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Natural resource-seekingEfficiency-seeking Market-seeking Strategic-asset seekingTNCsWhat TNCs seek in host countries determines the types of FDIMiningTourismOil and gas extraction, Access to a large domestic (Brazil, China, India) or regional market (EU, NAFTA, ASEAN) horizontal FDIDivide and specialize production in line with the comparative advantages of different locations vertical FDI export-oriented FDIprimarily through M&AsHost country determinantsHost Country Determinants of FDI Policies on functioning and structure of markets (especially competition and M&A policies) Privatization policy Good infrastructure and support services e.g. banking, legal accountancy services Note: this type of FDI takes place through cross-border M&As for a variety of strategic reasons Availability of firm-specific assets: technological, innovatory, marketing, brand names, etc. Buying market power or new markets, spreading risks, lowering transaction costs Availability & cost of skilled laborA. Market- seeking Market size and per capita income Market growth Access to regional and global market Country specific consumer preferences Structure of markets Availability of raw materials and natural resources (e.g., for tourism) Cost of raw materials Physical infrastructure (ports, roads, railways, power, telecom) Low-cost unskilled labour or skilled labour Cost of resources and labour adjusted for productivity Other input costs, e.g. transport and communication costs to and from and within host economy Regional integration agreements (inter-country division of labour)B. Resource -seekingC. Efficiency- seekingD. Strategic asset- seekingI. Policy framework for FDI Economic, political and social stability Rules regarding entry and operations Standards of treatment of foreign affiliatesII. Economic determinants Hassle costs or red tape (corruption, administrative efficiency, etc) Social amenities (quality of life, bilingual schools etc.) Social capital; attitude to work International trade and FDI agreements

Trade policy (tariffs and NTBs) and coherence of FDI and trade policies Tax policyTO NAME A FEW.. Investment promotion Investment incentivesIII. Business facilitationType of FDI by motives of TNCsPrincipal economic determinants in host countries5Each type of FDI has a different set of economic requirements

Sorting out host country FDI determinantsKey factors determining FDI inflows into countriesAs a rule, countries that offer what TNCs seek stand a greater chance to attract more FDITNCs seek many things (called locational advantages) in host countries. Key among them are economic attractions including: natural resources (giving TNCs access to, and control of, natural resources) large and dynamic domestic markets and access to international markets (permitting TNCs to grow faster than in national markets, spread the risks and better service the markets) lower costs of resources such as labour and other inputs, e.g., infrastructure services (permitting TNCs to reduce costs of production and operations) availability of firms possessing assets needed by TNCs (e.g., R&D, brands, customers base, marketing or other capabilities)

Factors Influencing FDI Inflows

http://www.univ-lille1.fr/afsemedee/communications/toubal_farid.pdfGeneral policies affecting FDIPolicies affecting economic, political and social stabilityTrade policyPrivatization policyTax policyMonetaryfiscal exchange rate policiesimport-substitution vs. export-orientationmembership of regional integration schemescan be a powerful determinant of FDI inflowstax heavens tax incentives corporate and personal taxesKey general policies that affect FDINOTE: THERE ARE MANY OTHER POLICIES AFFECTING FDI IN ONE WAY OR THE OTHER, RANGING FROM EDUCATIONAL POLICIES THROUGH LABOUR MARKET POLICIES TO ENVIRONMENTAL AND SECTORAL (E.G., MINING) POLICIES113 Specific Policies determining FDI1.Rules and regulations governing the entry and establishment of foreign investors in a host countrye.g., prohibition of entry, restrictions on ownership (joint venture requirement) or liberalization of entry

2.Treatment of foreign investorsnon-discrimination in the treatment of foreign and domestic firms (NT)preferential treatment of foreign or domestic firms (e.g., incentives)distinguish treatment before and after entry

