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Foreign Direct Investment
1
Course Name:
Seminar (FDI)
Prepared by:
Taherou mass Kah
Assign by
Prof: Dr Murat doğanlar
Foreign Direct Investment
2
Definition
Foreign direct investment (FDI) is a direct investment into production or
business in a country by an individual or company of another country, either by
buying a company in the target country or by expanding operations of an existing
business in that country. Foreign direct investment is in contrast to portfolio
investment which is a passive investment in the securities of another country
such as stocks and bonds.
Broadly, foreign direct investment includes "mergers and acquisitions,
building new facilities, reinvesting profits earned from overseas operations and
intra company loans".[1] In a narrow sense, foreign direct investment refers just
to building new facilities. The numerical FDI figures based on varied definitions
are not easily comparable.
As a part of the national accounts of a country, and in regard to the GDP
equation Y=C+I+G+(X-M)[Consumption + gross Investment + Government
spending +(Exports - Imports], where I is domestic investment plus foreign
investment, FDI is defined as the net inflows of investment (inflow minus
outflow) to acquire a lasting management interest (10 percent or more of voting
stock) in an enterprise operating in an economy other than that of the
investor.[2] FDI is the sum of equity capital, other long-term capital, and short-
term capital as shown the balance of payments. FDI usually involves participation
in management, joint-venture, transfer of technology and expertise. There are
two types of FDI: inward and outward, resulting in a net FDI inflow (positive or
negative) and "stock of foreign direct investment", which is the cumulative
number for a given period. Direct investment excludes investment through
purchase of shares.[3] FDI is one example of international factor movements
In another words, Foreign Direct Investment (FDI) is a category of
investment that reflects the objective of establishing a lasting interest by a
resident enterprise in one economy in an 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 direct or indirect ownership of 10% or more of the voting
Foreign Direct Investment
3
power of an enterprise resident in one economy by an investor resident in
another economy is evidence of such a relationship. FDI is not just a transfer of
ownership as it usually involves the transfer of factors complementary to capital,
including management, technology and organizational skills.
Types OF FDI
1) Horizontal FDI arises when a firm duplicates its home country-based
activities at the same value chain stage in a host country through FDI.(for
example, Toyota assembling cars in both Japan and the UK.)
2) Platform FDI Foreign direct investment from a source country into a
destination country for the purpose of exporting to a third country. This is
the most unusual form of FDI as it involves attempting to overcome two
barriers simultaneously - entering a foreign country and a new industry.
This leads to the analytical solution that internationalisation and
diversification are often alternative strategies, not complements.
3) Vertical FDI takes place when a firm through FDI moves upstream or
downstream in different value chains. (for example, Toyota acquiring a car
distributorship in America) and Backward Vertical FDI is where
international integration moves back towards raw materials (for example,
Toyota acquiring a tyre manufacturer or a rubber plantation).
Horizontal FDI decreases international trade as the product of them is usually
aimed at host country; the two other types generally act as a stimulus for it. FDI
is building new facilities.
Methods Of FDI
The foreign direct investor may acquire voting power of an enterprise in an
economy through any of the following methods:
 by incorporating a wholly owned subsidiary or company anywhere
 by acquiring shares in an associated enterprise
 through a merger or an acquisition of an unrelated enterprise
Foreign Direct Investment
4
 participating in an equity joint venture with another investor or enterprise
Forms of FDI incentives
Foreign direct investment incentives may take the following forms:
low corporate tax and individual income tax rates
i. tax holidays
ii. other types of tax concessions
iii. preferential tariffs
iv. special economic zones
v. EPZ – Export Processing Zones
vi. Bonded warehouses
vii. Maquiladoras
viii. investment financial subsidies
ix. soft loan or loan guarantees
x. free land or land subsidies
xi. relocation & expatriation
xii. infrastructure subsidies
xiii. R&D support
xiv. derogation from regulations (usually for very large projects)
Governmental Investment Promotion Agencies (IPAs) use various marketing
strategies inspired by the private sector to try and attract inward FDI,
including Diaspora marketing.
