61B003 DYNAMICS OF MULTINATIONAL

COMPANIES
PODAR WORLD COLLEGE

NAME: - Kartik Purohit

UID NO: - 1823244

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 Declaration Form
I hereby declare that
- The submission is my own work
- All materials used has been acknowledged & appropriately referenced.
- I have not allowed another student to have access to my work.
- The work has not been submitted previously.

Student Name: Kartik Purohit

UID No: 1823244

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SR Table of content PAGE
No. NO.
1 Essay 4

2 Introduction 4

3 Discuss whether or not a FDI is beneficial to the development of its 4-5

host country and to what extent.

4 What efforts to attract FDI have been made in these countries? 5-6-7

5 Conclusion 7

6 Bibliography 7-8-9

7 Report 10

8 Introduction 10

9 What evidence in the case study suggests FDI (OFDI) can be 10-11
beneficial to the home countries? In what way? You need to include
additional supportive references to develop your arguments.

10 What can be the drawbacks of home country investment incentives? 11-12

In what way? You need to include supportive references to develop
your arguments.

11 Conclusion 13

12 Bibliography 13-14

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Essay

Introduction: -
A financial investment made by a corporation or person from one country into business interests
in another is known as a foreign direct investment (FDI). In general, FDI occurs when a foreign
company establishes or acquires foreign business operations or assets. FDIs, on the other
hand, are not the same as portfolio properties, which are individual transactions. Individuals or
companies are the most common recipients of foreign direct investment, which can be known as
reinvestment or money. (Oecd,2008).
Due to the latest Coronavirus pandemic, FDI dropped by nearly 49% globally in the first six
months of 2020. Africa has always been a major target for foreign investors, especially from the
United States, France, and the United Kingdom, all of which have seen a drop in their
investments in Africa, with FDI capital being 28% lower in 2019 than in 2018, indicating a similar
concern. In addition, Africa's Sub-Saharan region is projected to see a 30% decrease in FDI as
a result of the expected global recession triggered by Covid 19. The pandemic struck at an
already difficult time, with Africa's FDI falling 10% to $45 billion in 2019, and North Africa's
falling 11% to $14 billion the year before. Because of the low literacy rate in many of its
countries, as well as a lack of efforts from successive governments to improve education
standards in the countries, Africa has long been a continent where investors have been
reluctant to invest their capital. Similarly, although corruption among African officials has
decreased in recent years, it still exists, which is a disadvantage for any company considering
doing business in Africa. Africa, on the other hand, has steadily transformed into a viable
investment haven for investors, owing to the highest return on investment, the increasingly
rising economy, and the macroeconomic stability it provides to everyone interested in doing
business in the region over the last half-decade. Foreign direct investment is regarded as a
critical determinant in the concept of development for Africa. However, institutional
quality in the recipient countries is considered an essential factor that can be used to
drive FDI flow inward. Unctad.org. 2017
This study aims to examine in depth the global rules and tax regulations that apply to FDI, as
well as the possible benefits and drawbacks of FDI to the resident country. Oecd.org. 2019

Discuss whether or not a FDI is beneficial to the development of its host country and to
what extent.
As a result of economic reforms initiated by the governments of many African countries, Africa
has been making adequate changes to its infrastructure, as well as its trade and tax policies, in
order to use it as a strategy to attract investors. FDI flows into the country from abroad have
seen a dramatic rise in recent years. African countries need to attract more and strategic FDI
inflows and outflows in the manufacturing sector. The importance of manufacturing FDI for
Africa's industrial and economic growth and development has been discussed by a number of
academics. Africa's foreign direct investment fell from 30% in 1986 to 20% in 2015, with inflows
into the primary sector (extraction and agriculture) falling from 40% to 20% during that period.
Inflows into the services market, on the other hand, rose from 27% to 51%.

