and regional conflicts hinder any considerable improvement (Herzer 2010, p. 476). With the increase in global economic recovery, rebounding of corporate profits and rising valuations in stock markets reflects a positive increase in FDI outflows (Herzer 2012, p. 155). The ongoing corporate restructuring and emerging wave of privatisation in countries with empty state coffers in wake of financial crisis to create new investment opportunities for the cash-rich firms in both developed and developing economies (Herzer 2011, p. 1355). Some emerging economies like China and Russia have gained grounds as major FDI sources in recent years. It is projected that the FDI outflow from these economies will increase due to abundant resources and strong strategies to acquire strategic assets and mineral resources abroad (Hlaváček 2009, p. 27). Conclusion Over the years, significant changes have been experienced in the environment of international investment. The macroeconomic performance among the high-growth economies contrasts sharply with the sluggish growth in some regions in Europe. However, amidst all these extremes, continuous economic recovery is being experienced in countries like United States, and this has rekindled the investors’ confidence. Additionally, the weakening value of US dollar has contributed to increased influence of relative competitiveness for alternative production locations that affect the allocation of international business. This also affects FDI directly. Apart from the equity investments, FDI flows entails huge levels of cross-border transactions between related entities within ownership structures of the multinational enterprises. Many MNEs have taken advantage of weakening dollar in order to repay their inter-company loans. This depresses the inflow FDI values in some countries. Similarly, the structural factors can also enhance the FDI flows within the OECD area. Mostly, investors get attracted to large economies that allow both access to the buoyant customer base, as well as competitive production (Ahmed 2012, p. 1498). On the other hand, given the current high economic growth rates, many populous countries hold the prospect of expanding in the next few decades, with the international business increasingly betting on the outcome. Additionally, the administrative and regulatory reforms have been a major encouragement to the international investors to enable them take a closer look to the developing countries. Recent changes within the architecture of international trade, including the accession of WTO in China and termination of Multi-Fibre Arrangement have necessitated direct investment. The net export of FDI from OECD countries to various countries worldwide has been hitting records. Net FDI outflows have been increasing over the years; hence the OECD zone has been a major net FDI exporter. Following what has been perceived as a recovery from financial crisis experienced in 2010 and 2011, the global FDI inflows have drastically declined, and as the fragility of the world’s economy increases, the general global financial inflows have declined considerably from 2011 to 2012(Truitt 2013, p. 107). The FDI inflows have been decreasing both in developed and developing economies. Nevertheless, while most of the developed countries experience considerable reduction in FDI inflows, the developing economies remain relatively resilient, with the decline being less pronounced. On the other hand, the FDI outflows are a major boost to domestic firms. The trends, as described in this paper, reflect the total aggregate production, and how it prevails the decrease within the capital stock (Camillus 2011, pp. 306). One major outcome from this paper is the effect of FDI inflows and outflows to the global production. The capital outflows result in higher decreased production than the corresponding increase from the inflows with the same amount. When it comes to GDP, the difference between sectors tends to vanish, so is the FDI inflows and outflows. References List Ahmed, E.M. (2012). Are the FDI Inflow Spillover Effects on Malaysias Economic Growth Input Driven? Economic Modelling 29 (4), pp. 1498-504. Arbatli, E. (2011). Economic Policies and FDI Inflows to Emerging Market Economies. Washington: International Monetary Fund. Ateljevic, J. (2004). Enhanced Transition through Outward Internationalisation: Outward FDI by Slovenian Firms. 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