6IB003 Dynamics of Companies

Module code: -6IB003

Student name: - kartik purohit
Student UID: -1823244

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 Declaration Form
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- The submission is my own work
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Student Name: Kartik Purohit

UID No: 1823244

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Essay

Introduction: - FDI (Foreign Direct investment) a foreign direct investment made by

a firm or individual in one country into business interests located in another country.
Generally, FDI takes place when an investor establishes foreign business operations
or acquires foreign business assets in a foreign company. However, FDIs are
distinguished from portfolio investments in which an investor merely purchases
equities of foreign-based companies.
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.
Main body: -
African countries needs to attract more and strategic FDI inward and outward flow in
its manufacturing sector. There are many researchers who discussed about the
importance of manufacturing FDI for industrial and economic growth and
development in Africa. In 1986 Africa’s foreign direct investment has decreased from
30% to 20% in 2015; inflows into the primary sector (extractive and agriculture)
slumped from 40 to 20 percent over the period. However, inflows into the services
sector increased from 27 to 51 percent.
There are many factors through which the manufacturing FDI include, inter alia, high
tariffs and costs of doing business and production as well as insufficient business
infrastructure. Primary sector FDI plummeted largely due to ongoing low commodity
prices that have hampered resource-seeking FDI. In fact, commodity price declines
reduced the incentives to invest in the primary sector. Increasing liberalization and
privatization of the services sector, along with growing consumer market and middle
class in Africa have attracted FDI in services. Despite the overall FDI decline, the
World Bank (2015) reports that a few countries such as South Africa, Nigeria,
Ghana, Egypt, Kenya, Lesotho, Tanzania, Uganda, Rwanda and Ethiopia have
attracted increasing FDI in manufacturing industries (like textile and clothing, leather
and footwear, vehicles, tobacco, food and beverages) over the years. The model of
FDI is mainly greenfield projects (market-seeking FDI) driven by market size and
potential – enhanced by the countries’ better economic development and
diversification, integration into regional and global markets via preferential trade
agreements with overseas partners, for example, African Growth and Opportunity
Act (AGOA). In addition, other factors such as political and economic stability as well
as macroeconomic and investment policies support the appeal of these investment
locations. Uganda Investment Agency survey (2012) found access to local and
regional markets as the major factor that influenced FDI decisions, followed by
economic and political stability and macroeconomic and investment policies.
(Böckem and Tuschke, 2021)

In 2018, FDI flows to Africa defied the global downward trend and rose to $46 billion,
an 11 per cent increase after successive declines in 2016 and 2017. Reduced FDI
flows to some major economies of the continent, including Nigeria, Egypt and
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Ethiopia, were offset by large increases in others, most significantly in South Africa.
Growing demand for and prices of some commodities, as well as sustained non-
resource-seeking investments in a few countries, were largely responsible for the
higher FDI flows to the continent. Egypt signed at least 12 exploration and
production agreements with international oil companies in 2018. Some large foreign
projects were announced in other sectors also, such as a $2 billion project of Nibulon
(Ukraine) to upgrade Egypt’s grain storage infrastructure and a $1 billion project of
Artaba Integrated Holding (Saudi Arabia) for the construction of a medical city.
(Aregbeshola, 2021) In addition, Shandong Ruyi Technology Group (China) signed
an agreement to invest $830 million for the construction of a textile area in the Suez
Canal Special Economic Zone (SEZ). FDI to West Africa fell 15 per cent to $9.6
billion, the lowest level since 2006. This was largely due to the substantial drop in
Nigeria, for the second consecutive year. Inward FDI to that country declined 43 per
cent to $2 billion, and Nigeria is no longer the largest FDI recipient in West Africa.
Foreign investors may have adopted a cautious approach and withheld planned
investments in light of the risk of instability associated with Nigeria’s elections and
disputes between the Government and some large MNEs. (Aregbeshola, 2021)

In 2018, both HSBC (United Kingdom) and UBS (Switzerland) closed their local
representative offices in the country, and the telecommunication giant MTN (South
Africa) remained embroiled in litigation related to the repatriation of profits. In
addition, international oil companies have been ordered to pay $20 billion in back
taxes. Nevertheless, investments by oil companies, which included significant
reinvested earnings by established investors, remained prominent in 2018. The new
policy to reduce public ownership in joint-venture oil assets to 40 per cent could drive
up FDI in Nigeria in the coming years. (Why Foreign Direct Investment Is
Plummeting, 2021)