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FDI has a potential to develop nations like Africa which has grown over a short span of time and
moreover there are several pros for the country if it adopt FDI. Greenfield projects (market-
seeking FDI) are the most common form of FDI, and they are primarily driven by market size
and potential, which is aided by improved economic growth and diversification in the countries,
as well as their penetration into regional and global markets through preferential trade
agreements with overseas partners. Unctad.org. 2017. Other factors that contribute to the
attractiveness of these investment destinations include political and economic stability, as well
as macroeconomic and investment policies. According to a survey conducted by the Uganda
Investment Agency, access to local and regional markets is the most important factor
influencing FDI decisions, accompanied by economic and political stability, as well as
macroeconomic and investment policies.
Nigeria is one of the countries that has embraced inward FDI initiatives in its attempts to reform
its economy with open arms over the last decade, resulting in the country's economic and social
transformation. Several tax holidays, exemptions, credits, and other tax breaks are among the
government's more popular measures for investors, making Nigeria an appealing investment
proposition. Furthermore, some companies and organizations are eligible for Pioneer Status
under the NIPC Act, which grants these eligible entities a 5-year tax holiday. This has resulted
in a significant inflow of investment into the nation, thereby funding its rapid growth over the last
few decades.
Institutional Theory defines the standard as well as the method to be followed in defining the
organization and its hierarchy, including institutional rules, practices, and procedures, as well as
organizational values. If African institutions had a pre-determined set of rules and regulations,
they would have a plan of action to work with and a contingency plan to fall back on in the event
of a crisis, which would help boost operational efficiency and, in turn, increase the amount of
inflows into the business and the region.

What efforts to attract FDI have been made in these countries?

Africa has always been a place marked by economic downturns as well as political turmoil,
which has driven investors away. This is not the case, as recent events on the continent have
seen it adopt some beneficial economic policies that could make it a desirable location for
businesses to invest. In recent years, Africa has demonstrated a willingness to fund its own
companies rather than large foreign companies. In doing so, it also saw a drop in the value of its
national currency, which had previously been valued higher, resulting in an unanticipated period
of stability brought on by economic reforms and the currency's decline in value. (Oecd.org,
2020). The fall in the value of the African currency has aided macroeconomic stability, as the
government has eased economic reforms, allowing tax holidays and other incentives to draw
investors. Furthermore, research conducted in 1997 revealed that 26 of the 32 African countries
still developing adopted a more or less liberal trade policy, despite the region undergoing many
reforms, including improved education systems, more liberal trade, and more(Mti.gov.sg.
2021). FDI flows to Africa defied the global downward trend and increased by 11% to $46 billion
in 2018, following consecutive declines in 2016 and 2017. Reduced FDI flows to some major
African economies, such as Nigeria, Egypt, and Ethiopia, were counterbalanced by strong
increases in others, most notably South Africa. (Oecd.org, 2020). Higher FDI flows to the
continent were largely due to increasing demand for and prices of certain commodities, as well

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as sustained non-resource-seeking investments in a few countries. In 2018, Egypt signed at
least 12 agreements with foreign oil firms for exploration and development. Other major foreign
projects, such as a $2 billion project by Nibulon to upgrade Egypt's grain storage infrastructure
and a $1 billion project by Artaba Integrated Holding (Saudi Arabia) to develop a medical city,
were also announced. (Iisd.rg, 2020).
Africa is a developing region, with many of its countries experiencing economic turmoil until
recently, with low living standards among the country's population and a fluctuating HDI. Africa's
corporate companies have a reputation for being environmentally unfriendly, polluting the
atmosphere. Businesses based and operating in other countries are typically required to follow a
set of rules and regulations enforced by the Organization for Economic Co-operation and
Development (OECD) in order to be deemed environmentally friendly, which is also a major
selling point among consumers and critical to a company's brand image. These initiatives are
emphasized as both a responsibility and an incentive for businesses to get ahead of the
competition. They enable companies to set environmental targets and priorities, monitor them
over time, and ensure that they are reached by the end of the month, while also reviewing their
goals based on progress achieved in terms of environmental protection. (Unctad.org, 2020).
Considering the state of the African economy, the country's living and environmental conditions,
and the fact that the country's economy is dependent on local businesses and industries, the
governing body should enforce a similar set of guidelines on the country's businesses.
Encouraging them to be more environmentally aware, reduce their pollution, and act responsibly
in their surroundings In the long run, this would draw more FDI from abroad because Africa
would be seen as a rising star with potential due to its improved living standards and public
welfare system, while FDI investments might support the developing economy with its
infrastructure and some much-needed cash flow to invest in its education system and
manufacturing facilities. (Mti.gov.sg. 2021),
International Investment Agreements (IIAs) are agreements between countries to safeguard and
liberalize investments in companies in one country from companies in another, as well as to
ensure that no company's interests are abused. These international treaties provide legal
immunity to business investors, protecting them from the possibility of expropriation and
providing them with financial stability as well as unrestricted control over their international
operations. If these agreements are not signed ahead of time, international arbitration can be
used to protect investors. IIAs between two countries could encourage regular investments
between such countries, usually from a developed to a developing country, enabling the former
to increase its scale of operations and generate revenue while assisting the latter to boost its
cash flow and GDP, as well as grow its backward areas, attracting more FDI from elsewhere.
Although there are many more firm-based or industrial reasons for investment, which means
there would be no outward flows, African countries should attract FDI for faster growth and
relative capital shortages in developed countries will indicate that developing countries are more
likely to be net recipients of investment than net investors, although there are many more firm-
based or industrial explanations for investment, which means there will be no outward flows, but
Africa has, at least until recently, been a net recipient of investment As a result of its slower
growth than that of other developed countries, the consequences for net investment flows were
less obvious. As a result of its slower growth than that of other developed countries, the
consequences for net investment flows were less obvious. (Library.fes.de, 2020).

