Worldwide Patterns of Foreign Direct Investment - Essay Example

Name Title Professor Course Date Foreign direct investment (FDI) Introduction Foreign direct investment describes venture by businesses or companies in other countries. It is done through a physical venture like setting up buildings or equipment in the foreign country (Henry, C. M. 2004). They can do this by purchasing a business in a foreign country or through increasing its business operations in such countries. It also constitutes management of businesses by a company in a foreign country. United Nations body for research indicates that there was a decline in the FDI figures in the year 2010. FDI measures the local possessions in foreign countries also known as the domestic property. Theses assets include factories, schools, hospitals and other institutions in the other economy. Companies prefer investing in emerging economies, or developed economies like the US and in countries where the economy is stable (Bearce, D. H. 2007). This is so that they do not run at a loss incases where the economy is unstable. The opportunities in these economies are many and high. FDI is dissimilar from portfolio investment in that the latter involves venture into securities of a foreign country. It only involves speculation by a company into bonds and shares of another company in the foreign country (Cherunilam, 2008). FDI has complete power over the institutions in the foreign country, unlike portfolio investment which has no have power over the purchase of securities. Organizations prefer FDI in countries that have open economies and have the potential to develop. i. Reasons for foreign direct investment There are several reasons why companies opt to involve themselves in FDI. They are all because of the advantages that it brings to the companies that opt for it. FDI provides more and wide variety of markets for the companies through more channels of distribution (Bearce, D. H. 2007). It also encourages development and knowledge of technology by exchanging in two or more countries. It also involves incorporation of new skills in the company which improves its management and increases the return sin the long run. Companies indulge in FDI to benefit from the increase in earnings in the foreign country which in turn yield high profits. These high earnings can be as a result of provision of low tax rates in the other country unlike it its home country (Henry, C. M. 2004). When the taxes are fewer or cheaper, the profits and returns of the will be high. This is because the business is giving less to the government in terms of the taxes and the cost of carrying out business is low. Another reason why companies opt for FDI is presence of incentives in the other country. These incentives may comprise tax holiday, availability of loan facilities or export processing zones and many others (Madura, J. 2009). Governments do give incentives to attract business by reducing the operating costs. It can also offer incentives for foreign companies so as to encourage FDI in its own country by increasing the entry of markets in the country. Incase there are tax exemptions in a foreign country, companies will be willing to invest there to take advantage of that offer. There are many countries that have open economy that encourage FDI from many organizations in other countries. Examples of these countries include China, India, the US and developing countries. FDI reduces if the wealth of the foreign country goes down, like when it faces a financial crisis (Cherunilam, 2008). It reduces because it becomes risky to invest in such an economy and this is not favorable for companies. The worldwide patterns of FDI There is a notable change in the preceding decade because of the growing rate of awareness and participation in FDI. These changes have led to the various patterns of FDI that exist in the world today. Foreign investment has become popular in the world, hence more participation in it and the benefits (Harvey, J.T. 2009). Many companies are embracing FDI after realizing that it leads to increase of yields in terms of profits. There is reduction of requirements and conditions for countries to participate in investment in a distant country. In the past, there were many requirements that countries had to comply with so as to venture in the host country. These requirements also vary from country to country on the basis of its policies regarding foreign ventures or the economic integration in the country. Another pattern in the world is the increasing competition amongst countries in investing in other countries. For instance, countries are competing to invest in outside countries that look profitable and have a stable and open economy. Countries in the world are challenging each other to venture in the US, China and other upcoming countries (Bearce, D. H. 2007). The competition is on the basis of which country will earn more returns than the other. There are benefits of this completion like growth of the economy in the host country and improvement in the products and services that consumers get from the companies. This is due to companies striving to give the best output than the other competing countries. The emergence of technology and its users is one of the changing patterns of foreign investment in the world. Companies can now carry out their management responsibilities and business in other foreign countries from their mother country (Madura, J. 2009). That means that their physical presence is not a requirement, due to the use of technology. Reduction in physical movement was a trend when investing in host countries. This means that venture does not need outlays of machinery or equipment. For instance, a company can invest in a country like China but manage them from its mother country. This new pattern is