Concept of Foreign Direct Investment, Trends and Patterns of FDI - Coursework Example

NAME OF UNIVERSITY FОRЕIGN DIRЕСT INVЕSTMЕNT & CURRENCY FLOW DOMESTIC POLICY NAME OF STUDENT: REG. NO: NAME OF THE COURSE: COURSE CODE: LECTURER SUBMISSION DATE DISСUSS THЕ WОRLDWIDЕ РАTTЕRNS ОF FОRЕIGN DIRЕСT INVЕSTMЕNT (FDI). IN DОING SО, DISСUSS TО WHАT DЕGRЕЕ, IF АNY, HОW СURRЕNСY FLОWS HАVЕ СОNTRIBUTЕD TО THЕ RЕDUСTIОN ОF DОMЕSTIС РОLIСY INFLUЕNСЕ Concept of Foreign Direct Investment Business has entered the era of the one-world market. Increasingly, companies are going overseas to attain sales and profits unavailable to them in their home markets. The emergency of international firms is perceived to be the latest developments in the last one decade, resulting from globalization. The key indicator of Multinational Enterprise (MNE) activity used to analyze the location decision is Foreign Direct Investment (FDI), defined as “investment in which the investor acquires a substantial controlling interest in a foreign country” (Bende‐Nabende, 2002). In other words, foreign direct investment is a flow of long-term capital based on long-term profit considerations and significant degree of influence by the investor on the management of the enterprise. It is this particular element of influence and control that differentiate direct from portfolio investment and other types forms of international capital flows. Since FDI is linked to MNE activity, it is used interchangeably with MNEs in much of the economics literature. In line with the growing impact of MNEs, global FDI inflows increased substantially in the last decade. As a result, every firm, including those with purely domestic operations, is facing increased pressure from foreign competitors. Overseas ventures have been transformed, and many firms are going international to market themselves and widen the market niches. This is made easier through joint ventures with existing firms in foreign countries or total takeover of subsidiary firms (Bende‐Nabende, 2002). According to Yasin (2005), firms have progressively developed their business activities because of easy in access of relevant information and invitation from governments of small nations that want to boost their economic growth and maintain their competitive edge. Most of the multinational firms from the Europe countries, Japan and United States have been prominent in establishing up the bigger joint venture firms in parts of Africa and Asia and importantly they have enabled advanced technology transfer. Trends and Patterns of Foreign Direct Investment The opportunities available to a particular country in mobilising foreign direct investment in economic growth and development depend on relevant typology characteristics and the investment surroundings of the country and the changing pattern of international production in the global context. The worldwide pattern of FDI incorporates resource based factors, labour intensive asspects and integrated processes and global production systems. Foreign direct investment started off from the decision of a MNE to relocate part of its activities in a selected host country. This decision is underpinned by the desire to reap benefits from particular benefits like existence of new technology, management expertise and marketing know-how which may not easily be acquired from market involvement of unrelated firms. Majority of emerging markets, especially in developing nations, for instance Asia and Africa stand to benefit from FDI. Asiedu (2006) argues that African nations stand to benefit to attract foreign direct investment that is not founded on local resources or else the extent of marketplaces, in improving local business. The use of foreign direct investment that does not result from magnitude of the marketplace and the existing natural resources in the host state may serve as a pointer of the business atmosphere for foreign domestic investment (Artadi and Sala-i-Martin, 2004). As such, the FDI growth rate encompass how trade openness can be used to improve the business atmosphere. The key trend is that nations that are gifted in resources or sometimes have big market size to catch the attention of more FDI. Furthermore, other factors that promote FDI comprises of good infrastructure, presence of educated labour-force, stability of macroeconomic factors, transparency to foreign direct investment, effective legal system, less corruption instances and political stability (Yasin, 2005). According to Asiedu, her findings insists that small nations like Kenya or Mexico and some that may lack natural resources may still attract FDI by improving their institutions and policy environnment. In the same script with her 2002 manuscript, Bende‐Nabende (2002) emphasises the relative performance of Sub-Saharan African (SSA) compared to other developing regions in attracting FDI, as well as in improving the environment for FDI. The