FDI & Reg Eco Integration

8/19/2019 FDI & Reg Eco Integration

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1. FOREIGN DIRECTINVESTMENT

2. REGIONAL ECONOMICINTEGRATION

Lecture Four, 2nd – 6th March

1PAC, 2nd Semester 2014/2015


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ore gn rec nves men(FDI)

• Introduction

• Host and Home country Persectives o!FDI

• "easons#Determinants !or FDI

• FDI and $echno%ogy $rans!er

• "e&uirements o!#!or $echno%ogy $rans!er2PAC, 2nd Semester 2014/2015


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Introduction• 'hen a rm invests direct%y in !aci%ities to

roduce or maret a roduct in a !oreigncountry

• *tart+u o! ne oerations• -uying into e.isting comanies ( urchases o!

more than 1/ 0 o! e.isting comanies)• Port!o%io investments (stocs, onds, etc)

FDIs are major avenues for foreign market

entry and expansion and may take twoforms – green-eld and acquisition

PAC, 2nd Semester 2014/2015


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-enets and 3osts o! FDI

Benefts

Host country Home country

"esource trans!er e4ects(techno%ogy, caita% and

management)

-oP enets – i! homecountry creates demand !or

home country e.orts o!

caita% e&uiment,intermediate goods,

com%ementary roducts

5m%oyment e4ect 5m%oyment e4ects

-a%ance o! ayments e4ect Learns va%ua%e si%%s

through e.osure to !oreignmarets

54ect on cometition andeconomic groth

P73, 2nd *emester 2/1#2/18


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-enets and 3osts o! FDI

Costs

Host country Home country

7dverse e4ects on cometition -oP su4ers !rom the initia% caita%out9o re&uired to nance theFDI

7dverse e4ects on a%ance o!ayments

3urrent account o! the -oPsu4ers i! the urose o! the!oreign investment is to serve thehome maret !rom a %o+costroduction %ocation

:ationa% sovereignty andautonomy

$he -oP su4ers i! the FDI is asustitute !or direct e.orts

8P73, 2nd *emester 2/1#2/18


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FDI

• Mareting !actors

• Derived demand (herd behaviour), growth &e!ansion, gov"t ere#ted)

• -arriers to trade (#ir#umventing barriers totrade, domesti# !rote#tion)

• 3ost !actors

• Investment c%imate



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*ummary $a%e; major determinants of FDI

MarketingFators

Barriers toTra!e

CostFators

In"est#entC$i#ate

Genera$

*iterectedarriers to

trade

Desire to enear sourceo! su%y

=enera%attitudetoard

!oreigninvestment

5.ectedhigher rots

Maret grothPre!erence o!%oca% customers!or %oca%roducts

7vai%ai%ity o!Laour

Po%itica%stai%ity ?ther

Desire to

maintain shareo! maret

7vai%ai%ity o!

ra materia%s

Limitation on

onershi

Desire toadvancee.orts o!arentcomany

7vai%ai%ity o!caita%#techno%ogy

3urrencye.changeregu%ations

:eed to

maintain c%osecustomercontact

Loer %aour

costs

*tai%ity o!

!oreigne.change

Dissatis!actionith e.istingmaretarrangements

Loer otherroductioncosts

$a. structure

5.ort ase

Loer

transort costs

Fami%iarity ith

country

Desire to !o%%o Financia% (@

APAC, 2nd Semester 2014/2015


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FDI @ $echno%ogy $rans!er

• $rans!er o! systematic no%edge !orthe manu!acture o! a roductB

– 7%ication o! a rocessB

– "endering o! a service

• $echno%ogy trans!er occurs• Forma%%y ($i#ensing, %, et#)

• In!orma%%y (reverse engineering, diversions,industria$ es!ionage)

CPAC, 2nd Semester 2014/2015


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FDI; the shi!t to servicesFDI is shifting away from extractive industries

and manufacturing and towards services

$he shi!t to services is eing driven y;

• $he genera% move in many deve%oed countries toardservices

• $he !act that many services need to e roduced herethey are consumed

•7 %iera%i


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"e&uirements !or $echno%ogy $rans!er

• 7vai%ai%ity o! suita%e techno%ogy

• *ocia% and economic conditions!avouring trans!er

• $he i%%ingness and ai%ity o! the

receiving arty to use and adattechno%ogy

1/PAC, 2nd Semester 2014/2015


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"egiona% 5conomicIntegration

• Introduction

• Leve%s o! integration

•

3ase !or and against regiona%integration

• 5E integration

•

?ther integration arrangements• Im%ications !or managers

P73, 2nd *emester 2/1#2/18 11


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Introduction• 7greements among countries in a

geograhic region to reduce andu%timate%y remove tari4 and :$-s to the!ree 9o o! goods, services and !actors o!roduction eteen each other

• Leve%s o! integration• Free trade area

• 3ustoms union

•

3ommon maret• 5conomic union

• Po%itica% union

12P73, 2nd *emester 2/1#2/18


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Leve%s o! Integration



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Free trade area

• 7%% arriers to the trade o! goods andservices among memer countriesare removed

• 5ach determines its on tradeo%icies ith regard to non+memers

• Most ou%ar !orm o! integration –:7F$7, 5F$7

1P73, 2nd *emester 2/1#2/18


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3ustoms Enion

• 5%iminates trade arriers eteenmemer countries and adots acommon e.terna% trade o%icy