3.Protection of foreign investorsexpropriation and nationalization; fund transfers; and dispute settlement are key issues in protectionFDI: Benefits to the Host CountryResource Transfer EffectsCapitalMNE invests capital in foreign marketsTechnologyResearch supports that MNEs do transfer technology when they invest in a foreign countryManagementWhen MNEs invest and manage in a foreign country, they often transfer management skills to the host countrys workforce Employment EffectsMNEs, by investing in foreign countries, can create employment opportunities for the local workforceBut: Acquisition vs. Greenfield InvestmentBalance of Payment EffectsBalance of Payment: A countrys balance-of-payment is the difference between the payments to and receipts from other countriesFDI can have beneficial and negative effects on a countrys balance of payment. We look at the beneficial effects nextEffect on CompetitionEfficient functioning of markets require adequate level of competition between producers13FDI: Benefits to Host Countrys Balance of PaymentInitial Capital InflowWhen a company invests in a foreign country, it brings capital into that countrySubstitute for ImportsTo the extent that the goods/services produced by the FDI substitute for imported goods/services, there is a positive effect on B-of-PInflow of payments from export of goods and servicesTo the extent that the goods/services produced by the FDI are exported to another country, there is a positive effect on the host countrys B-of-P14FDI: Costs to Host CountriesAdverse Effects on CompetitionMNEs may have too much power and kill off competitionAdverse Effects on Balance of PaymentsAfter initial inflow of capital, subsequent outflow of capital from the earnings of the FDIFDI may import inputs from abroadNational Sovereignty and AutonomyKey decisions that affect the host countrys economy may be made by a foreign parent that has no real commitment to the host country15FDI: Benefits & Costs to Home CountryBenefitsStream of income from foreign earningsFDI may import intermediate goods or inputs for production from the home country, creating jobsMNEs may learn skills from exposure to foreign countriesCostsBalance of payment: Initial capital outflow (but often set off by future stream of foreign earnings)Current account suffers if FDI is to serve home market from low-cost production locationCurrent account suffers if FDI is a substitute for direct exportEmployment effects:FDI a substitute for domestic production (e.g., Etch-A-Sketch)16Government Policy Instruments and FDI: Host Country PoliciesEncouraging Inward FDITax concessionsLow-interest loansGrantsSubsidiesRestricting Inward FDIOwnership restraintsExclusion from certain industriesWhy do so?To protect national interest (defense, etc)To facilitate resource-transferPerformance requirementsLocal content, exports, technology transfer, and local participation in top management17Government Policy Instruments and FDI: Home Country PoliciesEncouraging Outward FDIInsurance programs to cover major types of foreign investment risksSpecial funds or banks to make government loansPolitical influence to persuade host countries to relax restrictions on inbound FDIRestricting Outward FDILimit capital outflowsManipulate tax rules to encourage investment at homeOutright prohibition from investing in certain countries18Chapter 3: Foreign Direct Investment Theory and ApplicationEnsuring Growth from Organizational LearningMNEs exposed to multiple stimuli, developing:Diversity capabilitiesBroader learning opportunitiesExposed to:New marketsNew practicesNew ideasNew culturesNew competitionDecision Framework for FDIAre transportation costs high?Is know-how easy to license?Tight control over foreign ops required?Is know-how valuable and is protection possible?ExportFDIFDIFDILicenseNoNoYesYesNoNoYesYesImport Barriers?NoYesSlide 6-14The Theory of FDIA Decision Framework

Defining Political RiskIn order for an MNE to identify, measure, and manage its political risks, it needs to define and classify these risks which includeFirm-specific risksCountry-specific risksGlobal-specific risks18-22Predicting RisksPredicting firm-specific risk Different foreign firms operating within the same country may have very different degrees of vulnerability to changes in host-country policy or regulationsPredicting country-specific riskPolitical risk analysis is still an emerging field, though firms need to attempt to conduct this analysis

Firm-Specific Risks: BP Global oil spiltGovernance risksGovernance risk is the ability to exercise effective control over an MNEs operations within a host countrys legal and political environmentHistorically, conflicts of interest between objectives of MNEs and host governments have arisen over such issues as the firms impact on economic development, the environment, control over export markets, balance of payments (to name a few)The best approach to conflict management is to anticipate problems and negotiate understanding ahead of time

Firm-Specific RisksNegotiating Investment AgreementsAn investment agreement spells out specific rights and responsibilities of both the foreign firm and the host governmentThe presence of the MNE is as often sought by development-seeking governments of host countriesAn investment agreement should define policies on a wide range of financial and managerial issuesOperating Strategies after the FDI DecisionAlthough an investment agreement creates obligations on the part of both foreign investor and host government, conditions change and agreements are often revised in the light of such changesThe firm that sticks rigidly to the legal interpretation of its original agreement may well find that the host government first applies pressure in areas not covered by the agreement and then possibly reinterprets the agreement to conform to the political reality of that country

Motive of FDIKey determinants

Natural resource-seeking FDIAbundance and cost of natural resources

Physical infrastructure (ports, roads, railways, etc.)

Price movements

Market-seeking FDI

Market size and purchasing power (per capita income)

Market growth

Access to regional and global markets

Tradability of product/service

Structure of markets

Efficiency-seeking, export-oriented FDIQuality and cost of human resources

Physical infrastructure (ports, roads, telecom, etc.)

