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C
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Foreign Direct Investment & P
Globalization T
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Topics:
Meaning of FDI
International Investment Theories
Factors Influencing FDI
Emerging Global Economy
Drivers of Globalization
Objectives:
Globalization of Markets
Define foreign direct investment (FDI)

Discuss the international investment theories

State the factors that influence FDI

Realize the trends in the emerging global economy

Identify the drivers of globalization

Describe the concept of ‘globalization of markets’

Discuss the policy issues in globalization

T hrough Foreign Direct Investment a firm invests directly in facilities to produce

and/or market a product in a foreign country.
In the early 1980’s Honda, a Japanese automobile company, built an assembly
plant in Ohio and began to produce cars for the North American market. These cars
were substitutes for imports from Japan. Once a firm undertakes FDI, it becomes a
Multinational Enterprise (The meaning of Multinational being “more than one country”).
FDI takes on two main forms; the first is a green field investment, which involves
the establishment of a wholly new operation in a foreign country. The second involves
acquiring or merging with an existing firm in a foreign country. Acquisition can be a
minority (where the foreign firm takes a 10 percent to 49 percent interest in the
company’s Share Capital and voting rights), or majority (foreign interest of 10 percent to
99 percent) or full outright stake (foreign interest of 100 percent).
There is an important distinction between FDI and Foreign Portfolio Investment
(FPI). Foreign portfolio investment is investment by individuals, firms or public bodies
(e.g. National and local Govts) in foreign financial instruments, (e.g. Government bonds,
foreign stocks). FDI does not involve taking a significant equity stake in a foreign
business entity. FPI is determined by different facts than FDI. FPI provides great
opportunities for business and individuals to build a truly diversified portfolio of
international investments in financial assets, which lowers risk.
MEANING OF FDI
Foreign Direct Investment (FDI) is
defined as an investment made by an Debt Loans
investor of one country to acquire an asset
in another country with the intent to manage Inv
a
that asset (IMF, 1993). pit es
Ca l en tm
t
Foreign investment and technology play an
important role in the economic development
of a nation and have been exploited by a
number of developing countries. Earn
y
Equit

s
ing

The economic health of transition countries in

Eastern Europe, Russia, and Central Asia is
smoother due to FDI.

Even communist countries like China have welcomed foreign investment to improve
their economies.

Governments of developing nations are attracting FDI along with the technology and
management skills that accompany it. To attract multinational companies, governments
are offering tax holidays, import duty exemption, subsidised land and power and many
other incentives. FDI are supposed to bring many benefits to the economy. They
contribute to GDP, capital formation, balance of payment and generate employment.

INTERNATIONAL INVESTMENT THEORIES

 Monopolistic Advantage Theory
Stefan Hymer saw the role of firm-specific advantages as a way of marrying the
study of direct foreign investment with classic models of imperfect competition in
product markets. He argued that a direct foreign investor possesses some kind of
proprietary or monopolistic advantage not available to local firms.
These advantages must be economies of scale, superior technology, or superior
knowledge in marketing, management, or finance. Foreign direct investment took place
because of the product and factor market imperfections.
The direct investor is a monopolist or, more often, an oligopolist in product markets.
Humer implied that governments should be ready to impose controls on it.

Product and Factor Market Imperfection

Caves (1971) expanded Hymer’s theory and hypothesized that the ability of firms
to differentiate their products - particularly high income consumer goods and services -
may be key ownership advantages of firms leading to foreign production.
The consumers would prefer to similar locally made goods and thus would give the firm
some control over the selling price and an advantage over indigenous firms. To support
these contentions, Caves noted that companies investing overseas were in industries
that typically engaged in heavy product research and marketing effort.

Cross Investment Theory

E. M. Graham noted a tendency for cross investment by European and American

firms in certain oligopolistic industries; that is, European firms tended to invest in the
United States when American companies had gone to Europe.
He postulated that such investments would permit the American subsidiaries of
European firms to retaliate in the home market of U.S. companies if the European
subsidiaries of these companies initiated some aggressive tactic, such as price cutting,
in the European market.
The Internalization Theory
It is an extension of the market imperfection theory. By investing in a foreign
subsidiary rather than licensing, the company is able to send the knowledge across
borders while maintaining it within the firm, where it presumably yields a better return
on the investment made to produce it.

