Host Countries and Multinational Enterprises Involved in Foreign Direct Investment - Coursework Example

To what extent is there a conflict of interest between host countries and multinational enterprises involved in foreign direct investment? Table of Contents Introduction 3 Asian Countries and Three Decades in FDI 4 Merits and Demerits of FDI 5 FDI Conflicts in Singapore 7 Conclusion 12 References 13 Bibliography 16 Introduction Foreign Direct Investment (FDI) refers to long term participation of foreign funds in lieu of multinational companies or other agencies as investment in various projects at a different country often referred as host market. It is one most important measures of growing global economy. Foreign direct investment is the largest source of foreign capital in the developing countries. In the last decade, FDI has grown phenomenally nearly 4 times, from US $ 174 billion to US $ 644 billion since 1992 till 1998. Asian countries have been the major partners in the fast growing FDI but this change has also brought great volatility in the predominantly stable markets of Asian countries (Earth Summit, 2002). FDI have a range of investors that can be classified based on sectors. Foreign direct investors can be an individual, a group, corporate, governmental bodies or any combination of various parties. For acquiring ownership or a voting power of 10% or more foreign investors can adopt methodology of acquiring share of host country companies or the company itself. It can also take a way of merger, acquisition or joint venture with the companies of host countries. Asian Countries and Three Decades in FDI Japan turned out to be world’s largest FDI source in 1980 benefiting mostly industrial countries. Prior to 1980, East Asia’s Newly Industrial Economies (NIEs) like Singapore, Hong Kong, Taiwan and Republic of Korea were the production bases for Japanese countries which was later sifted to Association of Southeast Nations and China. The reason behind this was that these countries made revolutionary changes toward new and expanding consumer markets and service markets. Japan’s FDI flow declined in 1989 because of price deflation in Japan. China and Indonesia are two countries that are gaining from changing trend of FDI towards low cost market (Jun & Frank, 1993). Among the Asian countries, China is the leader in growth of FDI in the last decade. India is following China hard being in 4th place with total FDI of US $ 26 billion in 2009-2010. India has been forecasted as a most promising country for FDI after China by Japanese investors under the survey done by Japan Bank for International Corporation. Leeds University Business School has also nominated India as one of the top three countries for business to British investors (IBEF, 2010). In the last two decades, Hong Kong and China are the major beneficiaries of inflow of FDI. Hong Kong and China governments have also taken steps towards examining statistical analysis of external direct investments. For this, they have implemented lots of resources in firm – level survey. Most of the global FDI in developing countries like Asia are through mergers and acquisitions. There is a tenfold increase in stock of global FDI in between the year of 1980 to 2000, from $ 636 billion to $ 6258 billion, due to increase in global mergers and acquisitions (Xiao, 2004). Merits and Demerits of FDI There are many advantages with foreign direct investments. It provides capital accumulation in country, facilitates transfer of advanced technology, and opens more employment opportunities. FDI and GDP ratio rises with rise in trade agreement in developing countries. Developing countries with good governance, developed infrastructure and higher quality public goods have higher flow of FDI. This motivates developing countries to build up infrastructure, focus on quality and initiate proper governmental control with excellent management (Baird & Goertz, 2008). FDI is a reason behind huge diversification of Asian economies. Impact of FDI in country depends upon its sector, duration, scale and location of investment. FDI supports in stimulation of national economy through its contribution in GDP, balance of payment and grass fixed capital formation. FDI has its valuable contribution on debt servicing capability of hosted country. Also, it has remarkable effect in export market and in increasing foreign reserve in the host country. Change in exchange rate has lesser affect in inflow of FDI in any country because when currency fluctuates production cost also fluctuates according to the exchange rate. FDI helps in stimulating diversification of product through its diversified investments and investments in new products. It is also a big support in social development through employment facilities, increased per capita income and advance education level. It is a source of infrastructural developments and technological transfers that create well trained and skilled workforce. Also, there are quite a few demerits of foreign direct investments. FDI impact is highly dependable in nature as it depends on governmental capabilities to manage high inflow of FDI in any country, global market trends, government regulations and environmental factors. FDI do not denote domestic economical growth because its advantages can get reduced due to corporate strategies like transfer pricing and protective