The political economy of FDI

Question 1

FDI in developing countries

Answer 1

morales nationalized four power companies, including a subsidiary of France’s GDF Suez

Nationalization of Owen-illnois and Agroislena in Venezuela

Question 2

Why are FDI ideologies shifting

Answer 2

• national security, exploitation, geo-politics, strategic trade policy, domestic industry protection

Question 3

Ideological shifts

Answer 3

radicalism - developing economies
free marked - developed economies

Question 4

FDI flow directions

Answer 4

inward FDI - investments coming into a country
outward FDI - investments leaving a country

Question 5

Home country benefits of outward FDI

Answer 5

resources - new skills and knowledge
employment - increased because overseas activites increase scale and therefore employment at home
competition - stimulates domestically grown companies and home economy
balance of payments/trade - long term capital inflows - profits back home. trade surplus

Question 6

Policy instruments for encouraging outward FDI

Answer 6

special rate loans and tax incentives

employment - increase due to overseas activities

competition and economic growth - stimulates domestically grown companies and home economy
balance of trade - long term capital inflows, more exports to subsidiary.

Question 7

China’s one belt, one road strategy

Answer 7

The 2015 implementation of the “One Belt, One Road” strategy helped improve infrastructure access and interconnection with neighbouring countries as well as with those along the routes. This will bring in new development opportunities for outbound investment in infrastructure, energy cooperation and advanced manufacturing sectors.

Question 8

Home country costs of outward FDI

Answer 8

resources: lose knowledge to overseas firms
employment: possibility of creating unemployment as domestic jobs are off-shored and not replaced (more likely)
competition: domestic value chain may suffer from loss of business
balance of trade: loss of trading income, trade deficit (when importing goods back to home country)

Question 9

Policy instruments for discouraging outward FDI

Answer 9

• Foreign exchange controls: limits the purchase of foreign currencies for outward FDI
  
  • Formal or informal use of political pressure: e.g. restriction on US firms investing in Iran & Cuba
  • Admin bureaucracy
  • High tariffs on imports from foreign subsidiaries

Question 10

Host country benefits of inward FDI

Answer 10

resource: tech and skills transfer, e.g Tesla in China

employment: Greenfield - new employment created, brownfield - jobs retained

balance of trade: import substituting FDI and export-orientated FDI create surplus

competition - local competition stimulated

environmental - raise local environmental standards to international levels.

Question 11

Policy instruments to encourage inward FDI

Answer 11

Subsidies, Tax holidays and low interest loans, export processing zones.

Question 12

Free trade zone in Ghana

Answer 12

a free zone company in Ghana can be 100% foreign-owned, 100% Ghanaian-owned owned or a joint venture between foreigners or a Ghanaian and a foreigner.

100% exemption from payment of direct and indirect duties and levies on all imports for production and exports from free zones

100% exemption from payment of income tax on profits for 10 years, which will not exceed 8% thereafter.

no important licensing requirements

no restrictions on repatriation of dividends or net profit

Question 13

Host country costs of inward FDI

Answer 13

resource: natural resource depletion

employment: acquisition - often post rationalisation activity results in redundancies

balance of payments/trade: repatriation of profits - capital outlfows

competition - eliminated

environmental - disregard for local-environment exploitation

Question 14

Direct policy instruments to discourage inward FDI

Answer 14

• Bureaucratic procedures: how long it takes to register a business.
  
  • Low export quota: for export-orientated FDI
  • Stringent environmental regulations: for highly polluting industries
  • Legislative decisions
    Foreign ownership restrictions: local content rules

Question 15

FDI restrictions in China and India

Answer 15

India:
automatic route (no caps) - automobile, airports, railways, hospitals
government route (caps) - newspapers, multi-brand retailing, security agencies

China:
allowed - electronics, pharmaceuticals, water treatment
restricted - telecommunications, higher education
prohibited (no entry) - mining rare earth minerals

Question 16

Indirect instruments to discourage inwards FDI

Answer 16

Alter the environment in favour of local firms: subsidies to local firms, infrastructural investments, support them as national champions (infant industry), encourage them to up-skill through training.

Question 17

Developing countries are advised to focus on encouraging FDI from stand-alone firms (firms that are not part of an MNE group.

Answer 17

why? - increased linkages to domestic suppliers, more autonomy to make decisions that favour the local community, more bargaining power for host governments.

Question 18

Implications

Answer 18

• ability to “manage” FDI depends on: government experience and preferences and economic conditions.
  • Most countries adopt a pragmatic stance
  • Managers must be aware of FDI policy