Importance and barriers to FDI
Foreign Direct Investment
5
The rapid growth of world population since 1950 has occurred mostly in
developing countries. This growth has been matched by more rapid increases in
gross domestic product, and thus income per capita has increased in most
countries around the world since 1950. While the quality of the data from 1950
may be of question, taking the average across a range of estimates confirms this.
Only war-torn and countries with other serious external problems, such as Haiti,
Somalia, and Niger have not registered substantial increases in GDP per capita.
The data available to confirm this are freely available.
An increase in FDI may be associated with improved economic growth due to
the influx of capital and increased tax revenues for the host country. Host
countries often try to channel FDI investment into new infrastructure and other
projects to boost development. Greater competition from new companies can
lead to productivity gains and greater efficiency in the host country and it has
been suggested that the application of a foreign entity’s policies to a domestic
subsidiary may improve corporate governance standards. Furthermore, foreign
investment can result in the transfer of soft skills through training and job
creation, the availability of more advanced technology for the domestic market
and access to research and development resources. The local population may be
able to benefit from the employment opportunities created by new businesses.
A key assumption is that there are no institutional barriers to discretionary
redistribution, so any group can appropriate all expropriated resources. Because
the group in power is not forced to transfer resources to other groups, a “tragedy
of the commons” arises: there is too much expropriation in equilibrium. A
tragedy of commons occurs when property rights of an asset cannot be enforced;
a typical example is fishing on a lake. Typically this gives rise to over-
consumption or under-investment (see Gordon 1954 or Lancaster 1973). In our
model, it is precisely the fact that groups cannot ensure ex ante that they will
receive the benefits of expropriation in the future that cause overexpropriation
in the first period, making the level of bribes inefficiently large. The degree of
such inefficiency is related to how likely it is that the current group in
government retains power in the second period. That is, the degree of such
inefficiency is related to the political instability.
While countries that have higher political instability are predicted to exhibit
higher levels of indirect expropriation, direct expropriation levels are lower. The
Foreign Direct Investment
6
intuition is as follows: because each group finds its chances of being in power in
the second period very unlikely, it becomes shortsighted and demands a large
quantity of bribes when in power (i.e., in the first period). This discourages
investment, and the reduction of capital decreases the marginal cost of direct
expropriation.
FDI in some countries
CHINA FOREIGN DIRECT INVESTMENT
Foreign Direct Investment in China increased to 1175.86 USD Hundred
Million in December of 2013 from 1055.06 USD Hundred Million in November of
2013. Foreign Direct Investment in China is reported by the National Bureau of
Statistics of China. Foreign Direct Investment in China averaged 374.80 USD
Hundred Million from 1997 until 2013, reaching an all time high of 1175.86 USD
Hundred Million in December of 2013 and a record low of 18.32 USD Hundred
Million in January of 2000. . This page contains - China Foreign Direct Investment
- actual values, historical data, forecast, chart, statistics, economic calendar and
news. 2014-01-28
ACTUAL PREVIOUS HIGHEST LOWEST FORECAST DATES UNIT FREQUENCY
1175.86 1055.06 1175.86 18.32 352.58 | 2014/01 1997 - 2013 USD HUNDRED MILLION MONTHLY NSA
Foreign Direct Investment
7
See TRADING ECONOMICS for more information [a]
TRADE LAST PREVIOUS HIGHEST LOWEST FORECAST UNIT TREND
CURRENT ACCOUNT 403.77 2013-08-15 509.00 1330.85 -8.96 570.47 2013-11-30 USD HUNDRED MILLION
CAPITAL FLOWS -168.16 2012-06-29 2210.56 2210.56 -168.16 -316.98 2012-12-31 USD HML
EXTERNAL DEBT 7369.86 2012-12-31 6949.97 7369.86 158.28 7425.63 2013-12-31 USD HML
FOREIGN DIRECT INVESTMENT 1175.86 2013-12-31 1055.06 1175.86 18.32 352.58 2014-01-31 USD HUNDRED MILLION
TERMS OF TRADE 99.09 2013-11-15 101.93 118.33 81.75 100.96 2013-12-31 INDEX POINTS
TOURIST ARRIVALS 165.60 2013-12-15 175.10 216.60 21.70 153.19 2014-01-31 TENS OF THOUSANDS
CURRENT ACCOUNT TO GDP 2.30 2012-12-31 1.90 10.10 -3.70 2.30 2013-12-31 PERCENT
BALANCE OF TRADE 256.41 2013-12-15 338.01 404.00 -319.71 171.93 2014-01-31 USD HUNDRED MILLION
