FOREIGN DIRECT INVESTMENT

1
FOREIGN DIRECT INVESTMENT

• Dosen
• R. Widya Setiabudi, S.IP.,S.Si., M.T
• Viani Puspita Sari, S.IP.,M.M

2
Foreign Investment

• FI can be divided into 2 components
• 1. Portfolio investment
• ? The purchase of stocks and bonds to obtain a
  return on the funds invested
• 2. Direct investment
• ? The purchase of sufficient stock in a firm to
  obtain significant management control

3
Portfolio investment

• Although portfolio investors are not directly
  concerned with the control of a firm, they invest
  immense amounts in stocks and bonds from other
  countries
• Example persons residing outside the US owned
  American stock and bonds other than US Treasury
  securities with a value of 2,861 billion in 2002
  (including 1,171 billion in corporate stocks, a
  decline of 293 bilion from 2001 level).

4
Direct investment

• By which the investors participate in the
  management of the firm in addition to receiving a
  return on their money.
• The distinction between the two components has
  begun to blur, particularly with the growing size
  and number of international mergers, acquisitions
  ,and alliances in recent years.
• Ex investments by a foreign investor in the
  stock of a domestic company generally are treated
  as direct investment when the investors equity
  participation ratio is 10 or more

5
Level and Direction of FDI

• If a nation is continuing to receive appreciable
  amount of foreign investment, its investment
  climate must be favorable. This means that
  political forces of the foreign environment are
  relatively attractive and that the opportunity to
  earn a profit is greater there than elsewhere.
• Other reasons for investing exist, to be sure
  however if the above factors are absent, foreign
  investment is not likely to occur.

6
Trade leads to FDI

• Historically, FDI has followed foreign trade. One
  reason is that FDI is typically less costly and
  less risky than making a direct investment into
  foreign markets
• Management can expand the business in small
  increments rather than through the considerably
  greater amounts of investment and market size
  that a foreign production facility requires.
• Typically, a firm would use domestic or foreign
  agents to export. As the export business
  increased, the firm would set up an export
  department and hire sales representatives to live
  in overseas market. The firm might even establish
  its own sales company to import in its own name ?
  continuously make a subsidiary as a reason of
  creating economic of scale

7
Does trade lead FDI or does FDI lead Trade ?

• Trade?market expansion? FDI
• FDI?integrate the entire production regionally or
  globally?trade decisions

8
Ways to invest

• Acquire going companies or build new ones?

9
Why enter foreign markets?

• Increase profits and sales
• Preferential trading arrangements
• Faster growing market
• Improved communications
• Greater revenue
• Lower cost of goods sold
• Higher overseas profits as an investment motive
• Protect market, profits and sales
• Using foreign production to lower costs
• Attack in competitors home market.

10

• In bond plants (maquiladora)investments
• ? new concept ?reverse maquila