Economics
Foreign Direct Investment
Foreign Direct Investment (FDI) refers to when a company or individual from one country invests in a business or entity located in another country. This investment involves a significant degree of control or influence by the investor over the operations of the foreign business. FDI is a key driver of globalization and can bring benefits such as job creation and technology transfer.
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eBook - PDFThe Economics of Brexit
A Cost-Benefit Analysis of the UK's Economic Relationship with the EU
- Philip B. Whyman, Alina I. Petrescu(Authors)
- 2017(Publication Date)
- Palgrave Macmillan(Publisher)
The inflow of Foreign Direct Investment (FDI) is typically associated with a variety of economic benefits, ranging from increased productiv- ity to enhanced innovation and technological development. The UK has been relatively successful in attracting inward flows of FDI, and con- sequently it has been one of the areas where it is suggested that Brexit may have a negative impact. Thus, it is important to assess the veracity of predictions made by the various studies which have examined this question, to test whether these provide a firm evidence base for UK policy makers with the responsibility to manage the transition towards independence from the EU. Definition—What Is FDI? Foreign Direct Investment (FDI) 1 may be defined as the acquisition by firms, governments or individuals, in one (source) country, of assets in another (host) nation, for the purpose of controlling the production, distribution and/or other productive activities. It is the aspect of con- trol of the productive process which distinguishes FDI from the more 4 Foreign Direct Investment (FDI) © The Author(s) 2017 P.B. Whyman and A.I. Petrescu, The Economics of Brexit, DOI 10.1007/978-3-319-58283-2_4 123 124 P.B. Whyman and A.I. Petrescu passive international portfolio investment—i.e. where firms, govern- ments or individuals purchase securities, including shares and bonds, in another country. Whereas portfolio investment is typically under- taken to spread risk by diversifying holdings in multiple securities, and where investors do not typically seek to influence the management of the organisation, FDI involves the concentration of investment specifi- cally in order to control production. It is not a short term investment, but rather seeks to acquire a long term controlling interest (IMF 2013).
eBook - PDFLiberalizing Financial Services and Foreign Direct Investment
Developing a Framework for Commercial Banking FDI
- L. Páez(Author)
- 2011(Publication Date)
- Palgrave Macmillan(Publisher)
2 Correspondingly, a definition of FDI will reflect these statistical and legal discrepancies. Nonetheless, a concept that has had grow- ing acceptance in an important number of countries is the OECD Benchmark definition. This definition is consistent with the IMF Balance of Payments Manual and has also been systematically taken up by the United Nations Conference for Trade and Development (UNCTAD) in its World Investment Report. 3 The OECD defines Foreign Direct Investment as follows: Foreign Direct Investment reflects the objective of obtaining a last- ing interest by a resident entity in one economy (“direct investor”) Understanding FDI 9 in an entity resident in an economy other than that of the investor (“direct investment enterprise”). The lasting interest implies the existence of a long-term relationship between the direct inves- tor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all sub- sequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated. 4 As the word foreign denotes, Foreign Direct Investment is a cross-bor- der transfer of capital from a source to a host country. In essence, FDI reflects an interest on behalf of the “direct investor” to seek establishment in the host country through a “direct investment enterprise.” Further, this interest is accompanied by the objective to exercise some form of control over the investment, since the investor holds “a significant degree of influence on the management of the enterprise.” Two important considerations arise in the context of this defini- tion. First, how much FDI is required to qualify establishment of an enterprise as a direct investment enterprise? Second, to what extent does the direct investor have an influence over the enterprise management? These questions can be answered when ownership control is addressed.
eBook - PDFForeign Direct Investment and Development in Vietnam
Policy Implications
- Pham Hoang Mai(Author)
- 2003(Publication Date)
- ISEAS Publishing(Publisher)
4 Foreign Direct Investment and Development in Vietnam © 2004 Institute of Southeast Asian Studies, Singapore 2 Theoretical Overview of FDI While FDI is acknowledged as a significant form of capital in many developing economies, often constituting a large proportion of gross national investment, its socio-economic impact is hotly debated. This chapter reviews the various, often oppositional, theories about the nature, origins and patterns of transnational FDI flows. In addition, this chapter analyzes the role of government in influencing the effects of FDI on recipient economies. The arguments presented here set the background for this book’s analysis of the impact of the first decade of FDI flows in Vietnam, between 1988 and 1998. Definitions There are several ways to define Foreign Direct Investment. According to the International Monetary Fund, FDI includes: • new equity purchased or acquired by parent companies in overseas firms they are considered to control (including the establishment of new subsidiaries); • reinvestment of earnings by controlled firms; and • intra-company loans from parent companies to controlled firms. (Graham and Krugman 1993, p. 16). The United Nations defines FDI as “an investment involving a long term relationship and reflecting a lasting interest of a resident entity (individual or business) in one economy (direct investor) in an entity resident in an economy other than that of the investor (host country)” (United Nations 1992 cited in Lindblad 1997, p. 1). In general, FDI has been defined as the long-term investment made by non-residents of a host country through the creation or acquisition of capital assets in the host country. FDI implies the ownership of capital assets large enough to have full or partial control of the enterprise and a physical presence by foreign firms or individuals (Gillis et al. 1992, 4 Reproduced from FDI and Development in Vietnam, by Pham Hoang Mai (Singapore: Institute of Southeast Asian Studies, 2004).