Further readings
Philippines: Foreign Investment
 According to the UNCTAD's World Investment Report 2020, foreign direct
investment flows (FDI) to the Philippines fell to USD 5 billion in 2019, down from USD
6,6 billion in 2018 and remaining below the full-year target of USD 8 billion set by the
Central Bank of Philippines. FDI stock was about USD 88 billion in 2019, an increase of
more than USD 60 billion when compared to 2010 level. Japan, the United States and
Singapore are traditionally the main investors, while inflows are concentrated in the
manufacturing and the real estate. Nevertheless, China took over Japan and Singapore
as the largest investor in the Philippines in 2018. This was mainly due to the
construction of an iron and steel plant by the Chinese Hesteel Group (HBIS) in southern
Philippines. Last year, the country eased the obligation of local employment for foreign

investor workers.

Factors Influencing FDI

1. Wage rates - A major incentive for a multinational to invest abroad is to
outsource labor-intensive production to countries with lower wages. If average
wages in the US are $15 an hour, but $1 an hour in the Indian sub-continent,
costs can be reduced by outsourcing production. This is why many Western
firms have invested in clothing factories in the Indian sub-continent.

2. Labor skills - Some industries require higher skilled labour, for example
pharmaceuticals and electronics. Therefore, multinationals will invest in those
countries with a combination of low wages, but high labour productivity and skills.
3. Tax rate - Large multinationals, such as Apple, Google and Microsoft have sought
to invest in countries with lower corporation tax rates. For example, Ireland has
been successful in attracting investment from Google and Microsoft. In fact, it
 has been controversial because Google has tried to funnel all profits through
Ireland, despite having operations in all European countries.
4. Size of economy / potential for growth - Foreign direct investment is often
targeted to selling goods directly to the country involved in attracting the
investment. Therefore, the size of the population and scope for economic growth
will be important for attracting investment. For example, Eastern European
countries, with a large population, e.g. Poland offers scope for new markets. This
may attract foreign car firms, e.g. Volkswagen, Fiat to invest and build factories
in Poland to sell to the growing consumer class. Small countries may be at a
disadvantage because it is not worth investing for a small population. China will
be a target for foreign investment as the newly emerging Chinese middle class
could have a very strong demand for the goods and services of multinationals.
5. Political stability / property rights - Foreign direct investment has an element of
risk. Countries with an uncertain political situation, will be a major disincentive.
Also, economic crisis can discourage investment. For example, the recent
Russian economic crisis, combined with economic sanctions, will be a major
factor to discourage foreign investment. This is one reason why former
Communist countries in the East are keen to join the European Union. The EU is
seen as a signal of political and economic stability, which encourages foreign
investment.

Costs and Benefits Associated with FDI

Benefits to the Host Country

1. Resource-transfer Effects - FDI can make a positive contribution to a host
economy by supplying capital, technology, and management resources that
would otherwise not be available and thus boost that country’s economic growth
rate.
2. Employment Effects - The effects of FDI on employment are both direct and
indirect. Direct efforts arise when a foreign MNE employs a number of host-
country citizens. Indirect effects arise when jobs are created in local suppliers as
a result of investment and when jobs are created because of increased local
spending by employees of the MNE. The indirect employment effects are often
as large as, if not larger than, the direct effects.

When Toyota opened a new auto plant in France in 1997, estimates suggested the plant
would create 2,000 direct jobs and perhaps another 2,000 jobs in support industries.
 3. Balance-of-Payments Effect - Given the concern about current account deficits,
the balance-of-payments effects of FDI can be an important consideration for a
host government.

4. Effect on Competition and Economic Growth - When FDI takes the form of a
green-field investment, the result is to establish a new enterprise, increasing the
number of players in a market and thus consumer choice. In turn, this can
increase competition in a national market and thus consumer choice. In turn, this
can increase competition in a national market, thereby driving down prices and
increasing the economic welfare of consumers. Increased competition tends to
stimulate capital investments by firms in plant, equipment, and R&D as they
struggle to gain an edge over their rivals. The long-term results may include
increased productivity growth, product and process innovations and greater
economic growth.

FDI’s impact on competition in domestic markets may be particularly important in the

case of services, such as telecommunications, retailing, and many financial services
where exporting is often not an option because the service has to be produced where it
is delivered.