EXPORTS 2077.42 2013-12-15 2022.05 2077.42 13.00 1839.25 2014-01-31 USD HUNDRED MILLION
IMPORTS 1821.02 2013-12-15 1684.04 1830.13 16.60 1716.14 2014-01-31 USD HUNDRED MILLION
Foreign Direct Investment
8
FDI in Africa
Foreign direct investment (FDI) and the emergence of multinational firms
(MNEs) have proven successful strategies for the growth performance of host
countries. In recent years, developing economies have gained substantial shares
of such worldwide FDI flows. Now, a “new wave of FDI” has even swept African
countries, (one of the poorest regions of the world (figue3) . With this, the
inflows to Africa are also becoming less and less concentrated compared to the
recent past, both geographically – dispersing across ever more countries – as well
as sectorally, shifting from extractive sectors to light manufacturing and services.
The increase in the size and geographical scope of the flows is partly due to a
significant expansion of South-South FDI – in particular intra-African FDI flows,
along with those from emerging economies such as China, India and other Asian
countries.
Figüre 3: FDI inflows worldwide, to developing economies and to Africa, 1970-
2010
Foreign Direct Investment
9
The empirical findings suggests that, as in other parts of the world, FDI flows
impact positively also on African domestic firms. We estimate in particular
vertical linkage effects – example . effects of FDI on firms that serve either as
suppliers or as customers to MNEs – and their impact on output per worker,
product innovation and process innovation of these firms. The study is not only
interested in the direction and size of the effects but also on the channels
through which they take place. Specifically, it investigates whether the
performance effects of the customer/supplier relation with multinationals can be
intensified by support from the government or from a multinational customer.
The idea is that with such support, firms may be able to build up better
absorptive capacities; they may thus not need to only rely on their own efforts.
Figure 4 shows that African firms in many countries (though with considerable
variance between countries) indeed utilised support both from governments and
from MNEs. The bulk of such help clearly came from the multinationals, with
around 30% of all firms in the dataset reporting receipt of such help. Support was
more often utilised when the African firm was a supplier to a MNE than when it
was a customer, and the support usually took the form of workforce upgrading or
technology transfer.
Figure 4. Support for African firms trading with MNEs
Foreign Direct Investment
10
Overall, the results from the data analysis show for the average domestic firm:
 Supplying to a foreign multinational (the backward linkage) fosters product
innovation and, to a lesser extent, process innovation.
 When also considering support either from government or MNEs,
supplying to a multinational also improves the domestic firms’ labour
productivity.
Foreign Direct Investment
11
 Buying from a multinational (the forward linkage) fosters labour
productivity, but does not affect or even discourages product and process
innovation.
These results have important policy implications. The observed mechanisms
can, at least to some extent, be influenced by policies, either through direct
government support efforts, or by providing incentives for multinationals to give
assistance. As the data show, the current level of such support is still quite low,
leaving substantial room for improvement.
FDI IN EUROPEN COUNTRİES
EU-27 foreign direct investment (FDI) is still affected by the global
economic and financial turmoil. In 2012, EU outward flows declined sharply,
down 53 % compared with 2011, and recorded their lowest level since 2004.
Similarly, EU inward flows decreased from the previous year — down 34 %, to
the lowest level since 2005. In this way, 2012 EU FDI flows stood at more than 60
% below the record peaks of 2007 in both inward and outward investment
Foreign Direct Investment
12
relations with the rest of the world (see Figure)
In 2010, total FDI outflows decreased by 8 %, mainly due to a sharp decline in
'equity capital', though partially compensated by an increase in 'reinvested
earnings'. In 2011, they recovered slightly, up 18 %, again due to recovery in
equity capital invested outside the EU EU inward flows declined in 2010 by 22 %
but recovered partially in 2011, up 13 %. 'Other capital' contributed the most to
the positive change, together with reinvested earnings. The income return from
both EU outward and inward investment in 2011 was slightly down from the
previous year but remained above the levels of 2008-2009 (see Figure 3).
