Foreign Direct Investment and Third World Development

1
Foreign Direct Investment and Third World
Development
2
Definition of FDI

• A firm from one country buys a controlling
  investment in a firm in another country or where
  a firm sets up a branch or subsidiary in another
  country
• Portfolio investment firm purchase stocks/shares
  in other companies purely financial reasons
  (profits from rising stock price or
  diversification of assets)

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Global Trends in FDI

• During the 1960s, FDI grew at twice the rate of
  global gross national product and 40 percent
  faster than world exports
• During the 1970s and the first half of the 1980s,
  FDI and exports grew more or less in parallel
• After the mid-1980, FDI grew much faster than
  trade the primary mechanism of integration has
  shifted from trade to FDI

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Growth of FDI
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Who Makes Noise?

• Transnational Corporations
• Two Thirds of World Exports
• Intra-firm trade is one-third of total world
  trade
• 60,000 parent firms with 700,000 foreign
  affiliates
• Two investment strategies of TNCs
• Greenfield investment
• Mergers and Acquisitions

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TNCs and Trade Theory

• If significant portion of trade occurs within
  transnational corporations, what aspects of
  international trade theory we need to think
  again?
• External market prices vs. internal decisions of
  TNCs

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Changing Landscape of FDI Flows

• From the 1950s to the mid-1970s, US firms
  accounted for between 40 and 50 percent of the
  world total
• In 1960s, US and UK combined accounted for two
  thirds of world FDI
• By 1985, US-UK share fell to around 50 percent
• In 1990s, developing countries started to make
  FDI through their TNCs

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Major Players in Global FDI
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The Rise of Developing Countries in Global FDI
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Destinations of Global FDI

• 67 percent of world FDI stock in 2000 went to
  developed economies
• Before World War II, some 65 percent of the
  worlds FDI was located in developing countries
• Changes in the relative position of developed
  countries
• US in 1975, its outward FDI was 4.5 times
  greater than its inward FDI since then US
  become significantly important as an FDI
  destination

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Destinations of Global FDI

• Changes in the relative position of developed
  countries (Cont)
• Europe between 1975-1985, inward FDI in Europe
  fell from 41 percent to 33 percent of the world
  total by 2000, its share rose to 40 percent
• What would be the reason behind Europes
  resurgence as FDI destination during the 1990s?
• Intra-European FDI all major European countries
  send over 50 percent of their total FDI in Europe

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Destinations of Global FDI

• Changes in the relative position of developed
  countries (Cont)
• Japan 11.7 percent of total world outward FDI
  and 0.5 percent of total inward FDI
• What may be the reasons behind this anomaly in
  Japan?

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Destinations of Global FDI

• Changes in the relative position of developing
  countries
• What are the geographical characteristics of
  inward FDI flows to developing countries?

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Inward FDI to Developing countries
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Importance of FDI to host countries

• Relative importance of FDI, measured as
  percentage share of GDP, has increased in most
  major developed economies and developing economies

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Inward FDI as a share of GDP
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Foreign Branch Plants and Economic Growth

• What is your opinion about the following
  statements?
• What is good for General Motors is good for
  America
• The growth of large corporations is good for the
  countries that they operate

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Multiplier vs. Leakage

• Multiplier effects the positive economic
  benefits driven by initial FDI inflow
• Leakage potential beneficial effects leak out of
  the locality to benefit other places abroad
• What would be the bottom line of FDI? The bottom
  line can make the efforts to attract FDI
  justified or not.

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Flows and Stocks of FDI
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Impacts of FDI

• Monetary Flows
• Gains and Losses for Countries/Regions
• Gains and Losses for Corporations
• Transfer Pricing
• Impact on Local Firms
• Technological Transfer
• Labor
• FDI and the State

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Monetary Flows

• Balance-of-payments
• Do FDI inflows exceed FDI outflows?

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Gains and Losses for Countries
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Gains and Losses for Countries

• Some issues regarding interpreting FDI inflows
• FDI inflows may not stay in Third World
  countries FDI inflows are mainly spent on wages,
  machinery, buildings and other fixed equipments
  that are from developed countries
• New FDI since the 1980s are mainly in the form of
  MAs, privatization, debt for equity swaps FDI
  has led to ownership transfer rather than
  investment in production capacity

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Gains and Losses for Corporations

• Are corporations making money through FDI?

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Gains and Losses for Corporations

• The higher profits in developing countries may be
  attributable as much to the ability of TNCs to
  negotiate profitable terms as to the efficiency
  of its third world branch plants

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Transfer Pricing
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Transfer Pricing

• According to one study, on average, the price
  paid by TNC branch plants in Colombia for inputs
  imported from other branches of the same
  corporation250 of the open market price for
  pharmaceuticals inputs, and 125-150 of the
  market price for other inputs
• Why do TNC charge more for their own branch?

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Transfer Pricing

• FDI proponents transfer pricing is simply a way
  to fix distorted market price
• FDI critics transfer pricing makes governments
  policy to keep benefits of FDI within their
  boundaries
• It can be hypocritical to castigate government
  for engaging in international dumping practices
  when transfer pricing by corporations is neither
  criticized nor regulated

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Impact on Local Firms

• The presence of branch plants may stimulate
  demand for, and investment in, local firms that
  buy from or sell to the branch plant
• Local linkage of branch plants
• In 1987, Japanese electronics branch plants in
  Asia were purchasing just 36 locally
• What kinds of local linkages Distribution of
  benefits from local linkages

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Impact on Local Firms

• More competition to local firms that produce the
  same commodity of branch plants
• Pro-FDI branch plants will result in more
  competition and as a result more efficient local
  firms
• Anti-FDI collapse of local firms due to stronger
  branch of TNCs increasing dependence on TNCs
• Technological Transfer
• Little evidence that TNCs carry out RD
  activities in third world host countries
• Between 67 and 90 of RD investment by American
  and European TNCs stays at home