tariffs. It also has impact on culture and social factors of host countries if invested in nontraditional goods. Its biggest disadvantage is that it is highly concentrated towards certain countries (Earth Summit, 2002). After post-crises of 1997-1998, Asian countries have taken steps toward transforming their economy form being dollar debtor towards dollar creditor. This process of transformation has given rise to many conflicts in FDI which leads Asian economy towards deflation. Prior to making any investment, policy makers analyse different companies, sectors, opportunities and risk involved and its impact on investments. According to the analysis, most conflicting sectors are petroleum and mining followed with mobile phones, commercial banks and construction sector. FDI Conflicts in Singapore Singapore is the second most lucrative destination for FDI among Asian nations. It is also ranked second largest source for FDI among Malaysia, Myanmar, Philippines, Thailand and Vietnam. Globally, FDI inflow in Singapore is ranked 15th. It is also ranked 4th in top ten emerging markets in terms of FDI in 2006 (Ellingsen & Et. Al, 2006). The FDI in Singapore differs from other countries by substantial extent. Firstly, the concentration of FDI in Singapore is almost equal to the concentration of German and British FDI. There is conflict with Japanese FDI because Japan views Asia as an economy having minor prospects of growth and gives lesser importance. The conflict gets stronger because Singapore’s FDI investment is majorly (by almost 90%) focused on manufacturing sectors of Asia where Japan had a major share but reduced off – late because of the changing perception. Singapore mainly concentrates on investing upon less developed countries than self - conflicting international foreign investors who tend to invest in those countries that have high growth prospects and lesser conflicts. Flow of FDI by industrialized countries into another industrialized countries are horizontally structured whereas in case of Singapore it is vertically aligned. Horizontal FDI deals with investment in same line of products and services that is present in the home country and this is known as market seeking FDI and is highly dependable on market considerations. Vertical FDI, on the other hand, is based on segmentation of production process for the purpose of cost reduction. Here, main emphasis is provided to differentiate in factor prices of same products and services in different countries. Horizontal FDI is highly dependable on effective demand as host country’s lower per capita income attracts vertical FDI (Ellingsen & Et. Al., 2006). Market determinants like population size, GDP, per capita income, unemployment of host country has lesser impact on Singapore’s FDI. Integration of industrialized region has not stimulated as proficiently as they have been with European foreign direct investors. In Singapore, government and all government linked companies have major contribution and support. Governments of Singapore encourage outward FDI in contrast with this other developing countries like China which is a leader and ahead of Singapore in FDI. China government discourages foreign investment. Singapore also has a different ownership structure (Ellingsen & Et. Al, 2006). There can be conflict because of many reasons in between the host country and the investing country. It can arise when foreign investors accumulates stock in a particular province as a supplement of local investors. Foreign investors also want to modulate policies according to their need and business competitiveness especially if they are exporters in international arena. Foreign direct investors play an important role in generating revenue and employment in host country and for continuing this they take advantage of central legal ambiguity and also many of the times, violate laws. The law breaking activity of foreign direct investors is not appreciated by the governance of the host country because it generates negative impact on their economy in the long run. All these issues generate conflicting situation in between the host government and the foreign investors. Revenue allocation between the host and the home countries create conflict in tax jurisdiction which leads toward double taxation in single activity. In situation of conflicts, even small changes play a big role and can cause drastic change in expected outcome. In any of the conflicting situations in any of the host countries, only few of the investors stay on and invest. Considering the political conflict in countries like Liberia, Columbia, Rwanda foreign direct investors don’t invest with lesser options or value of return. In conflicted countries, FDI face low suitability of location and huge capital investment in physical assets. In this type of investments, investors use shift balance of power towards themselves by investing huge capital so that path towards success becomes clear and this also results in ending conflict’s effect on their organization (Mihalache, n.d.). Investors in most conflict affected sectors use strategies to dominate those effects with their presence. In petroleum and mining companies foreign direct investors have to face high political and security risk. New companies often take this risk in order to find opportunities before competitors but this risk taking capability of firm reduces