Costs of FDI to Host Countries

1. Possible Adverse Effects on Competition within the Host Nation

Host governments worry that the subsidiaries of foreign MNEs may have greater
economic power than indigenous competitors. It is a part of a larger international
organization, the foreign MNE may be able to draw on funds generated
elsewhere to subsidize its costs in the host market, which could drive indigenous
companies out of business and allow the firm to monopolize the market.
2. Adverse Effects on the Balance of Payments
First, the initial capital inflow that comes with FDI must be the subsequent
outflow of earnings from the foreign subsidiary to its parent company. Such
outflows show up as a debit on the capital account. Some governments have
responded to such outflows by restricting the amount of earnings that can be
repatriated to a foreign subsidiary’s home country.
A second concern arises when a foreign subsidiary imports a substantial number
of its inputs from abroad, which results in a debit on the current account of the
 host country’s balance of payments.
3. Perceived Loss of National Sovereignty and Autonomy
Many host governments worry that FDI is accompanied by some loss of
economic independence. The concern is that key decisions that can affect the
host country’s economy will be made by a foreign parent that has no real
commitment to the host country and over which the host country’s government
has no real control.

Benefits and Costs of FDI to Home Countries

Benefits of FDI to the Home Country

1. The capital account of the home country’s balance-of-payments benefits from

the inward flow of foreign earnings FDI can also benefit the current account of
the home country’s balance of payments if the foreign subsidiary created
demands for home country exports of capital equipment, intermediate goods,
complementary products, and the like.

2. Benefits to the home country from outward FDI arise from employment effects.
As with the balance of payments, positive employment effects arise when the
foreign subsidiary creates demand for home-country exports of capital
equipment, intermediate goods, complementary products, and the like.

Toyota’s investment in auto assembly operations in Europe has benefited both the
Japanese balance-of-payments position and employment in Japan because Toyota
imports some component parts for its European-based auto assembly operations
directly from Japan.

3. Benefits arise when the home-country MNE learns valuable skills from its
exposure to foreign markets that can be transferred back to home country. This
amounts to a reverse resource transfer effect. Through its exposure to a foreign
market, an MNE can learn about superior management techniques and superior
products and process techniques. These resources can then be transferred back
to the home country, contributing to the home country’s economic growth rate.
Costs of FDI to the Home Country
1. First, the capital account of the balance of the payments suffers from the initial
capital outflow required to finance the FDI. This effect, however, is usually more
than offset by the subsequent inflow of foreign earnings.
 2. Second, the current account of the balance of payments suffers if the purpose of
the foreign investment is to serve the home market from a low-cost production
location.
3. Third, the current account of the balance of payments suffers if the FDI is a
substitute for direct exports.
Globalization
A fundamental shift is occurring in the World
economy. We are rapidly moving from a world in which
national economies were relatively self-contained
entities, isolated from each other by barriers to cross border
trade and investment; by distance, time zones, and
language and by national differences in government
regulation, culture and business systems –And we are
moving towards a world in which barriers to cross- border
trade and investment are tumbling, perceived
distance is shrinking due to advances in transportation and telecommunication
technology, material culture is starting to look similar the world over and national
economies are merging into an inter dependent global economic system. The process
by which this is happening is currently reported as globalization.
International Monetary Fund defines Globalization as “the growing
interdependence of countries worldwide through increasing volume and variety of cross
border transactions in goods and services and of international capital flows and also
through the more rapid and wide spread diffusion of technology”.
Charles U.L. Hill defines globalization as “The shift towards a more integrated
and interdependent World Economy. Globalization has two main components-the
globalization of markets and Globalization of production.”
Emerging Global Economy
The decades of the 1980s and 1990s brought transitions in the political,
economic, technological, and environmental arenas. Some of these changes continue to
reshape our work and non-work lives, much as the early Industrial Revolution did during
the mid-1800s. This revolution is fuelling increased globalisation.
Globalisation has made a big world smaller. Globalisation affects trade, finance,
production, communications, and technological change. When we look at the world map,
we need to think about how this global community of people and nations is being
systematically drawn closer together.
At Distributed Service Systems, a small full-service computer company located in
Reading, Pennsylvania, a technical consultant sits at a terminal and solves assembly
line production problems at Carpenter Technology steel plants in India, China, Mexico,
and Taiwan. At the same time, a major U.S. global manufacturer in Green Bay,
Wisconsin, has a small staff of foreign currency traders working twenty-four hours a day
to manage the firm’s global financial needs and resources.
Since 1980, world exports (goods leaving a country) have increased 194 per cent,
and U.S. imports (goods coming into the country) have more than tripled. In 1980, total
U.S. trade equalled 9 per cent of Gross Domestic Product (GDP), and Gross National
Product (GNP), both of which measure the annual output of goods and services; in 2004,
it amounted to 26 per cent. Nations have found it cheaper and more efficient to trade
more with each other than to produce all their products at home.
The last quarter of century has seen rapid changes in the global economy.
Barriers to the free flow of goods, services, and capital have been coming down. The
volume of cross-border trade and investment has been growing more rapidly than
global output, indicating that national economies are becoming more closely integrated
into a single, interdependent, global economic system.
The move toward a global economy has been further strengthened by the
widespread adoption of liberal economic policies by countries that for two generations
or more were firmly opposed to them. Country after country, we are seeing state-owned
businesses privatized, widespread deregulation, markets being opened to more
competition, and increased commitment to removing barriers to cross-border trade and
investment.
This suggests that over the next few decades, countries such as the Czech Republic,
Poland, Brazil, China, and South Africa may build powerful market-oriented economies.