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Conclusion: - After all, it should be remembered that Africa's problems stem from the ground
up, and it will take some time for the macroeconomic situation to improve before it can properly
draw investors, as shown by the fact that only 5% of global investors invest in Africa, a very low
figure as compared to the rest of the world.
Bibliography: -
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January 2021].
3. Center For Global Development. 2020. International Taxation And Developing
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taxation-and-developing-countries> [Accessed 8 January 2021].
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<https://www.iisd.org/system/files/publications/assessing-impacts-investment-
treaties.pdf> [Accessed 4 January 2021].
5. Kaulihowa, A. (2018) FDI and Welfare Dynamics in Africa. Thunderbird
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6. Kim, J. (2018) BALANCING REGULATORY INTERESTS THROUGH AN
EXCEPTIONS FRAMEWORK UNDER THE RIGHT TO REGULATE PROVISION IN
INTERNATIONAL INVESTMENT AGREEMENTS. The George Washington
international law review. 50 (2), 289–.
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<https://www.mti.gov.sg/Improving-Trade/International-Investment-Agreements>
[Accessed 6 January 2021].
8. Ncert.nic.in. 2021. [online] Available at: <https://ncert.nic.in/ncerts/l/lebs103.pdf>
[Accessed 6 January 2021].
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2021].
11. Oecd.org. 2019. Incentives For Attracting Foreign Direct Investment: An Overview
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[Accessed 7 January 2021].

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13. Oecd.org. 2020. New Corporate Tax Statistics Provide Fresh Insights Into The
Activities Of Multinational Enterprises - OECD. [online] Available at:
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the-activities-of-multinational-enterprises.htm> [Accessed 23 January 2021].
14. Oxfordre. 2021. Institutional Theory In Organization Studies.
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document/poiteiitm15.pdf> [Accessed 3 January 2021].
19. Unctad.org. 2020. Global Foreign Direct Investment Falls 49% In First Half Of 2020
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20. Unctad.org. 2020. Investment Flows In Africa Set To Drop 25% To 40% In 2020 |
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New African Magazine. [online] Available at:
<https://newafricanmagazine.com/19037/> [Accessed 6 November 2020].
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Available at: <https://www.weforum.org/agenda/2015/07/10-trends-on-foreign-
investment-in-africa/> [Accessed 12 November 2020].
24. World Economic Forum. 2021. What's Causing Africa's Foreign Direct Investment
Slump?. [online] Available at: <https://www.weforum.org/agenda/2016/01/what-s-
causing-africa-s-foreign-direct-investment-slump/> [Accessed 8 November 2020].
25. World Bank Blogs. 2021. Capital Inflows To Sub-Saharan Africa: On A Different
Path. [online] Available at: <https://blogs.worldbank.org/developmenttalk/capital-
inflows-sub-saharan-africa-different-path> [Accessed 9 November 2020].
26. CENTRE, T., 2021. African Countries Need To Attract More And Strategic FDI In
Manufacturing Sector. [online] tralac. Available at:
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attract-more-and-strategic-fdi-in-manufacturing-sector.html> [Accessed 13
November 2020].
27. Aregbeshola, A., 2021. Foreign Direct Investment And Institutional Adequacy: New
Granger Causality Evidence From African Countries. [online] Scielo.org.za.
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28. Böckem, S. and Tuschke, A., 2021. A Tale Of Two Theories: Foreign Direct
Investment Decisions From The Perspectives Of Economic And Institutional

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 Theory. [online] Papers.ssrn.com. Available at:
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November 2020].
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cons-and-importance-3306283> [Accessed 16 October 2020].
30. Emerald.com. 2021. Emerald Insight. [online] Available at:
<https://www.emerald.com/insight/search?q=Benefit+of+outward+FDI+%28OFDI
%29+for+african+country&showAll=true> [Accessed 10 November 2020].
31. World Bank Blogs. 2021. FDI In Southern Africa: Microeconomic Consequences
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microeconomic-consequences-and-macro-causes> [Accessed 5 November 2020].