with its growth and after reaching a certain stage of production, they search for more stable and secure segments for investment. Mobile phone investors prefer to make small investments in search for quicker return. Investors of the mobile phone companies find conflict area more attractive because their market are not matured and have big area to expand in order to capture more revenue. Conflicts arise in construction and engineering sector mainly with governmental agencies for proper supply of needed resources. Political risk is comparatively more in such investment segments. International companies along with their local partners can plan strategies that can override conflicts and deprivation in host countries. In order to do so, they need to apply more entrepreneurial strategies compared to military expertise (Bray, 2005). Government restriction also plays a major role in conflict between FDI and host governments. Government majorly restricts those foreign direct investors whose investment is mainly focused on the resources and strategic assets of the host nations. Corruption within government organization in host countries also gives rise to conflicts. Foreign investors majorly prefer corruption free countries for investment because it helps them in creating efficient operational activities. On the other hand, also it is true that investors do not always neglect corrupted countries if they find good prospects. Those countries which are in the process of privatization, government intervention in each firm’s affairs can propel a negative indication to multinational enterprises (MNE) and it can also deter MNE’s from investing in those countries. MNE mostly focuses on cost in order to invest in countries. They prefer countries with low production cost and high unemployment for getting cheap labour advantage but corruption plays an obstacle in it. Basically, multinational enterprises desire investment locations to be technologically advanced with highly educated population, fast growing economy and good ethical culture. But host countries that pursue their national priorities more than investor priorities might initiate a conflicting situation with MNE’s (Meier, n.d). For solving such conflicts many forms of bilateral trade treaties and double taxation treaties are signed in between investing and host countries. Conclusion Foreign Direct Investment is a kind of investment that is initiated by agencies of one country into another country’s companies or markets. It can be processes through acquiring stock, companies or mergers and acquisitions. There is no doubt that FDIs bring prosperity, growth, employment and foreign currency in the host country. Also, it can get affected due to political, social, technological and economical environment of the host country. Basically, major conflicts arise in between host countries and investing companies due to government’s interference, country regulations and company’s own attitude towards its requirement. References Baird, R. G. & Goetz, G., 2008. The Competition for FDI in Developing Countries: Governance infrastructure and Public Goods vs. Regime Type. Department of Political Science University of Arizona Tucson. [Online] Available at: https://ncgg.princeton.edu/IPES/2008/papers/S110_paper1.pdf [Accessed June 26, 2010]. Bray, J. 2005. Cross-Sectoral Comparisons. International Companies and Post-Conflict Reconstruction. [Online] Available at: http://www.international-alert.org/pdf/International_companies_post-conflict_WBank.pdf [Accessed June 26, 2010]. Earth Summit, 2002. Foreign Direct Investment: A Lead Driver for Sustainable Development? Foreign Direct Investment. [Online] Available at: http://www.earthsummit2002.org/es/issues/FDI/fdi.pdf [Accessed June 26, 2010]. Ellingsen. G. L. W. & Et. Al., 2006. Outward FDI by Singapore: a different animal? Transactional Corporation. [Online] Available at: http://www.unctad.org/en/docs/iteiit20062a2_en.pdf [Accessed June 26, 2010]. IBEF, 2010. Foreign Direct Investment. Trade and Economy. [Online] Available at: [Accessed June 26, 2010]. [Online] Available at: http://www.ibef.org/economy/fdi.aspx [Accessed June 26, 2010]. Jun, K. W. & Frank, S., 1993. Japanese foreign direct investment: recent trends, determinants, and prospects, Volume 1. The Economics of Conflict. [Online] Available at: [Accessed June 26, 2010]. [Online] Available at: http://econ.worldbank.org/external/default/main?pagePK=64165259&theSitePK=477960&piPK=64165421&menuPK=64166093&entityID=000009265_3961005140924 [Accessed June 26, 2010]. Meier, L. No Date. Factors Driving U.S. Foreign Direct Investment. Washington University in St. Louis. [Online] Available at: http://www.olin.wustl.edu/Documents/CRES/Meier.pdf [Accessed June 26, 2010]. Mihalache, A. S. No Date. Dissertation Abstract. Foreign Direct Investors and Political Violence in Developing Countries. [Online] Available at: http://www.personal.psu.edu/asm218/materials--final/mihalache-AbstractOnly.pdf [Accessed June 26, 2010]. Xiao, G. 2004. People’s Republic of China’s Round-Tripping FDI: Scale, Causes and Implications. [Online] Available at: http://www.hiebs.hku.hk/working_paper_updates/pdf/wp1137.pdf [Accessed June 26, 2010]. Bibliography Sachs. L. E. & Sauvant. K. P., 2006. BITs, DTTs, and FDI flows: An Overview. The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties and Investment Flows. Read More