Therefore, African governments need to attract more FDI from within and outside
Africa in manufacturing to enable countries to beneficiate their abundant natural
resources, diversify their export and manufacturing base, enhance productive
capacity, and move up value chains (i.e. from raw materials to finished products
suppliers/exporters). Manufacturing FDI would also accelerate industrialisation and
boost economic growth and development, create jobs and alleviate poverty. FDI in
the primary and services sectors are also crucial in this respect. (Capital Inflows to
Sub-Saharan Africa: On a different path, 2021)

Though important, FDI does not bring the benefits to the host economy or region
automatically. The accrual of FDI benefits to the host economy depends on a
number of factors. For example, host governments, need to implement policies that
can encourage FDI ensure rapid growth or expansion of the sector. Labour market
regulations, intellectual property rights and tax laws, policies aimed at human
development and capacity building, for instance, can play a crucial role in harnessing
the potential FDI benefits. (Böckem and Tuschke, 2021)

The African countries should attract FDI for the faster growth and relative shortage of
capital in developing countries would suggest 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, grown more slowly than other

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developing countries so that the implications for net investment flows were less
clear.

Institutional theory deals with foreign direct investment (FDI) through the complex
and uncertain environment in which they are located. From this perspective, the
decision to locate foreign investments takes into account the institutional forces that
shape the environment in which the foreign investors. The institutions are those that
create the “rules of the game” in which multinational corporations and governments
of the host countries are actors. (10 trends on foreign investment in Africa, 2021)

FDI inflows into Africa have been significantly very much going well and those
African countries which are successfully diversifying their economies into other
sectors such as services and manufacturing are expected to experience higher
growth and higher gross domestic product (GDP) growth and attract higher FDI
inflows. Africa has attracted increased interest as an investment destination over the
past five years due and Africa is more politically mature and easier to access with
improved judiciary system. Africa’s increasing population and rise in consumption;
and – Africa’s vast tracts of unutilised land and significant mineral and other
resources. FDI inflows to developing economies increased by 2%, to US$681.0
billion, during 2014, however, FDI inflows to Africa remained unchanged at US$53.9
billion during this period. Global FDI inflows increased by 36% to US$1.7 trillion
during 2015 comprising of increased FDI flows to developed economies amounting
to US$936 billion and developing economies amounting to US$741 billion. Africa’s
share of the FDI inflows to developing economies dropped to US$38 million with
Latin America and the Caribbean dropping to US$151 billion and developing Asia
increasing to US$548 billion. Africa’s reducing FDI inflows are largely due to the fact
that many African economies are still heavily reliant on mineral and other resources
and, therefore, have been heavily impacted by the low commodity and oil prices
linked to, inter alia, the slowdown of the Chinese economy. (10 trends on foreign
investment in Africa, 2021)

An International Investment Agreement (IIA) is a type of treaty between countries

that addresses issues relevant to cross- border investments, usually for the purpose
of protection promotion and liberalization of such investments. Most IIAs cover
foreign direct investment (FDI) and portfolio investment, but some exclude the latter.
Countries concluding IIAs commit themselves to adhere to specific standards on the
treatment of foreign investments within their territory. IIAs further define procedures
for the resolution of disputes should these commitments not be met. The most
common type of IIAs are Bilateral Investment Treaties (BITs) and Preferential Trade
and Investment Agreements (PTIAs). International taxation agreements and double
taxation treaties (DTTs) are also considered as IIAs, as taxation commonly has an
important impact on foreign investment. Bilateral investment treaties deal primarily
with admission, treatment and protection of foreign investment. They usually cover
investments by enterprises or individuals of one country in the territory of itd treaty
partner. Preferential Trade and Investment Agreements are treaties among countries
on cooperation in economic and trade areas. Usually they cover a boader set of
issues and are concluded at bilateral or regional levels. In order to classify as IIAS,
PTIAs must include, among other content, specific provisions on foreign investment.

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International taxation agreements deals primarily with the issue of double taxation in
international financial activities. (CENTRE, 2021)

Conclusion: -
FDI is also used for improving the infrastructure of economically backward countries.
The funding is done by world level organisations like World Health Organisation,
World Bank and International Monetary Fund. The infrastructure is provided even in
terms of upgrading medical facilities. The money invested in the country can also be
used for constructing roads to remote areas which will help in transportation of
medicines and in situations like floods and other natural disasters. It can also be
effectively used for training unskilled labour by conducting educational programmes
that would benefit them to get into any industry. The extent to which a country can be
benefited out of FDI is solely decided by the government and foreign firms. Many
foreign firms involve actively in promoting social and environmental factors. The
government can give tax exemptions and other incentives for the companies that
benefit their country.

