Fdi and International Trade Essay Sample
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- Category: economics
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Fdi and International Trade Essay Sample
This Paper explains how the particular figures and results of foreign direct investmens and the international trade accrued and what reasons are behind. What conditions have to be complied, what the actual situation is and the amount of commitment, control, risk and profit potentia when entering a new foreign market. First, the basic motivations and used theories that cause a firm to invest abroad or export and outsource production to national firms, have to be understood. But still we cant determine a generally accapted theory because every new evidence add some new criticism and elements to the previous one. (Hosseini, 2005) The purpose of this study is to enable getting an overview of the specific circumstances through analyzing and explaining the main flows and trends and thorugh highliting how these theories were developed and what the motivators are which led to the need for new approaches to enrich economic theroy of FDI and International Trade. This paper aims at overlooking the factors that drives the FDI and the International Trade to go where they do by using different theroies.
Foreign direct investment
FDI (=Foreign direct Investment),an element of rapid globailization proccess, is the buying of permament property an businesses in foreign nations. The most common form of FDI is a foreign subsidiary. FDI is one oft he most advanced, complex, expensive and risky entry strategy between all other facilities abroad so basicly on the other hand the benefit of such a difficult investment has to be even more, which explains that the general FDI has made rapid increases in the last few decades.
There are generally three ways for a firm to engage FDI
– starting a new operation, called Greenfield investment. – to partner or merger with a local firm in the host country – to sell a license to a foreign firm to manufacture their product. 2. Major flows
Global FDI hasnt recoverd fully to its pre-crises level yet. Global inflows of FDI in 2010 totalled $1.12 trillion, a bit more than the $1.11 trillion recorded during 2009 (UNCTAD). Last year for the first time rich countries received less than half of global FDI. With more than $100 billion of FDI poured into China, China has been world’s second-largest recipient of such investment. Inflows to China, climbed 11% to 16 billion. With receiving about 20% of all FDI to developing countries over the last 10 years, China is getting very attractive for foreign investors. In 2010 $105.7 billion were invested into China and 30% of Chinas output and 10% of Chinas labour is generated by foreign invested companies. Durring 1980-2010 China had a 10% grwoth rate through its foreign direct investmens. 2010 the value of cross boarder M&As increased by 36% and the majority of FDI caused by Greenfield projects continued to fall The major Outflows of FDI in 2010 were made by:
The US with $351.4 bn, follwing by Germany with $107bn, France with $84.1 bn, China with $60.1 bn, Japan with $56.3 and Russian Federation with $52.5 billion. The highest inflows of FDI in 2010 were made by:
The US with $236.2 bn, China with $185 bn, Belgium with $72 bn, Brazil with 48.5, Germany $46.1, and UK with $51,8 billion. Inflows to east asia, south east asia and south asia for example with Bangladesh jumping by 30% to to $913 million , as a whole rose by 24% in 2010 reaching 300 billion. FDI flows to West Asia in 2010, falling by 12 per cent, continued to be affected by the global economic crisis but they are expected to bottom out in 2011. FDI outflows from South Asia for example with Bangladesh jumping by 30% to to $913 million, East and South East Asia grew by 20% to abt 232$ billion in 2010. FDI outflows from West Asia dropped by 51 per cent in 2010.
Net flows into India contracted by nearly a third, to $23.7 billion. In 2010 America remained the world’s biggest destination for FDI with $186 billion what is 43% more than in 2009. Flows of FDI to rich countries as a whole decreased by nearly 7% while those to the rest rose by almost 10%.
3. Advantages and explaining the trends of 2010
The following overview of the different advantages and explainiation of the major flows and trends through theories related to the results of the FDI 2010 makes it more understandble why FDI figures are what they are. One theory is that firms will engage FDI in terms of gaining a competitive advantage by exploiting abilities that are unique to the firm. This may enable a firm to enforce its position in their home market through getting access to resources such as knowledge or labor. Some firms may use these advantages to reduce production costs what result a price advantage. Other firms may be attracted to new markets because of high demand for their products. However, others may engage in FDI to prevent a competitor from gaining a significant market advantage (Bochem & Tuschke, 2010).
FDI DRIVING FACTORS
A theoretical framework is the “eclectic paradigm” created by John Dunning.It is a conceptation with which can be explained why and where Multinational companies (MNCs) invest abroad. Multinational enterprises invest abroad to look for three types of advantages:
Ownership (O), Location (L), and Internalization (I) advantages, also called OLI framework. For engageing FDI, these three factors must be present and the absence of any one of these will prevent FDI from taking place. The specific ownership (O) advantages of managerial ability, techniques, property rights or intangible assets allow a firm to compete with others in the market it serves despite being foreign, because of having access to, and export natural resources that are available to it. These advantages could arise a firm’s ability to coordinate things like manufacturing and distribution, and the ability to take use of the differences between the countries.
