Lecture 4.

INTERNATIONAL MOVEMENT OF
INVESTMENT CAPITAL AND MANUFACTURING ACTIVITY
Apalkova Viktoriia
PhD, Associate Professor, Department of International Economics
 Content
1. Modern features of the international capital movement.
2. Direct investment as a key resource for transnational
business activities.
3. International portfolio investment.
4. Influence of the investment climate on international
investment.
5. Governance and regulatory factors .
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1. Modern features of the international capital movement
• The international movement of capital belongs to the classical
forms of international economic relations that originated in the
early stages of the formation of the world economy. Being the
material basis for the internationalization of entrepreneurial
activity, it, along with international trade and labour migration,
played an important role in the economic development of both
the exporting countries and the countries that took it, as well as
the world economy as a whole.

• International capital movement is the transfer of capital in cash

or commodity form from one country to another in order to
obtain its owners profit, socio-economic effect or other dividends.

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1. Modern features of the international capital movement
• Today, the main forms of international capital movements are
international investments (entrepreneurial capital), international loans
(loan capital) and official development assistance

Fig. 1. The main forms of the international capital movement

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1. Modern features of the international capital movement
• International investments, loans and official development
assistance can be provided in the following ways:

cash funds;

movable and immovable property, inventory;

shares, bonds, other securities, corporate rights;

gold and other precious metals;

rights to fulfil the contractual obligations;

intellectual property rights;

rights to conduct business activities.

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1. Modern features of the international capital movement
• The main objects invested in foreign capital are real assets,
intangible assets and financial assets:

Fig. 2. The objects of international investment

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1. Modern features of the international capital movement
• Absolute and relative indicators are used to estimate the level and
magnitudes of interstate capital movements.
• Absolute indicators include:

volumes of export and import of capital of the country for a definite

period;

value of net foreign assets of the country as the difference between its
export and import;

number of enterprises with foreign capital;

number of employed in enterprises with foreign capital

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1. Modern features of the international capital movement
• Relative indicators of the international capital movement are:
coefficient of export (import) of capital [percent relation of volume of export (import) of capital to GDP of
the country];

coefficient of the country's needs in foreign capital (the ratio of foreign capital to total demand for capital
in the country);

amount of foreign investments per capita;

percentage of foreign investment in the country's GDP;

ratio of the volume of investments of this country abroad to the volume of foreign investments in its
territory;

percentage of the value of the country's external debt to its GDP.

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1. Modern features of the international capital movement
• The international movement of capital is one of the key factors in the
transnationalization of national economies, an effective means of
integrating national economic systems.
• Through its channels to emerging countries, new technologies come
on the basis of which there are competitive industries.
• This stimulates the expansion of research and development works
and development of workers who are able to serve high-tech
production and intensify the development of the service sector and its
modern types: banking, consulting and innovation activities,
medical, educational and tourist services, information technologies,
etc.
• The attraction of foreign capital to the country is usually accompanied
by the creation of new jobs requiring staff of different qualifications -
from specialized workers to highly qualified managers, financiers,
engineers, consultants, marketers, etc.
• Often, foreign capital becomes the main financial resource for the
development of depressed areas of the country, the creation of
prosperous free economic zones, ports, tourist clusters, recreational
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1. Modern features of the international capital movement

https://www.youtube.com/watch?v=cXuQaS13d9U
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2. Direct investment as a key resource for transnational business activities

• In the modern era, the international movement of capital is

carried out mainly in the form of financial resources, or
investments. It is the multi-purpose investment activity of
the subjects of the international economic system that is
the nucleus and key driver of globalization processes. It
provides effective transnationalization of national
economies, their connection to the production networks of
TNCs, an international scientific and technological transfer,
and a new quality of reproductive processes at the
international level is achieved.
• International investments should be understood as long-
term investments of international capital in any branch or
sphere of national economies in order to profit.