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Report: -
Introduction: -
The case study explains what outward foreign direct investment (OFDI) is and what initiatives
and subsidies the government is taking to encourage business entities in its own country,
assisting it in going local. There are fewer barriers to entry and exit in the sector, as well as
insurance policies and programmes in place to assist companies in times of need, which, if done
transparently, will almost certainly result in increased investment in the country. Financial
subsidies, on the other hand, are more likely to spark unwelcome debate within the nation. In
the last ten years, there has been a substantial increase in OFDI, necessitating the
establishment of an international mechanism to limit such local incentives. These rewards, on
the other hand, have their own set of benefits, such as an improvement in the local country's
GDP, increased ideas and creativity as a result of higher employee satisfaction, and assisting
local businesses in expanding beyond their aspirations by allowing them to trade globally, aided
by economies of scale brought about by the large size of the business operations. Increased
foreign investment has its own set of issues, including financial corruption, unfair market
competition caused by some companies having more financial resources than others, and
‘beggar thy neighbor' policies resulting from a country being too dependent on OFDI from an
investor country. This report focuses on how OFDI benefits the host nation, as well as the pros
and cons of subsidies provided to promote foreign investment into the country, as well as
whether they are actually beneficial to the home country as a whole. (Case Study).

What evidence in the case study suggests FDI (OFDI) can be beneficial to the home
countries? In what way? You need to include additional supportive references to develop
your arguments.
The organizational case study demonstrates that OFDI benefits the host country by increasing
economies of scale, promoting productivity among business entities in the country by increasing
their international competitiveness, and facilitating information transfer between countries while
lowering production costs. An increase in OFDI caused by promoting local businesses
internationally also contributes to an increase in the number of exports into the region, resulting
in an increase in the host nation's FDI as well as an incentive for people in the country to
innovate and making them more effective, enabling local businesses to grow exponentially by
giving them the opportunity to prove themselves. In the international market, they have built
themselves. Europe saw a 55%drop in OFDI as a result of MNCs in the United States taking
back their retained earnings from their stakeholders, resulting in new tax reforms, and they saw
a 9% drop in OFDI to $252 billion. Outward foreign direct investment (OFDI) has been shown to
improve a country's investment competitiveness, which is critical for long-term, sustainable
development. As a result, some countries are turning to OFDI as a source of new growth and a
catch-up strategy for acquiring information and technology, upgrading production processes,
increasing competitiveness, improving managerial skills, and gaining
distribution(UNCTAD,2020). A home country with a developing economy, such as India, may
benefit because it would have a spillover impact on the home country, resulting in more
employment opportunities and better job training for local workers. It might help to decrease the
country's unemployment rate while still paying workers a fair wage, improving the FDI of the
country because people now have more disposable income. By securing the supply of natural

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resources or leveraging economies of scale, OFDI will help the home country's economy
expand. OFDI has usually positive impact on the economic growth of the home country on this
basis. MNEs may acquire strategic assets such as know-hows, technology, and management
skills through OFDI, and then move those strategic assets to the host country. (Cnbc,2020).
Apart from that, MNEs have stronger intellectual capital for original technology advancement
because they are close to global R&D centres. In the end, both methods will help to upgrade the
domestic industrial system. Positive spillovers, on the other hand, do not happen by themselves,
especially in the case of technology spillovers that rely heavily on the efficient use of host
country technologies. That is, the externality of assistance international technologies to be
transferred back to the home country, however assimilating the technologies necessitates the
home country's strong absorptive ability.
OFDI often contributes to economic development in a region, which leads to increased exports,
resulting in a steady stream of foreign exchange for the country's Central Bank, which helps to
maintain the country's exchange rate at a stable level. OFDI is also important for a country's
long-term planning because it can help establish a competitive market environment in the
sector, allowing for long-term growth. The competitive market helps to eliminate monopolies
while also encouraging rivals to innovate, allowing customers to obtain higher-quality goods at
lower prices. FDI can also assist businesses in making payments. Less tax since developed
countries exclude FDI companies from paying taxes. Based on the field of interest of the
interested MNCs, such as Horizontal or Vertical FDI, or other aspects of the market such as
Greenfield or Brownfield investments, foreign investments may directly benefit the home
country. Springboard theory is a theory that multinational companies use to track the
motivations and processes of their rivals. As firms like Reliance, which invested in Hamley’s and
partnered with Google to help them acquire assets internationally and cover the international
market as a springboard, the expansion is driven by leverage, learning, and linking. .
(Waipa.org, 2019).
Investors flocked to South Asia, with the country accounting for nearly 70% of all OFDI
investments. Furthermore, promoting OFDI would result in a smoother supply chain because
better technology would enable employees to be more effective, as well as provide them with
the opportunity to travel to foreign countries to work for the investing business, allowing them to
gain valuable work experience while also reducing costs assisting in the growth of human
resources in the home country.