writer affirms that SSA’s share of foreign developing investment with developing nations in last decade had declined over time, for the reason that of less attractiveness of Sub-Saharan Africa for FDI determinants, the previous experience of SSA can be characterised as absolute progress but relative decline. Presently, the SSA has transformed its key institutions, enhanced its infrastructure in addition to liberalising its FDI regulatory structure. Still, compared with other developing nations, the extent of changes in SSA has been massive. The findings focused on policy-related factors, like opneness to FDI, infrastructure and quality of institutions. China investment in Africa has rapidly grown in several sectors of the economy, like in manufacturing, mining, infrastructure construction among other services. Chinese firms that presently invest in Africa are Small and Medium Enterprises (SMEs). Around 2000, about 500 SMEs had been established in different parts of Africa as foreign direct investment projects. Since 1982, Chinese policies on FDI improved tremendously, a move that saw a shift to a clear and proactive policy system of investment from passive framework (Artadi and Sala-i-Martin, 2004). In the course of 1990s, the Federal Republic of Chinese government initiated “the going global” strategy that motivated outward FDI. The initiative was accompanied by a number of incentives, for example easy access of bank loans, easy border measures and preferential policies for imports and exports as well as subsidised taxation (Rodrik, 2011). Bilateral investment agreements have also been a key factor in facilitating investment policies adopted not only meant for attracting FDI but also promoting better protection to Chinese firms venturing in overseas businesses. In 2005, China signed about 118 bilateral trade agreements globally with almost 28 of them in Africa. The majority of trade treaties with Chinese companies and African Sates are always in form of equity joint ventures, however not for the present interventions of resource exploration FDI (Asiedu, 2006). Several challenges have been experienced by Chinese firms investing in FDI in Africa Continent, the headache for this firms has been to find suitable business partner, State support, technology transfer along with market oriented activity in host nation. Some of the problems faced by this companies includes, shortage of skilled personnel, restraint on foreign exchange, not enough or unsuitable incentive system among others. Majority of African countries have advantage of cheap labour and are richly endowed woth natural resources (Artadi and Sala-i-Martin, 2004). However, bureaucracy in their systems, poor road networks, weak institutions that create openings for looting of public assets are the key hinderances that have undermined the attraction of FDI. Ways in which currency flows have соntributеd to rеduсtiоn of influence in dоmеstiс policy The influence on domestic policy will occur whether currency flow, especially exchange rates are fixed, freely floating, or somewhere in between. On one end of the spectrum, exchange rates can be fixed; that is, political authorities set the rates at which currencies are exchanged. On a day-t-day basis, the rates are supposed to remain unchanged (Rodrik, 2011). In a regime with floating exchange rates, on the other hand, markets are left to determine the rates at which currencies are traded. Changes in the supply of and demand for the currency cause the rates to change. Obviously, in such a situation governments can still use policy to shift supply and or demand for currencies, so in a way political authorities may still be able to set exchange rates. The currency flow from foreign direct investment or through exchange rate influence the domestic policy, for example, the changes in the exchange rate affect the prices of goods and services in each country (Yao and Yin, 2005). If a currency of a particular country rises in value against another, the same amount of the first currency will buy more of the second than before. Assuming domestic prices in each country do not change, people from the first country can take their money, purchase more goods in the second country than they could prior to the shift in the exchange rate. Rodrik (2011) emphasizes need to understand why currency flows have соntributеd to rеduсtiоn of influence in dоmеstiс policy over time, think of the price of a currency in its own terms. The price for money is established in interest rates, for interest is the price incurred when borrowing money. When we want to switch money from one currency to another, we must pay a price for the money we’re buying (Artadi and Sala-i-Martin, 2004). The price will be determined by the interaction of supply and demand. If there is a lot of the currency available, the price will fall; if the currency is scarce, the price will rise. The same logic applies