unlike the old one where administration of the company had to be in the host country. Technology has, therefore led to many changes in the pattern of foreign investment. It has made foreign investment easy and cheap to operate for companies and organizations. This means that activities such as compiling of returns other accounting activities can be done via the computer faster than through manual means. The pattern today is investing in companies that deal with low technology because they have fewer risks. This is due to the constant changes in technology (Cherunilam, 2008). Their development time is more than those of low technology companies because of changes before it gets to the market for sale. This includes products like software because of the uncertainty that they have. This is unlike investment of fixtures or vehicles which have low risk because of the clear identification of its book value. The analysis of these changes is by looking at each country that plays an important role in foreign investment globally. There has been improvements in the patterns of FDI in the world in countries like the US and China. Different countries have different trade patterns and policies that encourage FDI in them. The patterns of countries change from year to year to incorporate other patterns in the world. Changes in patterns in Eastern Europe are clearly visible and notable. Over the last about ten years, there has been development of trade in countries in this region leading to formation of many trade unions. This pattern in these countries encourages foreign investment by other countries in the world (Henry, C. M. 2004). These unions brought about new policies and reforms in countries in the region. There is improvement in the economy of these countries and trade liberalization. Korea has a pattern known as the outward direct investment that encourages FDI, which traces its formation after the crisis in Asia (Bearce, D. H. 2007). There was a financial crisis in Korea that led to a declining trend in the economic status of the country. The trend in return led to reduction in the amounts of foreign investments in the country. This means that there was lesser involvement by other countries in FDI in Korea because of the fear of loss due to the financial crisis there. China encourages foreign investment worldwide because of its growing economy. Government policies and the geographical position of this country support the good economy present in the country (Madura, J. 2009). The policies are favorable to FDI, like encouraging exports and accommodating foreign investors in their country. ii. Currency flows Currency is an icon of value universally acceptable by many countries for use amongst themselves as they carry out business (Bearce, D. H. 2007). Currency flows is how currency flows in and out of the country in the involvement of foreign investment activities. The effect of this is that some currencies are more powerful that the others due to their activeness in the trade. Currencies from different countries trade with each other through the foreign exchange rates. Changes in the currency flows in a country might lead to inflation or positive effects depending on the change. This knowledge is essential in knowing the changes that take lace in the returns in a short duration of time and a long time. These returns are in regard to investments in that particular country. They measure the impact that ventures have on the exchange rates of the currency of the country in question (Cherunilam, 2008). They contain impacts on the rates of currencies on the basis of the returns from various ventures in the country. They also measure the changes of returns from ventures in the country. The determinant of currency flows is the trade amongst countries through the foreign investment via the exchange rates (Harvey, J.T. 2009). This is because investors use the host country’s currency to carry out their trade as they venture in business in the host country. iii. Domestic policy They are decisions and policies that the government makes concerning business and trade activities in the country. They are laws guiding trade in the country and not without the country. It is unlike the foreign policy which regulates activities of trade that takes place without the country (Bearce, D. H. 2007). That is, trade between the country and other countries. These regulations indicate the social and economic status of the country because they have to consider all the social classes of people in that country. Domestic policies have a role to play on trade between the country and other countries because they help determine how the country trades with the others. Some of the contents of these policies are common to many countries. This is because such policies ought to have a provision for education for all the citizens and to ensure equality of law for all citizens. This means that domestic policies have the interest of its citizens in mind, like reducing the levels of poverty in the country and ensuring economic fairness (Madura, J. 2009). How currency flows have contributed to the reduction of domestic policy influence There has been reduction of the domestic policy influence in the countries due to the currency flows as a result of the foreign trade (Henry, C. M. 2004). This has had a negative effect on the domestic policy due to its erosion. The influence of the domestic policies has lost meaning in the countries due to the raise in the currency flows because of foreign trade. Patterns of FDI are shaping the domestic policies in many countries like in the United States and with time eroding the influence that these policies have in the country. This means that countries are paying attention on the foreign trade than on the domestic trade (Edwards, S. 2007). The reason behind this