The location (L) factor related to advantages to make the chosen foreign country a more attractive site for example with labor advantages, natural resources, trade barriers which restrict imports and gains in trade costs for FDI than the enterprises own home country and the advantages could also include those of the country that benefits from FDI. The location advantages may increase from differences in government regulations, transport costs and cultural factors. For example labor costs of China are very low and were even lower, but in time they used to increase their laber costs more in more. But still the foreign companies are interested in makeing FDI in China and to attract the China consumer market. Lastly, the internalization (I) factor related with the advantages of imperfections in external markets, including reduction of uncertainty and transaction costs to create a more efficiently knowledge, as well as imperfections like tariffs, foreign exchange controls, and subsidies (Dunning J. H., 2001).
In this case, the delocalization of all or a part of the production process leads to low costs benefits. Following, Dunning determined four categories of motives for FDI: market seeking such as gaining access to new market, follow key customers and compete with key rivals in their own market; resource seeking including accessing of raw materials, gaining access to knowledge or other assets, efficiency seeking like reducing sourcing and production costs, and strategic-asset seeking to access development, regeneration, and advanced technology (Dunning, 1993) One of Asias strategy, related to strategic-asset seeking FDI with a clear recognition of strategy as a dynamic variable, is investing in developed countries to seek strategic advantages for the diversification and development of the industrial capabilities at home. Other countries generally seek to create a level of capacity in their home country before engageing outward irect investment, but the approach of these countries differs, increasingly their policy is creating productive capabilities which are missing at home, such as motor vehicels, alternative energies and electronics.
Domestic new strategies for attracting and increasing of Taiwanese FDI are an important element of Kunshan’s success. FDI, mainly from Taiwan, has enabled Kunshan stepwise to upgrade its economy, following a development path largely based on the full production chains from Taiwan. One oft he main reason why people engage FDI is that the company maintains complete control over any technology or qualifications it could own. The major disadvantage of it is that they have to commit funds and technology within foreign boundaries and if the relationships with the foreign country where the subsidiary is located (=host country) stumble, the firms advantage could be taken over by the foreign government. (McGraw-Hill). Greenfield investments in 2010 declined while merger and aquzitions increased. greenfield investmes follow the Global strategy, and merger and aquizitains use the multic domestic strategy, Harzing identified that the headquarter of global strategy have a higher control of their subsidary than the multi domestic strategy and this is why MNA success are more.
USA use a lot of MNA?
Driving FDI factors realized also non-policy and policy factors as influencer of FDI. Policy factors such as product-market and labor market regulations, corporate tax rates, direct FDI limitations, infrastructure and trade barriers and other regulations (Fedderke and Romm, 2006).West Asias Outward investment with falling rates, is mainly driven by government-controlled entities, which have been sending some of their national oil surpluses to support their home economies. The economic diversification policies of these countries maintain the strategy of investing in other Arab countries to support their small native economies. Macroeconomic policies of the host government mainly influence market-seeking FDI. In the case of efficiency-seeking FDI the most significant factors are paticulary production cost- related, but more emphasis is placed on factors like quality of local infrastructure and institutions and macroeconomic policies (Dunning, 1998) In India, the setback in attracting FDI was partly because of macroeconomic problems (WTO, 2010)
Market failures may be a reason for FDI which is categorizes into the ownership and location segments of the OLI framework. The location choice of the firm will often be influenced by areal market failure, trade barriers like tax rates or political issues. Investing in another country could reduce transaction costs what is an real advantage over competition. Market failure thorugh government action may cause too high processing costs for a firm in its home country (Dunning J. H., 2002) For example FDI falling flows to West Asia in 2010 experienced problems about poltical instability in the region which are likely to restraint the recovery. Taking benefit is also possible through joining a parntership project (joint venture) with shared technology and risk, shared marketing and management expertise and the chance to enter into markets while foreign companies cant, because of not producing their goods locally. Colgate-Palmolive“ from the US used the method with one of China largest toothpaste producers and since then China exports to 70 countries.
Driving FDI factors are also non-policy and policy factors as influencer of FDI. Policy factors such as product-market and labor market regulations, corporate tax rates, direct FDI limitations, infrastructure and trade barriers and other regulations (Fedderke and Romm, 2006).West Asias Outward investment with falling rates, is mainly driven by government-controlled entities, which have been sending some of their national oil surpluses to support their home economies. The economic diversification policies of these countries maintain the strategy of investing in other Arab countries to support their small native economies. An intangible asset may come extern, which dont acquire through market forces. These externalities may come in terms of knowledge that makes a certain location attractive (Tyner, 2008). For example Silicone Valley in California where is a lot of location specific knowledge because of computer industry. This specific knowledge spillover may provide a benefit to a firm that chooses to locate in this particular area (Hill, 2009).