FDI

Question 1

What counts as FDI?

Answer 1

BPM5 - investment to acquire long lasting interest in enterprises operating outside the investor’s economy. The investor also has effective voice in the management of the enterprise (UNCTAD, 2010)

• Long lasting interest
• In foreign enterprises
• Investor has effective voice

Question 2

What is a lasting investment?

Answer 2

There is no specific timing required for it to count as FDI, but what matters is the intention, commitment and long-term orientation towards the investment

Question 3

What counts as effective voice?

Answer 3

According to the BD3 of the OECD, a foreign investor of a direct investment enterprise must own 10% or more in voting power to have effective voice
- Contract beforehand

Question 4

FDI gets reported in 4 ways

Answer 4

• Inward flow (year)
• Inward stock (total throughout time)
• Outward flow
• Outward stock

Question 5

Types of FDI

Answer 5

• Investing on international business- equity investment
• Reinvested earnings
• Other capital

Question 6

What is the UNCTAD

Answer 6

United Nations Conference on Trade and Development: in the 90s it became a policy-making body and advisory agency

Question 7

World Investment Report

Answer 7

Published by the UNCTAD
Principal source material for understanding what MNs are up to, provides data and analysis of FDI and MN enterprises
- Data lag: takes a long time to add all figures and come up with recent data

Question 8

Current FDI trends

Answer 8

• A lot of FDI is acquisition, not traditional ‘set up a factory’ (41% of total FDI in 2015 were acquisitions)
• Firms are playing the global tax regulations
• Increase in FDI inflow in developing economies: depend on MNs for infrastructure
• FDI inflow in developed countries: wild swings, really steep inclines, reaches peaks before falling down
• FDI is coming from biggest economies and also going towards big economies
• Investment by sector: 7% primary industries (agriculture, mining), 27% manufacturing, 64% stock of global FDI is services (infrastructure)
• Multinationals stay clear from countries with policy ‘all over the place’ (e.g. India)
• China (post 1970s) - FDI increase from liberalisation of market and opening to global market
• Fad fashion of FDI behaviour - herd behaviour

Question 9

Reasons for cross-border investing

Answer 9

• Labour costs
• Transportation costs
• Diversification
• Operational constraints
• Special incentives
• Market considerations
• Factor advantages

Question 10

Organising framework - John Dunning’s eclectic paradigm (OLI framework)

Answer 10

Framework of why companies invest overseas - firm engages in international operations where the 3 OLI conditions are met:

1. Firm has ownership-specific advantages
2. Best exploited by itself (internalised operations/investments)
3. Location factors that make foreign location profitable

Question 11

Disadvantages of going international

Answer 11

Cultural differences, political climate, trading regulations