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Foreign Direct Investment

Foreign Direct Investment

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Published by anki_301

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Published by: anki_301 on Jul 06, 2012
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Foreign Direct Investment
 Foreign direct investment (FDI) is defined as a long-term investment by a foreign directinvestor in an enterprise resident in an economy other than that in which the foreign directinvestor is based
. Foreign direct investment (FDI)
is aiso defined as "investment made toacquire lasting interest in enterprises operating outside of the economy of the investor. TheFDI relationship consists of a parent enterprise and a foreign affiliate which together form aMultinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise
over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolioinvestment. Foreign Direct Investment (FDI) flows have increased dramatically in last few decades. Asdeveloping countries, particularly in Asia, remove restrictions and implement policies toattract FDI inflows, trade and investment have become increasingly intertwined. As such,there have been growing calls for a multilateral framework of foreign investment rules to benegotiated under the auspices of the World Trade Organization (WTO). This paper reviewsdevelopments in FDI flows and their impacts in developing Asia, and the importance of thepolicy context in which those flows occur. It discusses advantages and disadvantages of including FDI in WTO negotiations, and related policy options for developing Asianeconomies.
In the years after the Second World War global FDI was dominated by the United States, asmuch of the world recovered from the destruction brought by the conflict. The US accountedfor around three-quarters of new FDI (including reinvested profits) between 1945 and 1960.Since that time FDI has spread to become a truly global phenomenon. FDI has grown inimportance in the global economy with FDI stocks now constituting over 20 percent of globalGDP.In the US, in the late 1960s and early 1970s, foreign direct investment became increasinglypoliticized. Organized labor,convinced that foreign investment exported jobs, undertook a major campaign to reform the tax provisions which affected foreign direct investment. TheForeign Trade and Investment Act of 1973 (or the Burke-Hartke Bill) would have eliminatedboth the tax credit and tax deferral. The Nixon Administration, influential members of Congress of both parties, and well-financed lobbying organizations came to the defense of themultinational. The massive counterattack of the multinational corporations and their alliesdefeated this first major challenge to their interests.
Different Types of FDI
A. By Direction
1 Inward:
Inward foreign direct investment is a particular form of  inward investment when foreign capital is invested in local resources.
 2 Outward:
 Outward foreign direct investment, sometimes called "direct investment abroad", is whenlocal capital is invested in foreign resources. Yet it can also be used to invest in imports andexports from a foreign commodity country.
B. By Target
1.Greenfield investment
Direct investment in new facilities or the expansion of existing facilities. Greenfield
investments are the primary target of a host nation‘s promotional efforts because they create
new production capacity and jobs, transfer technology and know-how, and can lead tolinkages to the global marketplace
 2.Mergers and Acquisitions
Transfers of existing assets from local firms to foreign firms takes place; the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from differentcountries are combined to establish a new legal entity. Cross-border acquisitions occur whenthe control of assets and operations is transferred from a local to a foreign company, with thelocal company becoming an affiliate of the foreign company. Nevertheless, mergers andacquisitions are a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI flow into the United States. Mergers are the most common way for multinationals todo FDI.
 3.Horizontal FDI 
Horizontal FDI occurs when the multinational undertakes the same production to activities inmultiple countries.
 4.Vertical FDI 
Vertical FDI 
 Where an industry abroad provides inputs for a firm's domestic productions.Forward
Vertical FDI 
Where an industry abroad sells the outputs of a firm's domestic production.
C.By Motive
FDI can also be categorized based on the motive behind the investment from the perspectiveof the investing firm:
Investments which seek to acquire factors of production that are more efficient than thoseobtainable in the home economy of the firm. In some cases, these resources may not beavailable in the home economy at all (e.g. cheap labor and natural resources). This typifiesFDI into developing countries, for example seeking natural resources in the Middle East andAfrica, or cheap labor in Southeast Asia and Eastern Europe.
Investments which aim at either penetrating new markets or maintaining existing ones. FDIof this kind may also be employed as defensive strategy; it is argued that businesses are morelikely to be pushed towards this type of investment out of fear of losing a market rather thandiscovering a new one. This type of FDI can be characterized by the foreign Mergers andAcquisitions 
in the 1980‘s by Accounting, Advertising and Law firms.
Benefits of Foreign Direct Investment
1. it helps in the economic development of the particular country where the investment isbeing made.2. It has also been observed that foreign direct investment has helped several countries whenthey have faced economic hardships.3. direct investment also permits the transfer of technologies. This is done basically in theway of provision of capital inputs.4.The countries that get foreign direct investment from another country can also develop thehuman capital resources by getting their employees to receive training on the operations of aparticular business..5. Foreign direct investment helps in the creation of new jobs in a particular country. It also helps in increasing the salaries of the workers..

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