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2. Direct investment as a key resource for transnational business activities

According to the statistics of the International Monetary

Fund, there are three groups of investments that are
included in the balance of capital movements:

direct portfolio other

investment; investments; investments.

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2. Direct investment as a key resource for transnational business activities

 Foreign direct investment can be defined as the long-term investment of non-material and
intangible capital by the non-residents into the national economy for the purpose of obtaining
business profits and establishing control over the object of investment on the basis of systemic
institutional support.
 According to international standards, the share of foreign participation in the equity of the firm,
which allows for such control, is 25%. In practice, in most countries, 10% (or higher) equity
participation in the charter capital of a foreign company is already qualified as a direct foreign
investment.
 In Australia, Belgium, Luxembourg, the USA, Finland, this threshold is 10%; in Italy and France -
not less than 20%; in Germany, New Zealand and Japan - 25%; in Sweden - from 20% to 50%, in
Spain - 50%, in the Netherlands - 80%.
 However, it is possible to classify a direct investment with a smaller share of the participation of a
foreign investor if it provides a real influence on the decision making about the investment object.
 Conversely, if an investor's share exceeds the limits set by the national legislation, but he has no
real control over the object, then the corresponding investment is not recognized as direct.
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2. Direct investment as a key resource for transnational business activities

 Portfolio investments include investing in foreign objects exclusively for the

purpose of obtaining financial interest, without a claim to manage an
enterprise.

This includes:

purchase of shares (up to 10% of the total value of the firm),

acquisition of bonds,
derivative financial instruments,
purchase of government securities and loans.

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2. Direct investment as a key resource for transnational business activities

Other investments include

 foreign corporate and bank loans,
 loans from international financial institutions.

These qualitative differences between different types of financial resources are

reflected in the differences in their dynamics, stability, as well as the nature of the
impact of their flows on the economy of host countries.

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3. International portfolio investment

 International portfolio investment is the capital investment in foreign

securities (stocks, bonds, promissory notes, deposit certificates, debt
certificates) for the purpose of obtaining profit, but without the right to
control or influence the activities of the issuer.

 The main motives of international portfolio investment are earnings in the

form of dividends and interest, as well as minimization of risks, but not
participation in the management of the enterprise.

 Their main advantage over direct investments is the absence of the

responsibility of the investor for the efficiency of the capital invested, which
is not interested in which branch of the economy or company to invest.

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3. International portfolio investment

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3. International portfolio investment

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4. Influence of the investment climate on international investment

 Worldwide practice shows that one of the determining factors that

determine the large-scale inflow of investment resources in the
national economy is to create a favourable investment climate for
countries.

 It can be qualified as an important indicator of the favourableness of

the national business environment to the functioning of foreign capital.
For example, the United States, the European Union and Asian
countries, whose economic growth has been largely due in recent
decades to the transformation and improvement of the investment
climate and, as a result, to the growth of their international investment
activity.

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4. Influence of the investment climate on international investment
On the basis of a systematic analysis of the world-wide methods, they can be grouped into three types of common
methodologies that rank countries: a universal methodology, a special methodology and a methodology of a score
assessment:
Methodology, development The essence of the methodology Rating countries according to the
methodology

Universal Methodology, Covers the maximum number of economic indicators, namely: export-import 1. USA2. UK3. China4. France5.
developed by the American operations, political climate, legislative and tax base, allows us to deeply and Germany6. Japan7. Belgium8.
Institute of Reforms in 1995 comprehensively assess the situation in the country at the present time and Netherlands9. Spain10. Russia
draw conclusions about its possible development

Most used in transition economies. Pays particular attention to the pace and
prospects of reforms. The importance of this assessment is determined by the
fact that new opportunities for international companies in countries are
Special methodology,
developed in 1998 by the directly dependent on how these reforms will be implemented. This technique 1. USA2. China3. Germany4.
International Organization for involves interviewing experts representing large banks and taking into account Luxembourg5. Estonia6. UK7. Japan8.
the statistical information of a factor. Among the characteristics of these France9. Russia10. Italy
the Investigation of
International Investments factors there are the forecasts of macroeconomic indicators, the risk of non-
payment of goods, the risk of non-repayment of loans, the assessment of the
creditworthiness of countries, policies in the field of banking assets, policies
regarding fines and discounts, etc.