Provisional figures for 2012 show that EU investment vis-à-vis the rest of the
world decreased, partially confirming the lasting impact of the global economic
crisis. As in earlier years, FDI flows channeled through special-purpose entities
(SPE) played a very significant role in the results for 2012.
Summary
Foreign direct investment occurs when a business invests in a foreign country by
either acquiring a foreign business that it controls or starting a business in the
foreign country. Advantages and disadvantages often depend upon whether you
are the investing company or the foreign country. Advantages for the company
investing in a foreign market include access to the market, access to resources,
and reduction in the cost of production.
Disadvantages for the company include an unstable and unpredictable
foreign economy, unstable political systems, and underdeveloped legal systems.
Advantages for the foreign country include infusion of foreign capital, increases
in revenue, development of new industries, and the ability to learn from foreign
investors. Disadvantages for the foreign country include getting caught in a race
to the bottom resulting in poor labor treatment and environmental destruction,
the risk that foreign investment will crowd out local development, and the
possibility of undue political influence of foreign investors.
Foreign Direct Investment
13
References
1. Boly A, N D Coniglio, F Prota and A Seric (2012), “Which Domestic Firms Benefit from FDI?
Evidence from Selected African Countries,” Working Paper, UNIDO.
2. Bwalya, S M (2006), “Foreign direct investment and technology spillovers: Evidence from panel
data analysis of manufacturing firms in Zambia,” Journal of Development Economics, 81, 514–526.
3. Görg, H and E Strobl, (2005), “Spillovers from foreign firms through worker mobility: an empirical
investigation,” Scandinavian Journal of Economics, 107, 693-709.
4. Görg, H and A Seric, (2013), “With a little help from my friends: Supplying to multinationals,
buying from multinationals, and domestic firm performance,” Kiel Working Paper 1867, Kiel
Institute for the World Economy.
5. http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx
6. http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Foreign_direct_investment_stat
istics
7. IMF (International Monetary Fund) 1993, Balance of Payments Manual 5th Edition,
Washington DC.
8. IMF (International Monetary Fund) 1995, Balance of Payments Compilation Guide, 1st
Edition, Washington DC.
9. IMF (International Monetary Fund) 2001, Balance of Payments Statistics Yearbook,
Washington DC.
10. OECD (Organisation for Economic Cooperation and Development) 1996, Benchmark
Definition of Foreign Direct Investment, 3rd Edition, Paris.

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Foreign Direct Investment

  • 1. Foreign Direct Investment 1 Course Name: Seminar (FDI) Prepared by: Taherou mass Kah Assign by Prof: Dr Murat doğanlar
  • 2. Foreign Direct Investment 2 Definition Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans".[1] In a narrow sense, foreign direct investment refers just to building new facilities. The numerical FDI figures based on varied definitions are not easily comparable. As a part of the national accounts of a country, and in regard to the GDP equation Y=C+I+G+(X-M)[Consumption + gross Investment + Government spending +(Exports - Imports], where I is domestic investment plus foreign investment, FDI is defined as the net inflows of investment (inflow minus outflow) to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.[2] FDI is the sum of equity capital, other long-term capital, and short- term capital as shown the balance of payments. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward and outward, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.[3] FDI is one example of international factor movements In another words, Foreign Direct Investment (FDI) is a category of investment that reflects the objective of establishing a lasting interest by a resident enterprise in one economy in an 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 direct or indirect ownership of 10% or more of the voting