In short, current trends indicate that the world is moving rapidly toward an
economic system that is more favourable for the practice of international business.
Greater globalisation brings with it risks of its own. This was starkly
demonstrated in 1997 and 1998 when a financial crisis in Thailand spread first to other
East Asian nations and then in 1998 to Russia and Brazil. Ultimately, the crisis
threatened to plunge the economies of the developed world, including the United States
into a recession.

BRICS
BRICS is the title of an
association of leading emerging
economies, arising out of the
inclusion of South Africa into the BRIC
group in 2010. As of 2012, the
group's five members are Brazil,
Russia, India, China and South Africa. With the possible exception of Russia, the BRICS
members are all developing or newly industrialised countries, but they are distinguished
by their large, fast-growing economies and significant influence on regional and global
affairs. As of 2012, the five BRICS countries represent almost 3 billion people, with a
combined nominal GDP of US$13.7 trillion, and an estimated US$4 trillion in combined
foreign reserves. Presently, India holds the chair of the BRICS group.
President of the People's Republic of China Hu Jintao has described the BRICS
countries as defenders and promoters of developing countries and a force for world
peace. However, some analysts have highlighted potential divisions and weaknesses in
the grouping, such as India and China's disagreements over Tibetan and border issues,
the failure of the BRICS to establish a World Bank-analogue development agency, and
disputes between the members over UN Security Council reform.
The grouping has held annual summits since 2009, with member countries
taking turns to host. Prior to South Africa's admission, two BRIC summits were held, in
2009 and 2010. The first five member BRICS summit was held in 2011. The most recent
summit took place in New Delhi, India, on March 29, 2012.
Drivers of Globalization
Two macro factors seem to underlie the trend toward greater globalization:

The Role of Technological Change

Microprocessors and Telecommunications: Perhaps the single most important
innovation has been development of the microprocessor, which enabled the explosive
growth of high-power, low-cost computing, vastly increasing the amount of information
that can be processed by individuals and firms. The microprocessor also underlies
many recent advances in telecommunications technology.
The Internet and the World Wide Web: The phenomenal growth of the Internet and the
associated World Wide Web is the latest expression of this development.
Transportation technology: In addition to developments in communication technology,
several major innovations in transportation technology have occurred since World War II.
In economic terms, the most important are probably the development of commercial jet
aircraft and super freighters and the introduction of containerization, which simplifies
transshipment from one mode of transport to another. The advent of commercial jet
travel, by reducing the time needed to get from one location to another, has effectively
shrunk the globe.

GLOBALISATION OF MARKETS
The globalization of markets refers to the merging of historically distinct and
separate national markets into one huge global marketplace. Falling barriers to cross-
border trade have made it easier to sell internationally. It has been argued for some time
that the tastes and preferences of consumers in different nations are beginning to
converge on some global norm, thereby helping to create a global market.
Consumer products such as Citicorp credit cards, Coca-Cola soft drinks, Sony
play station, and Mc Donald’s hamburgers are frequently held up as prototypical
example of this trend; they are also facilitators of it. By offering a standardized product
worldwide, they help to create a global market.