Allows you to compare the main characteristics of the investment climate of

Methodology for assessment, the countries and to determine the indicators, taking into account the size of
developed by the International all components and criteria for ranking countries for their investment 1. China2. India3. USA4. Brazil5.
Bank and Moody's Russia6. UK7. Australia8. Mexico9.
attractiveness. This technique is universal and is used by different countries.
International Investment It is effective in conducting research at the macroeconomic level, especially Poland10. Netherlands
Agency in 2000. for comparing the level of economic development of several countries

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4. Influence of the investment climate on international investment

FACTORS FORMING NATIONAL INVESTMENT CLIMATE

Factor Characteristics of the components of the factor
The development of market infrastructure, the effect of privatization on investment activity, inflation and its impact on
Factor of the maturity of investment activity, the degree of involvement of the population in the investment process, the development of the
the market environment competitive environment of entrepreneurship, the capacity of the local market, the intensity of inter-economic relations,
export opportunities, the presence of foreign capital
General conditions of Ecological safety, development of branches of material production, volumes of unfinished construction, measure of
management productivity of basic production assets, development of construction base
Characteristic of the Provision of resources in the region, bioclimatic potential, availability of free land for productive investment, level of
economic potential energy resources and labour resources, development of scientific and technical potential and infrastructure
Budget revenues, as well as availability of funds from extrabudgetary funds per capita, availability of financial resources
Financial factors from federal and regional budgets, availability of foreign currency loans, bank interest rate, development of interbank
cooperation, bank loans per 1000 population, share of long-term loans, share of loss-making enterprises

Tax factors Granting of tax privileges and preferences, differentiated tax rates, granting of tax credits, discounts and privileges
The level of life of the population, housing and living conditions, the development of health care, the prevalence of
Social and socio-cultural alcoholism and drug addiction, the level of crime, the size of real wages, the impact of migration on the investment
factors process, the population's attitude to domestic and foreign entrepreneurs, working conditions for foreign professionals,
business quality and ethics local entrepreneurs
Attitude of authorities to foreign investors, observance of legislation by the authorities, level of efficiency in the decision-
Organizational and legal making on registration of enterprises, availability of information, level of professionalism of local administration,
factors efficiency of law enforcement agencies, conditions of movement of goods, capital and labour
The degree of public confidence in the regional authorities, the relationship between the federal centre and the
Political factors authorities in the region, the level of social stability, the state of national-religious relations

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4. Influence of the investment climate on international investment

2018
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4. Influence of the investment climate on international investment

At a high level, here is where foreign direct investment flows went, based on the type of economy:

Most money flows out of wealthier countries, and it flows into both developed
and developing nations.

Foreign direct investment is often considered a win-win that brings new capital
and jobs to developing nations, while simultaneously creating opportunities for
corporations and investors.

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4. Influence of the investment climate on international investment

Now, let’s look at the top 15 countries and jurisdictions receiving FDI inflows::

At the top of the list are the United States ($275.4

billion) as well as China and Hong Kong ($240.6
billion), which is not surprising to see.

Further down the list, things become more

interesting. Tax havens such as the British Virgin
Islands and the Cayman Islands rank higher than
developed economies like Canada, United Kingdom,
and Japan, which don’t even come close to cracking
the top 15.

Meanwhile, Brazil’s ranking in fourth place is also

quite impressive with $62.7 billion of foreign direct
investment inflows in 2017 – this is not a one-time
thing either, since the economy had $58 billion of
inflows in 2016 as well.