eBook - ePubTechnical Change and Economic Growth
Inside the Knowledge Based Economy
- George M. Korres(Author)
- 2016(Publication Date)
- Routledge(Publisher)
Direct investment is a category in which an international investment made by a resident entity in one economy (direct investor) with the objective of establishing a lasting interest in an enterprise (or, otherwise, the direct investment enterprise) resident in another economy is classified. Direct investment involves both the initial transaction between the entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated. OECD recommends that direct investment flows be defined as: “A foreign direct investor may be an individual, an incorporated or unincorporated public or private enterprise, a government, a group of related individuals, or a group of related incorporated and/or unincorporated enterprises which has a direct investment enterprise – that is, a subsidiary, associate or branch – operating in a country other than the country or countries of residence of the foreign direct investor or investors”. Moreover, following the IMF definition, we can say that: “Direct investment refers to investment that is made to acquire a stake in an enterprise operating in an economy other than that of the investor, the investor’s purpose being to have an effective voice in the management of the enterprise. The foreign entity or group of associate entities that makes the investment is termed the direct investor
- A. Bitzenis, V. A. Vlachos, P. Papadimitriou, A. Bitzenis, V. A. Vlachos, P. Papadimitriou(Authors)
- 2012(Publication Date)
- Palgrave Macmillan(Publisher)
Outward FDI is direct investment by resident entities in affiliated enterprises abroad. Outward FDI, also known as “direct investment abroad,” is backed by the government against all associated risk. FDI flows denote new investment made and are recorded in the finan- cial account of the balance of payments (BOP). 2 FDI flows are broken down into equity capital, reinvested earnings, and other FDI capital (loans), which are assets or liabilities between the direct investors and the direct investment enterprise. FDI stocks/positions denote the value of the direct investment and are recorded in the international investment position. FDI stock represents the direct investment position on a historical-cost basis, that is, the amount of investment already in the host country (stock of Foreign Direct Investment, which is the cumulative number for a given period), as opposed to the flow of capital into the host country in a given year. Outward FDI stocks are recorded as assets of the reporting economy, and inward FDI stocks are recorded as liabilities. FDI does not include foreign investments in stock markets. FDI may be undertaken by individuals, as well as by business entities. FDI net inflows are the value of inward direct investment made by non- resident investors in the reporting economy, including reinvested earnings and intracompany loans, net of repatriation of capital and repayment of loans. FDI net outflows are the value of outward direct investment made Motives, Barriers, and Trends in FDI ● 29 by the residents of the reporting economy to external economies, includ- ing reinvested earnings and intracompany loans, net of receipts from the repatriation of capital and repayment of loans. The components of direct investment capital transactions are recorded on a directional basis (resident direct investment abroad and nonresident direct investment in the recording economy).
eBook - PDF- OECD(Author)
- 2013(Publication Date)
- OECD(Publisher)
The Central Bank is responsible for compiling and disseminating FDI statistics as part of the balance of payment statistics and DoS provides the raw data of FDI surveys based on a questionnaire designed by CBJ. All OECD countries have made efforts over the past decade or so to align their national statistics with the recommendations of the OECD Benchmark Definition of Foreign Direct Investment (BMD) to provide more reliable, more comprehensive and internationally comparable FDI statistics for policy making and for other purposes. OECD and IMF define FDI as a category of investment that reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor. The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise. The numerical threshold of ownership of 10% of the voting power determines the existence of a direct investment relationship between the direct investor and the direct investment enterprise. The population of enterprises to be included in the statistics is determined according to the Framework of Direct Investment Relationship (FDIR). The statistical unit is the enterprise (as opposed to local enterprise group) resident within an economic territory. 1. THE ROLE OF Foreign Direct Investment IN JORDAN’S ECONOMIC DEVELOPMENT OECD INVESTMENT POLICY REVIEWS: JORDAN 2013 © OECD 2013 46 Foreign investor participation in privatisation programmes Jordan elaborated a national privatisation strategy 5 in the mid-1990s which launched a comprehensive state-owned enterprises restructuring and privatisation programme.