Despite the global prevalence of Citicorp credit cards and McDonald’s

hamburgers, it is important not to push too far the view that national markets are giving
way to the global market. Very significant differences still exist between national
markets along many relevant dimensions, including consumer tastes and preferences,
distribution channels, culturally embedded value systems and the like. For example,
automobile companies will promote different car models depending on a range of
factors such as local fuel costs, income levels, traffic congestion, and cultural values.
The most global markets are not markets for consumer products – where
national differences in tastes and preferences are still often important enough to act as
a brake on globalization – but markets for industrial goods and materials that serve a
universal need the world over. These include the markets for commodities such as
aluminum, oil and wheat; the markets for industrial products such as microprocessors,
computer memory chips and commercial jet aircraft.
In many global markets, the same firms frequently confront each other as
competitors in nation after nation.
Coca-Cola’s rivalry with Pepsi is a global one, as are the rivalries between Ford and Toyota,
Boeing and Airbus, Caterpillar and Komatsu.

Transition from Domestic to International to Global Markets

After a company decides to go international, it must decide the degree of marketing
involvement and commitment it is prepared to make. Generally, a domestic company
enters emerge as an international company through the following stages:
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POLICY ISSUES
Presently, international organizations, particularly the multilateral organizations,
such as the United Nations Organization, the World Bank, the International Monetary
Fund and the World Trade Organization, among others, carry with them fundamental
structural deformities. They, thus face compelling operational challenges.
These challenges are essentially derived from some of the following:
At inauguration: The global circumstances which gave birth to the constitutive
rules and consequently gave international institutions their structure of
operations have changed significantly particularly since the end of the Cold War.
The extant structures, therefore cannot serve effectively the present global
system of organization. At the minimum, the structures would have to be
reviewed and revised to take into cognizance, the present configurations of
national and regional balances and imbalances.

Democratic Deficits: Engagements within international organisations can hardly

 be described as democratic, as issues bordering on the transparency in the
decision making processes are constant. Developing countries are hard pressed
to pursue their positions conclusively, as they lack the resources/capacity to do
so at the expense of dominant states, which have the capacity. In the United
Nations for example, the presence of a permanent Security Council with veto
powers to vet decisions at the General Assembly, constitute a block of the
“almighty” in an assembly of equal states.

Global response to regional problems: The way and manner international

organizations such as the IMF, World Bank and even the United Nations address
national or regional problems in some of the continents are more of a wait for-
something-to-happen-before-we-move engagement. International mechanisms
for protecting basic human rights, or even preventing wide-scale atrocities, are
weak and inadequate and used sometimes arbitrary (i.e. the haste to save
Kuwaitis under Iraqi occupation and the lack of enthusiasm to prevent the
Rwandan Genocide or the lukewarm approach to Darfur). Therefore, what is
needed, are responsive global governance institutions that meet the needs of
everyone in a balance between the rights of the citizens, sovereignty of states
and legitimacy of mandate.
Issues of accountability and transparency: The case of accountability is
worsened by the Notes perceived lack of transparency in international
organizations. This is made important as they assume more and more global
tasks and responsibilities that go beyond the mission for which they were
originally created. They thus have a greater impact on the lives of peoples and
states, in ways that were not possible 20 years ago. They however, are hardly
accountable to any independent institution acting on behalf of the generality of
nations they represent or on whose behalf they act.
Enforcement of Mandates: Enforcement powers of international organizations
are severely limited, as their mandates are subject to the availability of resources
to be provided by the patronizing or member states as well as their authorization.
The concentration of powers in centralized distant bureaucracies with little
sympathy for local cultural norms has the potential to counteract the concept of
“division of powers” and the benefits of adapting methods of government to
localities.
Globalization promotes competitions, sometimes violent competitions and
conflicts, among nations, thereby putting in place motives for regional insecurities. It
also promotes emergence of global oligopolies as typified by the rash of Mergers and
Acquisitions (M&A) especially in banking and extractive industries.
Globalization also facilitated the rise of international media houses, which
monitor global events and transmit them live into people‘s living rooms. Much as they
can use this power to drive international development processes, majority of the global
media, however, chose to broadcast information that are stereotypical and tend to
stigmatize peoples and their cultures
Enrichment

Activity 1 Globalization of Markets

The following companies have found a stable market in foreign countries.

Try to find out the details of their international business with regards to its product
portfolio, revenue, major clients and reputation in foreign markets. Follow the given
format.

Company Product Portfolio Major Clients Reputation in

Foreign Markets
Activity 2 Challenges of Globalization

Find out the various policy issues that

Philippine faces in its quest for globalization.
Essay Writing Rubric