Trade costs

Quality of suppliers, clusters, etc.

Regional integration agreements

Strategic asset-seeking FDIPresence of firm-specific assets

Ease of cross-border M&As

Efficiency and transparency of financial markets

Chart13.783.793.813.843.863.873.933.963.963.984.094.154.214.34.47

1. FDI locational factors in developing countries, 2007, top importance (1=not at all important; 5=extremely important)

Locational factors by sectorPerceived importance of location factors, by sectorSectorFactorAll sectorsResource-basedManufacturingServicesMacroeconomic stability4.34.24.44.3Political stability4.34.54.24.4Quality of telecommunications4.34.14.14.4Costs of high-skilled labour4.33.74.44.3Supply of high-skilled labour4.23.84.44.2Corporate income taxes4.13.74.24.1Quality of banking and other financial services4.03.64.04.2Investment incentives4.03.34.33.8Attitude towards foreign investors4.03.73.74.2Hiring and firing regulations3.93.54.14.0Double taxation treaties3.93.84.23.7Quality of international air connections3.92.93.74.2General costs of doing business3.83.53.84.0Quality of local suppliers of goods and services3.83.83.83.8Access to export markets3.83.14.23.6Quality of life3.83.33.83.9Quality of universities and research institutes3.72.94.03.7Energy costs3.73.44.23.5Quality of road network3.74.04.03.4Bilateral investment treaties3.73.34.03.6Proximity to sophisticated customers3.63.23.43.9Presence of other companies in the same industry3.63.33.73.6Quality of housing3.63.13.63.7Ability to recruit internationally3.52.73.33.8International schools3.53.13.43.6Costs of real estate3.43.23.23.6Personal taxation3.43.73.33.4Costs of low-skilled labour3.32.94.03.0Quality of international sea links3.33.33.53.0Supply of low-skilled labour3.23.13.72.9Availability of natural resources3.23.33.23.1Quality of rail network2.83.33.22.3Number of respondents96123348

By country group Perceived importance of location factors, by country groupRegionLocational factors in developing countries,2007FactorAll countriesDevelopedDevelopingSEE/CISMacroeconomic stability4.34.54.34.2Quality of rail network2.7Political stability4.34.24.54.1Costs of low-skilled labour3.1Quality of universities and research institutes3.8Quality of telecommunications4.34.54.24.1Supply of low-skilled labour3.1Quality of international sea links3.8Costs of high-skilled labour4.34.44.24.4Personal taxation3.2Hiring and firing regulations3.8Supply of high-skilled labour4.24.54.14.2Costs of real estate3.3Quality of life3.8Corporate income taxes4.14.43.94.4Availability of natural resources3.4Corporate income taxes3.9Quality of banking and other financial services4.04.34.03.9Bilateral investment treaties3.5Access to export markets3.9Investment incentives4.03.94.04.0Ability to recruit internationally3.5Attitude towards foreign investors3.9Attitude towards foreign investors4.04.03.93.9International schools3.5Investment incentives4.0Hiring and firing regulations3.94.13.84.2Presence of other companies in the same industry3.6Quality of international air connections4.0Double taxation treaties3.94.23.64.2Proximity to sophisticated customers3.6Quality of banking and other financial services4.0Quality of international air connections3.93.84.03.5Double taxation treaties3.6Supply of high-skilled labour4.1General costs of doing business3.83.83.74.1Quality of road network3.7Costs of high-skilled labour4.2Quality of local suppliers of goods and services3.83.93.73.9Quality of housing3.7Quality of telecommunications4.2Access to export markets3.83.73.93.7Energy costs3.7Macroeconomic stability4.3Quality of life3.83.73.83.4General costs of doing business3.7Political stability4.5Quality of universities and research institutes3.73.83.83.5Quality of local suppliers of goods and services3.7Energy costs3.73.63.74.1Quality of road network3.73.73.73.9Bilateral investment treaties3.73.73.54.2Proximity to sophisticated customers3.63.93.63.2Presence of other companies in the same industry3.63.63.63.7Quality of housing3.63.43.73.6Ability to recruit internationally3.53.63.53.3International schools3.53.43.53.5Costs of real estate3.43.43.33.9Personal taxation3.43.73.23.6Costs of low-skilled labour3.33.53.14.0Quality of international sea links3.32.43.82.7Supply of low-skilled labour3.23.23.13.7Availability of natural resources3.22.53.43.4Quality of rail network2.82.72.73.1Number of respondents96255714