18P73, 2nd *emester 2/1#2/18


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3ommon maret

• Has no arriers to trade eteenmemer countries

– 3ommon e.terna% trade o%icy

– Enrestricted movement o! !actors o!roduction eteen memers (Immigration,5migration, cross order 9os o! caita%eteen memers

• "e&uires signicant degree o! harmonyand cooeration on sca%, monetary andem%oyment o%icies

16P73, 2nd *emester 2/1#2/18


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5conomic union

• "e&uires a common currency

• Harmoni ta. rates

•

7 common monetary and sca% o%icy• Demands high degree o! coordination

ureaucracy and the sacrice o!

signicant amount o! nationa%sovereignty to that ureauracy

1AP73, 2nd *emester 2/1#2/18


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Po%itica% union

• 7 centra% o%itica% aaratuscoordinates the economic, socia% and!oreign o%icy o! the memer states

1CP73, 2nd *emester 2/1#2/18


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Integration

States o%

Integration

A&o$ition o%

tari's ()*otas

Co##on

tari' ()*ota

s+ste#

A&o$ition o%

restritionson %ator

#o"e#ents

,ar#oni-at

ion (nifation

o% Eo./o$iies (

Instit*tions

Free $rade7rea es :o :o :o

3ustomsEnion

es es :o :o

3ommon

Maret es es es :o

5conomicEnion es es es es



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3ase %or "egiona%Integration

Eono#i ase /o$itia$ ase

-oost trade through secia%i


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ase aga ns eg onaIntegration

• -enets determined y e.tent o! trade

creation as oosed to trade diversion• $rade creation occurs;

– 1G hen high cost domestic roducers are re%acedy %o+cost roducers ithin the F$7

–

2G higher cost e.terna% roducers are re%aced y%oer cost e.terna% roducers ithin the F$7

• $rade diversion occurs; – 'hen %oer cost e.terna% su%iers are re%aced y

higher cost su%iers ithin the F$7

• 7 regiona% F$7 i%% enet the or%d on%y i!the amount o! trade it creates e.ceeds theamount it diverts

21P73, 2nd *emester 2/1#2/18


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5uroean Integration u to mid 1C/s

• 1C; ?rgani


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Provisions o! the $reaty o! "ome• Formation o! a !ree trade area

•

Formation o! a customs union

• Formation o! a common maret

• $he adotion o! a common agricu%tura% o%icy

• $he creation o! an investment !und to channe%caita% !rom the more advanced to the %essdeve%oed regions o! the community

Premise o! the $reaty o! "ome; !hat the mo"ility ofgoods services la"our and capital was#is$

important for economic prosperity


5E 3on9icts


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5E 3on9icts

• Dismant%ing o! trade arriers @ cometitiveness

• 7dministration o! the common 7gricG Po%icy

• Price+suort system

• Direct susidies to !armers

•

"eates to !armers ho e.ort or agree to store!arm roducts rather than se%% them ithin thecommunity


5E i th id 1C/


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5E since the mid 1C/s

• 3umersome rocedures @ restrictions on the

!our !reedoms>• Dissatis!action and groing g%oa% cometition

• *ing%e 5uroean 7ct

• Progress toards movement o! goods

• Less rogress toard !ree movement o! eo%e

• 5E created and started in 1 y theMaastricht $reaty ca%%ing !or a commitment toeconomic and monetary union and movetoard o%G Enion ith common !oreign andsecurity o%icy



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Integrated 5uroe; 'm!$i#ations• 5.ected economic groth

• 5%imination o! transactions costs andgains !rom trade

• 5conomies o! %arge sca%e roduction

• =ains !rom cometition


: th 7 i 5 i I t ti


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:orth 7merican 5conomic Integration

• 1C; E*+3anada Free $rade 7greement

• 11; :orth 7merican Free $rade7greement

• *taggered e%imination o! duty @ tari4s

:7F$7 oosition

• Laour

• 5nvironment

2APAC, 2nd Semester 2014/2015

? h 5 i 7%%i


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?ther 5conomic 7%%iances

• Latin 7merica

• 161; Latin 7merica Free $rade 7ssociation(L7F$7) 5%imination o! trade arriers

• 1C/; Latin 7merica Integration7ssociation (L7I7)

• 16/; 3entra% 7merican 3ommon Maret(373M), $reaty o! Managua

2CPAC, 2nd Semester 2014/2015


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Integration in 7sia

• 11; association o! *outh 5astern7sian :ations (7*57:)

•

7sia Pacic 5conomic 3ooeration(7P53)


Maor "egiona% $rade 7ssociations


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Maor "egiona% $rade 7ssociations

Tra!e Assoiation Me#&ers

7F$7; 7*57: Free $rade 7rea -runei, Indonesia, Ma%aysia, Phi%iines, *ingaore, $hai%and,Jietnam

7:3?M; 7ndean 3ommon Maret -o%ivia, 3o%omia, 5cuador, Peru, Jene


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"ecent#emerging integrationarrangements

%also referred to as mega-regionalagreements

• -"I3*; -ra


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Eono#i Integration ( t0eInternationa$ Manager

•

3reate a vision o! the outcome o! thechange

•

Deve%o strategic resonse to thechanged environment> !orcometitiveness reasons

• 3omany reorgani

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FDI & Reg Eco Integration

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