  • 3. Foreign Direct Investment 3 power of an enterprise resident in one economy by an investor resident in another economy is evidence of such a relationship. FDI is not just a transfer of ownership as it usually involves the transfer of factors complementary to capital, including management, technology and organizational skills. Types OF FDI 1) Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI.(for example, Toyota assembling cars in both Japan and the UK.) 2) Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country. This is the most unusual form of FDI as it involves attempting to overcome two barriers simultaneously - entering a foreign country and a new industry. This leads to the analytical solution that internationalisation and diversification are often alternative strategies, not complements. 3) Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains. (for example, Toyota acquiring a car distributorship in America) and Backward Vertical FDI is where international integration moves back towards raw materials (for example, Toyota acquiring a tyre manufacturer or a rubber plantation). Horizontal FDI decreases international trade as the product of them is usually aimed at host country; the two other types generally act as a stimulus for it. FDI is building new facilities. Methods Of FDI The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:  by incorporating a wholly owned subsidiary or company anywhere  by acquiring shares in an associated enterprise  through a merger or an acquisition of an unrelated enterprise
  • 4. Foreign Direct Investment 4  participating in an equity joint venture with another investor or enterprise Forms of FDI incentives Foreign direct investment incentives may take the following forms: low corporate tax and individual income tax rates i. tax holidays ii. other types of tax concessions iii. preferential tariffs iv. special economic zones v. EPZ – Export Processing Zones vi. Bonded warehouses vii. Maquiladoras viii. investment financial subsidies ix. soft loan or loan guarantees x. free land or land subsidies xi. relocation & expatriation xii. infrastructure subsidies xiii. R&D support xiv. derogation from regulations (usually for very large projects) Governmental Investment Promotion Agencies (IPAs) use various marketing strategies inspired by the private sector to try and attract inward FDI, including Diaspora marketing. Importance and barriers to FDI
  • 5. Foreign Direct Investment 5 The rapid growth of world population since 1950 has occurred mostly in developing countries. This growth has been matched by more rapid increases in gross domestic product, and thus income per capita has increased in most countries around the world since 1950. While the quality of the data from 1950 may be of question, taking the average across a range of estimates confirms this. Only war-torn and countries with other serious external problems, such as Haiti, Somalia, and Niger have not registered substantial increases in GDP per capita. The data available to confirm this are freely available. An increase in FDI may be associated with improved economic growth due to the influx of capital and increased tax revenues for the host country. Host countries often try to channel FDI investment into new infrastructure and other projects to boost development. Greater competition from new companies can lead to productivity gains and greater efficiency in the host country and it has been suggested that the application of a foreign entity’s policies to a domestic subsidiary may improve corporate governance standards. Furthermore, foreign investment can result in the transfer of soft skills through training and job creation, the availability of more advanced technology for the domestic market and access to research and development resources. The local population may be able to benefit from the employment opportunities created by new businesses. A key assumption is that there are no institutional barriers to discretionary redistribution, so any group can appropriate all expropriated resources. Because the group in power is not forced to transfer resources to other groups, a “tragedy of the commons” arises: there is too much expropriation in equilibrium. A tragedy of commons occurs when property rights of an asset cannot be enforced; a typical example is fishing on a lake. Typically this gives rise to over- consumption or under-investment (see Gordon 1954 or Lancaster 1973). In our model, it is precisely the fact that groups cannot ensure ex ante that they will receive the benefits of expropriation in the future that cause overexpropriation in the first period, making the level of bribes inefficiently large. The degree of such inefficiency is related to how likely it is that the current group in government retains power in the second period. That is, the degree of such inefficiency is related to the political instability. While countries that have higher political instability are predicted to exhibit higher levels of indirect expropriation, direct expropriation levels are lower. The