By country group

2. FDI locational factors in developing countries, 2007, less important (1=not at all important; 5=extremely important)

Sheet3

1. FDI locational factors in developing countries, 2007, top importance (1=not at all important; 5=extremely important)

Chart22.743.063.123.183.33.413.523.523.523.563.63.613.653.663.723.733.74

2. FDI locational factors in developing countries, 2007, less important (1=not at all important; 5=extremely important)

Locational factors by sectorPerceived importance of location factors, by sectorSectorFactorAll sectorsResource-basedManufacturingServicesMacroeconomic stability4.34.24.44.3Political stability4.34.54.24.4Quality of telecommunications4.34.14.14.4Costs of high-skilled labour4.33.74.44.3Supply of high-skilled labour4.23.84.44.2Corporate income taxes4.13.74.24.1Quality of banking and other financial services4.03.64.04.2Investment incentives4.03.34.33.8Attitude towards foreign investors4.03.73.74.2Hiring and firing regulations3.93.54.14.0Double taxation treaties3.93.84.23.7Quality of international air connections3.92.93.74.2General costs of doing business3.83.53.84.0Quality of local suppliers of goods and services3.83.83.83.8Access to export markets3.83.14.23.6Quality of life3.83.33.83.9Quality of universities and research institutes3.72.94.03.7Energy costs3.73.44.23.5Quality of road network3.74.04.03.4Bilateral investment treaties3.73.34.03.6Proximity to sophisticated customers3.63.23.43.9Presence of other companies in the same industry3.63.33.73.6Quality of housing3.63.13.63.7Ability to recruit internationally3.52.73.33.8International schools3.53.13.43.6Costs of real estate3.43.23.23.6Personal taxation3.43.73.33.4Costs of low-skilled labour3.32.94.03.0Quality of international sea links3.33.33.53.0Supply of low-skilled labour3.23.13.72.9Availability of natural resources3.23.33.23.1Quality of rail network2.83.33.22.3Number of respondents96123348

By country group Perceived importance of location factors, by country groupRegionLocational factors in developing countries,2007FactorAll countriesDevelopedDevelopingSEE/CISMacroeconomic stability4.34.54.34.2Quality of rail network2.7Political stability4.34.24.54.1Costs of low-skilled labour3.1Quality of universities and research institutes3.8Quality of telecommunications4.34.54.24.1Supply of low-skilled labour3.1Quality of international sea links3.8Costs of high-skilled labour4.34.44.24.4Personal taxation3.2Hiring and firing regulations3.8Supply of high-skilled labour4.24.54.14.2Costs of real estate3.3Quality of life3.8Corporate income taxes4.14.43.94.4Availability of natural resources3.4Corporate income taxes3.9Quality of banking and other financial services4.04.34.03.9Bilateral investment treaties3.5Access to export markets3.9Investment incentives4.03.94.04.0Ability to recruit internationally3.5Attitude towards foreign investors3.9Attitude towards foreign investors4.04.03.93.9International schools3.5Investment incentives4.0Hiring and firing regulations3.94.13.84.2Presence of other companies in the same industry3.6Quality of international air connections4.0Double taxation treaties3.94.23.64.2Proximity to sophisticated customers3.6Quality of banking and other financial services4.0Quality of international air connections3.93.84.03.5Double taxation treaties3.6Supply of high-skilled labour4.1General costs of doing business3.83.83.74.1Quality of road network3.7Costs of high-skilled labour4.2Quality of local suppliers of goods and services3.83.93.73.9Quality of housing3.7Quality of telecommunications4.2Access to export markets3.83.73.93.7Energy costs3.7Macroeconomic stability4.3Quality of life3.83.73.83.4General costs of doing business3.7Political stability4.5Quality of universities and research institutes3.73.83.83.5Quality of local suppliers of goods and services3.7Energy costs3.73.63.74.1Quality of road network3.73.73.73.9Bilateral investment treaties3.73.73.54.2Proximity to sophisticated customers3.63.93.63.2Presence of other companies in the same industry3.63.63.63.7Quality of housing3.63.43.73.6Ability to recruit internationally3.53.63.53.3International schools3.53.43.53.5Costs of real estate3.43.43.33.9Personal taxation3.43.73.23.6Costs of low-skilled labour3.33.53.14.0Quality of international sea links3.32.43.82.7Supply of low-skilled labour3.23.23.13.7Availability of natural resources3.22.53.43.4Quality of rail network2.82.72.73.1Number of respondents96255714

By country group

2. FDI locational factors in developing countries, 2007, less important (1=not at all important; 5=extremely important)

Sheet3

1. FDI locational factors in developing countries, 2007, top importance (1=not at all important; 5=extremely important)