No longer available |Learn more- (Author)
- 2011(Publication Date)
All real estate investment of a private, non- business nature, covering such areas as recreational facilities, vacation homes and residences owned by non-residents for personal use or leased to others should, in principle, be included in direct investment (IMF, 1993, paragraph 382). Some of this investment would be conducted through unincorporated entities in an economy. Box I.32. FDI in the banking sector FDI in banks and other financial intermediaries is limited to transactions associated with equity (share capital) and permanent debt. a Permanent debt consists of long-term loans, bonds and debentures, and other such long- term debt liabilities extended by a foreign bank to an affiliated bank in another economy. Equity capital is considered a long-term investment. There may be all types of liabilities by a direct investment enterprise in the banking sector with its foreign parent or other foreign affiliates. The liabilities considered as direct investment would be those that are normally included in the long- term liability or debt portion of the balance sheet. Branches are also included in this type of treatment where the fixed assets of the banks are considered as direct investment. The other liabilities by depository institutions with foreign affiliates would be treated as appropriate, as either portfolio investment or other investment. This would include the usual transactions, such as deposits and other claims, that take place between banks and depository institutions. a Under the fourth edition of the Benchmark Definition (BD4), permanent debt is no longer considered an FDI item (OECD, 2008). VOLUME I | 67 Box I.33. FDI in natural resource exploration Expenditures of direct investment enterprises for the exploration of natural resources would be recorded as direct investment inflows where the expenditures are financed by the direct investor.
- E. Graham(Author)
- 2005(Publication Date)
- Palgrave Macmillan(Publisher)
1 Introduction: Foreign Direct Investment in Developing Countries – Where Do We Now Stand? Edward M. Graham Institute for International Economics, Washington, DC, USA 1 Introduction This volume is about Foreign Direct Investment in developing countries. The chapters were selected from papers presented at the Thirteenth Congress of the International Economic Association, held in Lisbon, Portugal in September 2002. To be included in this volume, a paper had to address some aspect of the topic, but some addressed it rather obliquely, and justification for their inclusion is noted below. The IEA papers on this topic could not have come at a more opportune time. The past decade has seen the study of Foreign Direct Investment (FDI) and multinational enterprise enter increasingly into mainstream economics, especially mainstream econometrics. This has been, gener- ally, quite good news for a veteran such as myself who has tried to work on the interface between economics and FDI for something like thirty years and who has found that, for much of this time, FDI simply was not taken very seriously by most economists. It is not entirely good news, however, in part because some of the new research fails to account fully for insights and discoveries by veterans who investigated FDI and multi- national enterprises in the days before such study became ‘mainstream’. This has created a number of problems and shortcomings in the present body of work, and one thing that this introduction attempts to do is to identify these. The reader should realize, however, that I look upon the new work for the most part with approval; the contributions made by this work are substantial and likely to endure. My only intent in raising shortcomings is to suggest ways in which future research can continue to be useful. 1
eBook - PDF- Andrew Walter, Gautam Sen(Authors)
- 2008(Publication Date)
- Princeton University Press(Publisher)
They may have avoided political controversy in developing countries by focusing on export-oriented FDI, though the economic explanations discussed earlier seem better able to account for efficiency-seeking FDI of this form. Above all, a societal interests account does not easily explain why governments have been so keen in recent years to attract export-oriented FDI. Changing State Interests States can possess their own goals regarding FDI, but state interests regarding FDI are very difficult to define autonomously of economic theories. If the government wishes to promote national economic de-velopment and employment, for example, much depends on how it believes FDI affects these goals. Here, there has been much controversy among experts concerning the economic impact of FDI. Neoclassical economists generally assumed that inward investment in capital-poor developing countries promotes development by increasing efficiency, productivity, and exports. But the emphasis of the economic theorists of FDI on its source in market imperfections cast doubt on this assump-tion. Certainly, many governments of developing countries distrusted the liberal view. They saw MNCs as controlling access to capital and technology, hindering rather than promoting economic development and undermining national sovereignty. Particular groups associated with the state may derive direct or indi-rect personal benefits from FDI that lead them to favor openness. Indi-rect benefits may come in the form of claiming credit for successful 192 CHAPTER 6 policies or electoral advantage for politicians caused by the positive economic benefits FDI may provide to particular groups (e.g., more employment for voters). Direct benefits may take the form of bribes paid by MNCs to senior government officials and related individuals who must approve FDI projects (such bribes can include cash and eq-uity participation in joint ventures).
