The University of Economics in KatowicePoland

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The University of Economics in Katowice/Poland

• FOREIGN DIRECT INVESTMENTSin Turkey
• FDI

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The University of Economics in Katowice/Poland

• Part One
• Foreign direct investment theoretical aspects
• Intensive Programe Seminar of teachers and
  students
• 1st-13th May 2006 HONIM / Brussels

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The University of Economicsin Katowice/Poland

• Authors
• Anna Brzeska
• Anna Gandor
• Edyta Tyc
• Artur Barski
• Slawomir Czech
• Session led by PhD Joanna Czech-Rogosz

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WHAT IS FDI ?
FOREIGN DIRECT INVESTMENTSin Turkey
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Some definitions

• an investment in one country by firms owned in
  another country.
• a flow of lending to, or purchase of ownership
  in, a foreign enterprise that is largely owned
  (at least 10 percent ownership) by residents of
  the investing country.
• the movement of capital across national
  frontiers in a manner that grants the investor
  control over the acquired asset. (Thus it is
  distinct from portfolio investment which may
  cross borders, but does not offer such control )

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continued ....

• a firm based in one country (the 'home country')
  owning 10 percent or more of the stock of a
  company located in a foreign country (the 'host
  country') -- this amount of stock is generally
  enough to give the home country firm significant
  control rights over the host country firm. Most
  FDI is in wholly-owned or nearly wholly-owned
  subsidiaries. Other nonequity forms of FDI
  include subcontracting, management contracts,
  franchising, and licensing and product sharing
• a long term commitment to marketing in a foreign
  nation through direct ownership of a foreign
  subsidiary or division

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...and so on
FDI is an activity in which an investor resident
in one country obtains a lasting interest in,
and a significant influence on the management
of, an entity resident in another country
this may involve

• creating an entirely new enterprise
• changing the ownership of existing enterprises
• reinvesting the earnings of the FDI enterprise
• other capital transfers

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FDI the basic questions
A COUNTRY
Will I take any advantages of the investment?
What can I offer?
/-
Will I take any advantages of the locatin?
What do I look for?
AN INVESTOR
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Main types of FDI
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What are the profits, and what is the risk
connected with Greenfield Investments
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Greenfield Investments
On one hand, they are the primary target of a
host nations promotional efforts because
On the other hand, there is a risk connected with
greenfield investments because

• they create new production capacity and jobs
• they transfer technology and know-how
• they can lead to linkages to the global
  marketplace

• they crowd out local industry, multinationals
  are able to produce goods more cheaply and usurp
  resources
• profits from production do not feed back into the
  local economy, but instead to the multinational's
  home economy

other words, direct investment in new facilities
or the expansion of existing facilities.
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Mergers and Acquisitions

• occur when a transfer of existing assets from
  local firms to foreign firms takes place, this is
  the primary type of FDI.

Cross-border mergers occur when the assets and
operation of firms from different countries are
combined to establish a new legal entity.
Cross-border acquisitions occur when the control
of assets and operations is transferred from a
local to a foreign company, with the local
company becoming an affiliate of the foreign
company.
Unlike greenfield investment, acquisitions
provide no long term benefits to the local economy
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How to measure FDI
2 ways

• financial investment real activity
  of foreign
• flows and stocks, affiliates in host countries

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FDI takes place when three sets of
determining factors exist simultaneously

Ownership specific advantages
Location specific advantages
Internalization incentive advantages
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The Advantages and Disadvantages of FDI can be

• for the host
• country

for the investor
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• What are the advantages and disadvantages of FDI
  for the investor?

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For an investor
ADVANTAGES DISADVANTAGES

• Travel/communications costs more abroad.
• Investor doesnt have a close familiarity with
  local business scene in general
• The MNEs face risks such as exchange rate
  changes, expropriation by the government etc. can
  be taken against them.
• Language and culture are different
• Higher wages/benefits must be paid to the
  personnel going abroad.

• Jumping the tariff wall (and other non- tariff
  barriers)
• Securing access to minerals located in the host
  country
• Lower wage in host developing countries for
  labor.
• Protection of market shares in exports if MNE's
  competitors also have established plants

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• What are the advantages and disadvantages of FDI
  for the host country?

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For the host country
ADVANTAGES DISADVANTAGES

• Increased productivity due to technology
  transfer, or due to improved managerial,
  technical skills.
• Relieving unemployment in the host country.
• Possibility of earning foreign exchange with
  sale/export of FDI produced goods abroad.
• Weakening the power of domestic monopolies at
  home.

• Some MNEs are larger/more powerful than the
  countries they invest in--the danger of a foreign
  monopoly power
• Only low level skill develop in the host country
• Profits of MNEs are repatriated.

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What determines FDI in the host country ?
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The key determinants of FDI for the host country
are
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Economic conditions
-size
-income levels
-urbanization
-stability and growth prospects -access to
regional markets -distribution and
demand patterns.
Markets
Resources
-natural resources -location
-labour availability,
-cost, skills, train ability
-managerial, technical skills
-access to inputs
-physical infrastructure
-supplier base
-technology support.
Competitiveness
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Host country policies
-management of crucial macro variables
-ease of
remittance
-access to foreign exchange.
Macro policies
-promotion of private ownership
-clear and stable policies

-easy host country policies
entry/exit policies -efficient financial
markets other support
Private sector
-trade strategy
-regional integration
and access to markets
-ownership controls
-competition policies
Trade industry
-ease of entry
-ownership, incentives -access to
inputs -transparent and
stable policies.
FDI policies
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MNE strategies
Risk perception

• macro management,
• labour
• policy stability.
• perceptions of country risk, based on political
  factors,

Location sourcing

• company strategies on location,
• sourcing of products/inputs,
• integration of affiliates,
• training,
• technology transfer.

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What determines FDI for the investor?, what are
the strategic motives for FDI?
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Strategic motives for FDI

• Market size
• Market growth
• Access to other markets
• Consumer preferences
• Structure of markets
• Strength of domestic business

Market seeking

• Cost of resources and assets depended on
• labor productivity
• Other costs like transportation or intermediate
  products
• Membership of integration area availability of
  economies
• of scale

Efficiency seeking

• Resource
• seeking

Abundance of raw materials Low
costs Unskilled labor
Skilled labor Quality education and research
institutes Innovativeness capacity High level
of RD

• Asset
• seeking

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Literature

• 1. World Investment Report 2005.Transnational
  Corporations and the Internationalization of RD
  United Nations, New York and Geneva 2005
• 2. M. Frenkel, G. Stadtmann Foreign Direct
  Investment Theory, Empirical Evidence and Policy
  Implications. Verlag für Wissenschaft und
  Forschung, 2003
• 3. W. J. Jansen, A. Stokman Foreign direct
  investment and international business cycle
  comovement. European Central Bank, Frankfurt am
  Main 2004

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Thank you for your attention!!

• Have a nice day!