  • 6. Foreign Direct Investment 6 intuition is as follows: because each group finds its chances of being in power in the second period very unlikely, it becomes shortsighted and demands a large quantity of bribes when in power (i.e., in the first period). This discourages investment, and the reduction of capital decreases the marginal cost of direct expropriation. FDI in some countries CHINA FOREIGN DIRECT INVESTMENT Foreign Direct Investment in China increased to 1175.86 USD Hundred Million in December of 2013 from 1055.06 USD Hundred Million in November of 2013. Foreign Direct Investment in China is reported by the National Bureau of Statistics of China. Foreign Direct Investment in China averaged 374.80 USD Hundred Million from 1997 until 2013, reaching an all time high of 1175.86 USD Hundred Million in December of 2013 and a record low of 18.32 USD Hundred Million in January of 2000. . This page contains - China Foreign Direct Investment - actual values, historical data, forecast, chart, statistics, economic calendar and news. 2014-01-28 ACTUAL PREVIOUS HIGHEST LOWEST FORECAST DATES UNIT FREQUENCY 1175.86 1055.06 1175.86 18.32 352.58 | 2014/01 1997 - 2013 USD HUNDRED MILLION MONTHLY NSA
  • 7. Foreign Direct Investment 7 See TRADING ECONOMICS for more information [a] TRADE LAST PREVIOUS HIGHEST LOWEST FORECAST UNIT TREND CURRENT ACCOUNT 403.77 2013-08-15 509.00 1330.85 -8.96 570.47 2013-11-30 USD HUNDRED MILLION CAPITAL FLOWS -168.16 2012-06-29 2210.56 2210.56 -168.16 -316.98 2012-12-31 USD HML EXTERNAL DEBT 7369.86 2012-12-31 6949.97 7369.86 158.28 7425.63 2013-12-31 USD HML FOREIGN DIRECT INVESTMENT 1175.86 2013-12-31 1055.06 1175.86 18.32 352.58 2014-01-31 USD HUNDRED MILLION TERMS OF TRADE 99.09 2013-11-15 101.93 118.33 81.75 100.96 2013-12-31 INDEX POINTS TOURIST ARRIVALS 165.60 2013-12-15 175.10 216.60 21.70 153.19 2014-01-31 TENS OF THOUSANDS CURRENT ACCOUNT TO GDP 2.30 2012-12-31 1.90 10.10 -3.70 2.30 2013-12-31 PERCENT BALANCE OF TRADE 256.41 2013-12-15 338.01 404.00 -319.71 171.93 2014-01-31 USD HUNDRED MILLION EXPORTS 2077.42 2013-12-15 2022.05 2077.42 13.00 1839.25 2014-01-31 USD HUNDRED MILLION IMPORTS 1821.02 2013-12-15 1684.04 1830.13 16.60 1716.14 2014-01-31 USD HUNDRED MILLION
  • 8. Foreign Direct Investment 8 FDI in Africa Foreign direct investment (FDI) and the emergence of multinational firms (MNEs) have proven successful strategies for the growth performance of host countries. In recent years, developing economies have gained substantial shares of such worldwide FDI flows. Now, a “new wave of FDI” has even swept African countries, (one of the poorest regions of the world (figue3) . With this, the inflows to Africa are also becoming less and less concentrated compared to the recent past, both geographically – dispersing across ever more countries – as well as sectorally, shifting from extractive sectors to light manufacturing and services. The increase in the size and geographical scope of the flows is partly due to a significant expansion of South-South FDI – in particular intra-African FDI flows, along with those from emerging economies such as China, India and other Asian countries. Figüre 3: FDI inflows worldwide, to developing economies and to Africa, 1970- 2010
  • 9. Foreign Direct Investment 9 The empirical findings suggests that, as in other parts of the world, FDI flows impact positively also on African domestic firms. We estimate in particular vertical linkage effects – example . effects of FDI on firms that serve either as suppliers or as customers to MNEs – and their impact on output per worker, product innovation and process innovation of these firms. The study is not only interested in the direction and size of the effects but also on the channels through which they take place. Specifically, it investigates whether the performance effects of the customer/supplier relation with multinationals can be intensified by support from the government or from a multinational customer. The idea is that with such support, firms may be able to build up better absorptive capacities; they may thus not need to only rely on their own efforts. Figure 4 shows that African firms in many countries (though with considerable variance between countries) indeed utilised support both from governments and from MNEs. The bulk of such help clearly came from the multinationals, with around 30% of all firms in the dataset reporting receipt of such help. Support was more often utilised when the African firm was a supplier to a MNE than when it was a customer, and the support usually took the form of workforce upgrading or technology transfer. Figure 4. Support for African firms trading with MNEs
  • 10. Foreign Direct Investment 10 Overall, the results from the data analysis show for the average domestic firm:  Supplying to a foreign multinational (the backward linkage) fosters product innovation and, to a lesser extent, process innovation.  When also considering support either from government or MNEs, supplying to a multinational also improves the domestic firms’ labour productivity.