eBook - PDFForeign Direct Investment
Theory, Evidence and Practice
- I. Moosa(Author)
- 2002(Publication Date)
- Palgrave Macmillan(Publisher)
No wonder, then, that anti-globalization demonstrations are directed against the World Bank and the IMF as much as they are directed against MNCs. 94 Foreign Direct Investment MODELLING THE EFFECTS OF FDI Most of the empirical work that has been done on the effects of FDI is based on the single equation approach using time series or cross- section aggregated or disaggregated data. Typically, the underlying model would consist of an equation in which the dependent variable is the variable hypothesized to be affected by FDI, while FDI, whatever the measure may be, appears as an explanatory variable. Other explana- tory variables are used to control for the effect of other variables on the dependent variable. For example, Borensztein et al. (1995) inves- tigated the effect of FDI on economic growth by specifying a relation- ship of the form: g f (I F , H, Y 0 , X ) (3:1) where g is the growth rate, I F is Foreign Direct Investment, H is the stock of human capital, Y 0 is the initial level of output, and X is a vector of variables that are frequently used as determinants of growth, such as government expenditure, and variables representing foreign exchange and trade restrictions. The implication of Equation (3.1) is that the growth rate is determined by FDI and other factors, and in this sense causality runs from FDI to growth. Now, compare this with models of FDI determination, such as the model used by Yang et al. (2000) to study FDI in Australia. This (time series) model is written as: I F t 0 1 i t 2 E t 3 Y t 4 W t 5 O t 6 D t 7 t (3:2) where i is interest rate, E is the effective exchange rate, Y is output, W is the wage rate, O is openness, D is a measure of industrial disputes, and is the inflation rate. The implication of Equation (3.2) is that output (which is a proxy for market size) determines FDI, and hence causality runs from output to FDI.
eBook - PDF- Kenneth A. Froot(Author)
- 2008(Publication Date)
- University of Chicago Press(Publisher)
Washington, D.C.: Economics and Statistics Administration, Office of the Chief Economist, August. 1992a. Business statistics 1963-91. Washington, D.C.: Bureau of Economic Anal- ysis, June. 1992b. Foreign Direct Investment in the United States: Detail for historical-cost position and balance of payments flows, 1991. Survey of Current Business 72, no. 8 (August): 87-115. 1992~. Foreign Direct Investment in the United States: Operations of U.S. afiliates offoreign companies, revised I989 estimates. Washington, D.C.: Bureau of Eco- nomic Analysis, August. 1992d. Gross product of U.S. affiliates of foreign direct investors, 1987-90. Survey of Current Business 72, no. 11 (November): 47-54. 1992e. U.S. direct investment abroad: Detail for historical-cost position and bal- ance of payments flows, 1991. Survey of Current Business 72, no. 8 (August): Wilkins, Mira. 1989. The history of foreign investment in the United States to 1914. 116-44. Cambridge, Mass.: Harvard University Press. Discussion Summary Raymond Vernon led off the discussion by agreeing with Robert Lipsey that exchange rate movements might offer an important explanation of at least some of the FDI patterns. In addition, he feels that FDI may influence the impact of exchange rate movements on other economic variables such as ex- 171 Foreign Direct Investment in the U.S.: Changes over Three Decades ports: he conjectures that the J-curve phenomenon might be less pronounced in markets characterized by substantial FDI, since firms can adjust the trade between their own affiliates more easily and quickly than unaffiliated trading patterns could be changed. Vernon offered three reactions to the low reported profit rates of foreign direct investors in the United States. First, he noted that firms may undertake FDI to attenuate certain other business risks; firms that do FDI for this reason may do so-wisely-even though the expected rate of return is low.
No longer available |Learn moreAsia-Pacific Trade and Investment Report 2016
Recent Trends and Developments
- United Nations Economic and Social Commission for Asia and the Pacific(Author)
- 2016(Publication Date)
- United Nations Publications(Publisher)
FDI inflows in these sectors are also encouraged by regional integration efforts such as recently announced the Belt and Road Initiative and Asian Infrastructure Investment Bank (AIIB), and existing initiatives such as the Eurasian Development Bank (EDB), with its focus on regional integration and economies ties. Therefore, countries have paid special attention to promote and/or control investment in infrastructure industries, through investment policies and other means. Foreign Direct Investment MAKES A MODEST COME-BACK CHAPTER 3 Asia-Pacific Trade and Investment Report 2016 − 45 Box 3.1 Increasingly, economies are putting much effort into attracting the FDI that would enable sustainable growth. Originally, it was believed that FDI inflows would automatically result in growth and, hence, many economies pursued outward-oriented growth strategies that not only focused on increasing international trade but also encouraging high levels of FDI. However, empirical evidence has revealed that these FDI inflows by themselves do not automatically translate into growth, and particularly what is considered to be sustainable growth. The following prerequisites as well as required host country characteristics are necessary for attracting FDI for sustainable development. First, absorptive capacities are needed to ensure positive spillovers, which arise when resources, notably knowledge, are spread and transferred (Meyer, 2004). These positive spillovers lead to productivity growth via enhanced knowledge and skills (Görg and Greenaway 2004). Absorptive capacities and host country characteristics matter in making a difference in the extent or speed with which spillovers occur. Some of well-discussed absorptive capacities include research and development (R&D) capacities, human resources, technological capacity and infrastructure (Guimón 2013; and Görg and Greenaway 2004).
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