to domestic monetary policy and interest rates; the less money available, the higher the price, that is when the interest rate goes up. According to Artadi and Sala-i-Martin (2004), the flow of currency, i.e. supply and demand of a country’s currency can be driven by numerous factors. The size and nature of a country’s economy shapes the supply of a currency. A country such as the U.S. or China have great economies and therefore large amounts of currency in circulation when compared to almost any other economy, but especially when compared to one with a lower level of economic development. Also the demand for a country’s currency depends on the type of demands there are for making payments to that country to purchase its goods and services. Transactions for goods and services or involving international investments therefore influence the exchange rate. As such, domestic policy from governments target exchange rate to regulate currency flows. Government institutions like Central Bank may manipulate monetary policy to control the supply of a currency by either making interest rate to rise or fall, which makes it easier or more difficult to borrow money (Yao and Yin, 2005). Different governments have different institutional arrangements, which offer them with different policy instruments for adjusting the money supply. Along the same principles, the government can try to stimulate exports or imports by changing the relative price of its currency. Again, it does so by shifting supply. In addition, it can shift supply by selling more of its currency at cheap prices, thus driving the price down on exchange markets (Rodrik, 2011). Or it can force the rate up by purchasing much of its own currency using foreign currencies, thus bidding the price higher and reducing and reducing the supply. There are known as exchange rate interventions. Such a policy is often disguised as a floating exchange rate, and hence is referred to as a dirty float that negatively affects the currency flow of a country. The exchange rate affects exports and imports in a simple and direct fashion-when the price of the currency is exchanged, the prices of the goods within the economy are changed. This can make products or services appear cheaper or more expensive, thereby changing the competitiveness of goods in trade (Artadi and Sala-i-Martin, 2004). A higher value on the currency makes all the goods in the country look cheaper, thus making it easier to export and easier to compete against imports. Monetary policy can interact with or substitute for trade policy. One of the tricks to understand foreign economic policies is grasping how trade balances, monetary, and exchange rate actions. Sound economic policies like lessening of the foreign exchanges, provision of subsidies, equity regulations and relaxation of tariffs on imports have played a very important role in turning around the economies of emerging markets through FDI (Rodrik, 2011). For example, China receive positive of trade from its automotive exports to U.S., Europe and in emerging markets, which is in Africa and Latino America. Trade between China other nations from Europe, Africa, U.S. and Latin America whose economy has been growing since early 1990s because of sound domestic policy and stable currency flow (Yao & Yin, 2005). Chinese MNEs trade with other nations and FDI are fundamental in promoting global economic growth, development, freedom and prosperity. Conclusion To improve the situation of domestic policy, policy reforms should be initiated by government to offer a suitable business surroundings that will attract FDI from different parts of world. The reforms may comprise of simplying visa applications, award of expedition visas, provision of land to construct new industries, carrying out promotional activities overseas, establishing salary and wage reforms, looking for business solutions (consultancy) from developed nations (Rodrik, 2011). Warner (1997) argues that the management of MNEs must decide which operational structure of FDI will be employed to implement this international marketing venture. Active involvement in regional business initiatives like removal of trade barriers, agreeing to combine efforts to perfect the regional infrastructures will help boost FDI. The home country of the MNEs usually forms a base of expansion and initial development of the firm. The basic features of MNEs are that they attempt to treat the various markets as one, to the extent to which host countries governments permit. They also respond to the market opportunities overseas by pulling resources together to take maximum advantage of available resources. BIBLIOGRAPHY 1. Artadi, E.V. and Sala-i-Martin, X. (2004). “The economic tragedy of the twentieth century: growth in Africa”, in World Economic Forum. The Africa Competitiveness Report. Geneva: WEF 2. Asiedu, E. (2006). 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