Bibliography: -
1. New African Magazine. 2021. The State Of Foreign Direct Investments In
Africa - New African Magazine. [online] Available at:
<https://newafricanmagazine.com/19037/> [Accessed 6 November 2020].
2. World Economic Forum. 2021. 10 Trends On Foreign Investment In Africa.
[online] Available at: <https://www.weforum.org/agenda/2015/07/10-trends-on-
foreign-investment-in-africa/> [Accessed 12 November 2020].
3. 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].
4. 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].
5. CENTRE, T., 2021. African Countries Need To Attract More And Strategic
FDI In Manufacturing Sector. [online] tralac. Available at:
<https://www.tralac.org/discussions/article/11571-african-countries-need-to-
attract-more-and-strategic-fdi-in-manufacturing-sector.html> [Accessed 13
November 2020].
6. Aregbeshola, A., 2021. Foreign Direct Investment And Institutional Adequacy:
New Granger Causality Evidence From African Countries. [online]
Scielo.org.za. Available at: <http://www.scielo.org.za/scielo.php?
script=sci_arttext&pid=S2222-34362014000500003> [Accessed 18 November
2020].

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7. Böckem, S. and Tuschke, A., 2021. A Tale Of Two Theories: Foreign Direct
Investment Decisions From The Perspectives Of Economic And Institutional
Theory. [online] Papers.ssrn.com. Available at:
<https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1713122> [Accessed
13 November 2020].
8. The Balance. 2021. Why Foreign Direct Investment Is Plummeting. [online]
Available at: <https://www.thebalance.com/foreign-direct-investment-fdi-pros-
cons-and-importance-3306283> [Accessed 16 October 2020].
9. 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].
10. World Bank Blogs. 2021. FDI In Southern Africa: Microeconomic
Consequences And Macro Causes. [online] Available at:
<https://blogs.worldbank.org/allaboutfinance/fdi-in-southern-africa-
microeconomic-consequences-and-macro-causes> [Accessed 5 November
2020].

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Report
Introduction: -
In the given report we are going to discuss OFDI (outward foreign direct investment)
and its impact on home countries. The report is going to mention how along with
inward FDI, outward FDI is beneficial for the growth and productivity of the home
country. Outward FDI means when a domestic firm carries out its operations in a
foreign country via any merger, acquisition or expansion etc. It records the value of
cross border direct investment transactions from the reporting economy during a
year. The government of the countries are constantly trying to carry out necessary
home-country measures to sustain and promote beneficial OFDI activities.
Foreign Direct Investment is an investment in one country by an entity based in
another country. Distinguishes it from foreign portfolio investment. Therefore, it is
safe to say that FDI does not only bring in money but also skills, knowledge and
technology; elements essentials for the holistic development of a country. Foreign
direct investment is characterized by direct control and lasting. The intent to actively
participate in the day to day operations of the business is foreign direct investment.

Main body: -
Developing and implementing the appropriate investment policies and frameworks to
nurture and maximize the sustainable development benefits that both inward and
outward foreign direct investment can bring is critical to accelerating SDG progress.
But while there is a rich body of research and empirical evidence on the
development effects of inward foreign direct investment in host countries, the extent
to which outward foreign investment (OFDI) yields positive developmental outcomes
in home countries has remained a nascent area of study, especially in relation to
developing countries. Even less is known about the institutions, policies and tools
available to policymakers to support and facilities the generation of positive
developmental outcomes from OFDI in home countries. Whether a country move to
active promotion of outward FDI depends on several factors, including the balance-
of-payments situations and the capabilities of the enterprise sector. As promotional
measures involve costs, countries should be convinced that active support will bring
positive effects for the home economy before committing scare resources. Many low-
income countries may be better advised to focus on creating a competitive business.
There is growing evidence that outward foreign direct investment (OFDI) can
increase a country’s investment competitiveness, crucial for long-term, sustainable
growth. Some countries are thus using OFDI as a channel for new development and
a catch-up strategy to acquire knowledge and technology, upgrade production
processes, boost competitiveness, augment managerial skills, and access
distribution networks. (Foreign direct investment (FDI) - Outward FDI flows by partner country -
OECD Data, 2021)