  • 11. Foreign Direct Investment 11  Buying from a multinational (the forward linkage) fosters labour productivity, but does not affect or even discourages product and process innovation. These results have important policy implications. The observed mechanisms can, at least to some extent, be influenced by policies, either through direct government support efforts, or by providing incentives for multinationals to give assistance. As the data show, the current level of such support is still quite low, leaving substantial room for improvement. FDI IN EUROPEN COUNTRİES EU-27 foreign direct investment (FDI) is still affected by the global economic and financial turmoil. In 2012, EU outward flows declined sharply, down 53 % compared with 2011, and recorded their lowest level since 2004. Similarly, EU inward flows decreased from the previous year — down 34 %, to the lowest level since 2005. In this way, 2012 EU FDI flows stood at more than 60 % below the record peaks of 2007 in both inward and outward investment
  • 12. Foreign Direct Investment 12 relations with the rest of the world (see Figure) In 2010, total FDI outflows decreased by 8 %, mainly due to a sharp decline in 'equity capital', though partially compensated by an increase in 'reinvested earnings'. In 2011, they recovered slightly, up 18 %, again due to recovery in equity capital invested outside the EU EU inward flows declined in 2010 by 22 % but recovered partially in 2011, up 13 %. 'Other capital' contributed the most to the positive change, together with reinvested earnings. The income return from both EU outward and inward investment in 2011 was slightly down from the previous year but remained above the levels of 2008-2009 (see Figure 3). Provisional figures for 2012 show that EU investment vis-à-vis the rest of the world decreased, partially confirming the lasting impact of the global economic crisis. As in earlier years, FDI flows channeled through special-purpose entities (SPE) played a very significant role in the results for 2012. Summary Foreign direct investment occurs when a business invests in a foreign country by either acquiring a foreign business that it controls or starting a business in the foreign country. Advantages and disadvantages often depend upon whether you are the investing company or the foreign country. Advantages for the company investing in a foreign market include access to the market, access to resources, and reduction in the cost of production. Disadvantages for the company include an unstable and unpredictable foreign economy, unstable political systems, and underdeveloped legal systems. Advantages for the foreign country include infusion of foreign capital, increases in revenue, development of new industries, and the ability to learn from foreign investors. Disadvantages for the foreign country include getting caught in a race to the bottom resulting in poor labor treatment and environmental destruction, the risk that foreign investment will crowd out local development, and the possibility of undue political influence of foreign investors.
  • 13. Foreign Direct Investment 13 References 1. Boly A, N D Coniglio, F Prota and A Seric (2012), “Which Domestic Firms Benefit from FDI? Evidence from Selected African Countries,” Working Paper, UNIDO. 2. Bwalya, S M (2006), “Foreign direct investment and technology spillovers: Evidence from panel data analysis of manufacturing firms in Zambia,” Journal of Development Economics, 81, 514–526. 3. Görg, H and E Strobl, (2005), “Spillovers from foreign firms through worker mobility: an empirical investigation,” Scandinavian Journal of Economics, 107, 693-709. 4. Görg, H and A Seric, (2013), “With a little help from my friends: Supplying to multinationals, buying from multinationals, and domestic firm performance,” Kiel Working Paper 1867, Kiel Institute for the World Economy. 5. http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx 6. http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Foreign_direct_investment_stat istics 7. IMF (International Monetary Fund) 1993, Balance of Payments Manual 5th Edition, Washington DC. 8. IMF (International Monetary Fund) 1995, Balance of Payments Compilation Guide, 1st Edition, Washington DC. 9. IMF (International Monetary Fund) 2001, Balance of Payments Statistics Yearbook, Washington DC. 10. OECD (Organisation for Economic Cooperation and Development) 1996, Benchmark Definition of Foreign Direct Investment, 3rd Edition, Paris.