trend is that foreign trade tends to attract more capital into the country than the domestic trade. Foreign trade involves trade amongst many countries, hence attracting more capital into the host country. There is realization of more capital because many countries invest in the host capital, which generates more than just the local investments. It is for this reason that over the time, there has been the erosion of domestic policies in many countries in the world like in the US. The reduction in the influence that the policies have in the country affects negatively the citizens of the country. This is because the attention deviates to the FDI which ends up leading to neglect of the citizens (Levi, M. D. 2009). They want to attract more and more investors into their countries hence; their concern is more on the currency flows than the domestic policy. Failure has been on the countries because of not balancing both foreign investment policies (currency flows) and the domestic policies in their individual countries. Analysis by a body in the US states that politics influence the patterns of foreign direct investment. Capital controls and the currency flows have a great influence on the FDI, so the government of the United States has to make them favorable to suit FDI. Institutions set by foreign investors into the country influence the local firms because of the completion they pose to them. Some of these local; firms are just infants so they are not able to compete with these foreign companies. This trend has led to the collapse of many infant local companies in this country (Edwards, S. 2007). There are other companies that are vital and very important to the economy of a particular country hence; the need to protect them from the foreign investors. This can be done by emphasizing on the domestic policies and not letting the currency flows erode them. For instance, the US dollar has become the common currency in the world, where traders use it to trade and exchange amongst countries. Other countries exchange their currencies with the dollar rate in the world and hold reserves in terms of the US dollar (Henry, C. M. 2004). The US dollar has become the medium of exchange for different countries trading together hence; making foreign investment easier. Countries all over the world are adjusting their policies to make them favorable for the foreign investors by encouraging them. This is because these investments increase capital in the host country hence; growing its economy by a large percentage. In the case of countries like the US and China, the rapid growth of its economy is because of the many foreign investors (Edwards, S. 2007). FDI encourages other bonus benefits for the country like development of education system that attracts foreigners in the institutions, with the belief that they have better education facilities. There is an inverse relationship between the capital flows and the domestic investment. In many developing countries, increase in capital flows and foreign investment leads to a reduction in the domestic venture. The developing countries get a lot of capital from the FDI hence; get funds to help them achieve their development goals (Levi, M. D. 2009). The reason behind this is that there was a belief that these countries did not have enough capital hence; the need to attract more capital through improving the foreign investment policies. The increase in capital flows in these countries has led to the reduction in the domestic policy influence because of the view that it does not generate as much capital and revenue like the FDI. This includes reducing taxes for the foreign investors so that they find it cheaper investing in them than in other countries. Other policies that have been put in place to encourage foreign investment in the United States are giving the foreign investors tax holidays among many other benefits to attract more of the FDI. It is for this reason that there was adjustment of policies to encourage FDI, like giving them more incentives than the local companies can get (Edwards, S. 2007). They do this because they are aware that the FDI generates more capital inflows than the local industries and companies generate. The government also makes it possible for the foreign investors to get loans from the country faster and in huge amounts. The result of these policies is that capital inflows increase while the domestic earnings remain low because they pay less attention to the local policies. For instance, in developing countries they neglect the domestic policies that require there be social development. That shows why some of these countries have poor infrastructure and poor state of roads, yet they have the largest number of foreign investors who generate high amounts of capital inflows (Levi, M. D. 2009). That shows that there is a neglect of the domestic policies in such countries as they dwell more on the capital flows. This is evident by looking at the Gross Domestic product figures of most of the developing countries in the world. Its figures are very low despite the fact that there are policies to improve them. However, the Gross Domestic Product (GDP) of the developed countries is not as low as that of the developing countries like in the case of the United States. They try balance the exports and imports so that imports do not exceed exports such that their GDP is low (Henry, C. M. 2004). It is in such countries that the domestic policies still exist and there is no erosion by the currency flows. Erosion of domestic policies leads to neglect of local industries hence; low GDP. References Cherunilam, (2008): International economics: Tata McGraw-Hill Education publishers. Czinkota, M.R. (2001): Global business: Harcourt college publishers. Edwards, S. 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