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Benefit of outward FDI (OFDI) for home countries:-
The return from OFDI results into benefiting the insurance companies, benefits the
economic development by mitigating several issues in financial or technology sectors
and also help face the resources shortages or inadequate amount of exports of the
home countries. The image explains a systematic framework which explains the
returns from OFDI. The returns varies on whether the multinational companies
investment is made in equal or more advanced or are in less advanced economies.
The increase in outward FDI from developing countries is noteworthy. There has
been a big leap in outward FDI from developing countries since the early2000s.
Outward FDI flows from developing countries have increased from $55.23 billion in
1995 to $134.19 billion in 2000 and to $327.56 billion in 2010 (see Figure 1). Further,
outward FDI stock as a percentage of gross domestic product (GDP) has also risen
from 5.8 per cent in 1995 to 12.7 per cent in 2000 and 15.7 per cent in 2010. The
increase in outward FDI from developing countries has grabbed attention in recent
academic discussions. However, the empirical literature on outward FDI from
developing countries has remained fairly thin and limited to the examination of the
outward FDI experience of a handful of developing countries. Existing studies on the
subject have specifically tried to model the outward FDI experience of individual
countries or a few countries together. (Foreign direct investment (FDI) - Outward FDI flows
by partner country - OECD Data, 2021)

Springboard Theory or springboard perspective is an international business theory

that addresses the unique motives, activities, challenges, facilitating forces and
strategic behaviours of multinational companies in developing and expanding
business markets internationally. Systematic efforts and strategies exploit the
advantages and reducing the company's weaknesses against institutional and
market constraints are designed as a great plan to facilitate robust corporate growth
and competitive long-term strategy in spearheading global enterprise market
development. This typology classifies MNEs on the basis of their business ownership
and international diversification. There are four groups in the categories; niche
entrepreneurs; world stage aspirants; transnational agents; and commissioned
specialists. Niche entrepreneurs are privately owned firms that have specific focus in
their business activities globally while world-stage aspirants are privately owned
firms that have a wider involvement in their business activities globally. In contrast,
transnational agents are public enterprises in which government have strong control
and heavily involved in global business expansion, while commissioned specialists
are public firms that specialize and focus on few selected foreign market to leverage
their competitiveness and full fill government aspirations. Motives for springboard
international expansion can be categorized as asset-seeking and opportunity-
seeking. Asset- seeking may include technology, R&D facilities, know-how expertise,
human capital, customer based, brands, distribution channel, natural resources and
managerial expertise. While opportunity seeking may include shaping niche
opportunities in advanced markets that complement their strengths; benefit from
preferential financial and non-financial treatment offered by home and host
government. (How does outward foreign direct investment contribute to economic
development in less advanced home countries?, 2021)

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OFDI would conduce to the home country's economic growth by securing the supply
of natural resources or economies of scale. On this basis, OFDI generally has
positive effects on the home country's economic development. Through OFDI, MNEs
can acquire strategic assets not available at home, like know-hows, technologies
and management skills and then those strategic assets would be transferred to the
home country. Apart from that, by being close to global R&D centres, MNEs have
better intellectual resources for innovation in original technologies. And both of the
two approaches can promote the upgrading of the domestic industrial structure,
ultimately. However, those positive spill overs do not generate spontaneously,
especially for technology spill overs which rely heavily on the efficient utilization of
technologies from the host country. That is to say the externality of knowledge
makes it possible for foreign technologies to be transmitted back to the home country
but assimilating the technologies requires the strong absorptive capacity of the home
country.
Drawbacks of home-country investment incentives: -
However, employing such home country measures as financial and fiscal measures
to incentivize OFDI with the hope of reaping the above-mentioned benefits could
have significant drawbacks. They include risks of abuse, waste, “beggar-thy-
neighbour” policies, and negative effects on competitive neutrality. The observed
findings signifies that outward fdi results in deduction of domestic investments in the
home country. A 29% decrease in domestic investment is the result of just one
percentage point increase in FDI outflow of the home country whereas 55 percent of
the domestic investment gets stimulated by just one percent point increase of FDI
inflow

There are two mechanisms through which FDI outflow may affect the home country’s
domestic investment. The companies investing abroad would transfer a part of their
capital abroad, therefore a part of the private home country’s savings is being
transferred to other beneficial country. The home country faces difficulty as their
firms faces difficulty in raising funds in the domestic financial markets as their
financial activities gradually reduces due to lack of financial liquidity available
because of imperfect market conditions. Therefore we can say that the fdi outflow
demoralize the home country’s domestic investment especially when there is
overseas activities internally of the firms. (Strengths and weaknesses of the outward FDI
paths of the Central European countries, 2021)

There is a proven evidence that outward FDI can increase a home country’s
investment competitiveness that is very crucial long term growth. Some countries by