What can be the drawbacks of home country investment incentives? In what way? You
need to include supportive references to develop your arguments.
Using financial and fiscal incentives in the home country to encourage OFDI in the hopes of
reaping the above-mentioned benefits may have serious consequences. Abuse threats, waste,
"beggar-thy-neighbor" policies, and detrimental impacts on competitive neutrality are only a few
of them. Outward FDI leads to a reduction in domestic investments in the house, according to
the findings a nation. A 1% point rise in FDI outflow from the home country results in a 29%
decrease in domestic investment, while a one percentage point increase in FDI inflow stimulates
55% of domestic investment. . (Waipa.org, 2019). Every country's government encourages
multinational corporations (MNCs) to invest abroad in order to broaden their global scope and
gain leverage over operations, thus the cash flow into the country. In order to promote Chinese

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investment in foreign firms, the government invested in infrastructure while private companies
searched for opportunities in other fields. (Worldbank.org, 2020) Providing rewards to promote
FDI is not always a good idea, since there are a number of disadvantages. Governments often
put an undue focus on encouraging domestic businesses to invest in foreign companies,
overlooking the benefits that should be given to emerging businesses. FDI necessitates a
significant investment in financial resources in a foreign country, which is often more costly than
exporting a product. These are frequently high-risk, high-reward investments that are
susceptible to political change, as governments may change rapidly and new tax laws may be
introduced that favour or limit FDI. These political shifts can also result in a company losing
control of its operations in a foreign country as laws change, allowing the host country's
government to take control of the company's operations, a process known as expropriation.
Governments use three main methods to incentivize businesses. (Unescap.org, 2019). Grants
are amounts of money provided to companies to assist them in better educating their staff as
well as investing in research and development to help them perform better in the market. That's
also problematic because political changes in another country could influence the firm's
activities in the home country, potentially resulting in a loss of investment. Investment insurance
is a form of risk management that can only be provided by a regulatory body with significant
authority, such as Sinosure in China. Tax benefits are government or high-level authority grants,
such as tax holidays and exemptions, that make it possible for a company to invest in another
country.
OFDI from developing countries made up just 4% of global FDI in 1995, but it hit a new high of
27% in 2014. As a result, the number of developing countries participating in OFDI has risen
dramatically. In 1995, 87 developing countries participated in OFDI, but many of them just
insignificantly. Currently, there have been 109 countries in this region, with 26 of countries
having an OFDI-to-GDP ratio of 10% or higher. The evidence suggests that OFDI can boost
home country exports by fostering supportive relationships, such as opening new export
markets or increasing demand for intermediate exports. (Worldbank.org, 2020) In Southeast
Asia, for example, a 1% increase in OFDI resulted in a $72 million increase in exports for
Singapore, $41 million for Thailand, $31 million for Malaysia, and $750 million for the Philippines
between 1981 and 2013. As a result, OFDI from developed countries can be used as both
springboard and stepping stone. (Unescap.org, 2019).
The impact of FDI outflow on domestic investment in the home country can be attributed to two
mechanisms. Companies investing abroad will move a portion of their capital overseas,
resulting in a transfer of savings from the private home country to a more favourable country.
The home country is having trouble raising funds in domestic capital markets as their financial
activities gradually decrease due to a shortage of financial liquidity available due to market
imperfections. As a result, we can conclude that FDI outflows demoralize domestic investment
in the home country, especially when firms' overseas activities are conducted internally.
(NDTV,2020)

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Conclusion: -
To conclude, the advantages of OFDI to the homeland outweigh its disadvantages because it
helps companies increase their cash flow while also assisting them in developing backward
areas and making the market more efficient, resulting in better and more reasonably priced
goods, by providing job opportunities for the unemployed, to improve the living standards of the
people in the country. However, there are two sides to any coin, and OFDI has risks, such as
being a high-risk scheme with possible political adjustments and a high risk of expropriation,
which could result in a company losing control of its operations abroad.

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