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using OFDI as a channel for development and a catch up strategy to boost their
technology and competitiveness, add to managerial skills along with the upgrade of
their production process. The first edition of the World Bank Global Investment
Competitiveness Report showed a rise in OFDI from developing countries. In the
year 1995, OFDI of developing countries constituted of just 4 percent of global FDI
flows while in the year 2014 the share reached till 27 percent. The first edition of
the World Bank Global Investment Competitiveness report examined the rise of
OFDI from developing countries. In 1995, OFDI from developing countries
constituted just four percent of global FDI flows, while in 2014 this share reached a
record 27 percent. As a result, the number of developing countries engaged in OFDI
has notably increased. In 1995, 87 developing countries were engaged in OFDI, but
many only marginally. Today, that number has risen to 109 countries, with 26 of
these having an OFDI-to-GDP ratio of 10 percent or more. Regarding exports of the
firms of one countries, the evidence finds that OFDI can augment home country
exports through supportive relationships, for instance by opening new export
markets or elevating the demand for intermediate exports. Looking at Southeast Asia
from 1981 to 2013, for instance, one percent increase in OFDI led to a $72 million
rise in exports for Singapore, $41 million for Thailand, and $31 million for Malaysia, a
$750 million for the Philippines. OFDI from developing countries can thus be used
both as a ‘springboard’ and as a ‘stepping stone.’ 

Conclusion: - Countries that can offer a large domestic market and/or natural
resources have inevitably attracted foreign investors in Africa. South Africa, Nigeria,
Ivory Costs, and Angola have been traditionally the main recipients of FDI within the
region. Over the past decade, several African countries have attempted to improve
their business climate in an effort to attract foreign companies. Establishing a
competitive business climate is a difficult task because it takes time − not only to
implement policies but also to convince potential investors. In the case of Africa, it is
even more difficult because most countries are not even on the radar screen of most
companies. In 1997, we found that Mozambique, Namibia, Senegal and Mali were
perceived as the countries with the most attractive investment environments. . This
suggests that the negative or non-significant impact of FDI for the period from 1980
to 1994 may be linked to the implementation in many African countries of structural
adjustment programs, including privatization, the orientation of FDI in resource-
seeking activities, weak economic links between multinational enterprises and local
firms, and the low capacity of local enterprises to mobilize adequate resources to
launch production. The positive impact for the period from 1995 to 2009 could be
partially explained by the improvement of the business environment and the
contribution of resource-based industries to economic growth due to the export of
commodities.

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Bibliography: -

Emerald.com. 2021. Time Lag Analysis Of FDI Spillover Effect: Evidence From The
Belt And Road Developing Countries Introducing China’S Direct Investment |
Emerald Insight. [online] Available at: <https://www.emerald.com/insight/conten
/doi/10.1108/IJOEM-03-2019-0225/full/html> [Accessed 11 November 2020].

theOECD. 2021. Foreign Direct Investment (FDI) - Outward FDI Flows By Partner

Country - OECD Data. [online] Available at: <https://data.oecd.org/fdi/outward-fdi-
flows-by-partner-country.htm> [Accessed 15 November 2020].

Investopedia. 2021. Outward Direct Investment (ODI). [online] Available at:

<https://www.investopedia.com/terms/o/outward_direct_investment.asp> [Accessed
14 November 2020].

Taylor & Francis. 2021. How Does Outward Foreign Direct Investment Contribute To
Economic Development In Less Advanced Home Countries?. [online] Available at:
<https://www.tandfonline.com/doi/full/10.1080/13600818.2017.1283009> [Accessed
8 November 2020].

The Balance. 2021. Why Foreign Direct Investment Is Plummeting. [online] Available

at: <https://www.thebalance.com/foreign-direct-investment-fdi-pros-cons-and-
importance-3306283> [Accessed 16 October 2020].
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].
World Bank Blogs. 2021. FDI In Southern Africa: Microeconomic Consequences And
Macro Causes. [online] Available at: <https://blogs.worldbank.org/allaboutfinance/fdi-
in-southern-africa-microeconomic-consequences-and-macro-causes> [Accessed 5
November 2020].

Czinkota, M. and &rarr;, V., 2021. Pros And Cons Of Foreign Direct Investment -
Professor Michael Czinkota. [online] Professor Michael Czinkota. Available at:
<http://michaelczinkota.com/2015/03/pros-cons-foreign-direct-investment/>
[Accessed 21 October 2020].

Taylor & Francis. 2021. Strengths And Weaknesses Of The Outward FDI Paths Of
The Central European Countries. [online] Available at:
<https://www.tandfonline.com/doi/abs/10.1080/14631370903525561?
journalCode=cpce20> [Accessed 13 December 2020].

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