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4. Influence of the investment climate on international investment

FDI is seen as vitally important for

corporate profitability and
competitiveness, with 77% of investors
telling that FDI will be more important in
the coming years. And the share of
investors saying that FDI will be
significantly more important for corporate
profitability and competitiveness has
grown steadily over the past several years,
from just 26% in 2016 to 32% in 2019.
Given these views on the strategic
importance of FDI, it is not surprising that
79% of investors say their company will
increase its level of FDI over the next
three years.
Investors based in Asia Pacific and those in
the industry sector are particularly keen to
increase their level of FDI.

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4. Influence of the investment climate on international investment

Investors are continuing to pursue a

combination of FDI methods (see figure).
The continued lack of focus on a particular
mode of FDI likely reflects the fact that a
one-size-fits-all FDI strategy does not work
in an environment in which localization
strategies are used to adapt to markets
characterized by idiosyncratic political
risks, distinct policy frameworks, divergent
economic conditions, and other unique
local characteristics.
Furthermore, as companies pursue FDI
across a wider variety of markets—as
indicated by the broad-based increase in
countries’ scores on this year’s Index—the
need to tailor strategies to each market
only increases.

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4. Influence of the investment climate on international investment
However

 Despite investors’ consistent

responses in recent years of the
Index that their companies are
planning to increase their levels
of FDI, recorded FDI flows have
been falling since 2015.
 The most recent estimates from
the United Nations Conference
on Trade and Development
(UNCTAD) show a 19 percent fall
in global FDI flows in 2018 (see
figure).
 As in previous years, this drop
was driven almost entirely by
reduced FDI flows to developed
markets.

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4. Influence of the investment climate on international investment

 One of the most distinguishable macro

trends in the Index 2018 is that
developed markets once again
dominate the top 25 markets for
investor intentions. Developed
markets account for 22 of the 25 spots
on the Index—hitting their highest-
ever share of positions for the second
year in a row.
 China, India, and Mexico are the only
emerging markets on the Index. This
trend of high investor confidence in
developed markets has been growing
since 2014, with the exception of a
slight shift in favor of emerging
markets in the 2017 Index.
 Investor preference for developed
markets has corresponded with
somewhat stronger economic growth
in developed markets, which also
began in 2014.

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4. Influence of the investment climate on international investment

 At a regional level, investors remain most

optimistic about Asia Pacific (see figure). This
optimism is unsurprising, given that many of
the world’s most dynamic economies are in
that region, including India, China, and the
emerging markets of Southeast Asia. In
addition, Australia and New Zealand have been
growing relatively robustly in recent years—a
trend that is expected to continue in the near
to medium term.
 Investors are also optimistic about the Europe
and Eurasia economic outlook, although their
optimism has waned since last year’s survey
when there was a 27 percentage point
differential in investors who were more
optimistic than pessimistic about the region’s
economic prospects.
 Economic optimism about the Americas has
also faded since last year, although not by as
wide a margin as for Europe and Eurasia.

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5. Governance and regulatory factors
Investors’ prioritization of governance
and regulatory factors when
determining where to invest may also be
driving the increased focus on investing
in developed markets.
In fact, four of the top five factors that
investors consider when choosing where
to invest are governance and regulatory
factors.
And two of these factors—regulatory
transparency and lack of corruption and
the general security environment—have
been consistently among the top five
factors for investment decisions since
2015. Investors’ focus on such
governance issues helps to explain why
developed markets continue to
dominate the rankings, as these markets
are generally perceived to have more
transparent regulatory environments,
lower levels of corruption, and higher
levels of security.
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5. Governance and regulatory factors
The age of multi-localism also appears to be
increasing the importance of cities in driving
investment decisions.
Almost 60% of investors say that more than half of
their companies’ FDI is located in cities—with
companies based in Asia Pacific even more likely to
have the majority of their FDI in cities.
Strikingly, almost 60 percent of investors do not
start their investment decision-making process at
the country level (see figure).
Instead, many begin by selecting a region in which
to invest—and some companies even determine
the city in which they want to invest by analyzing
cities at a global level.
Investors based in the Americas and those in the IT
sector are most likely to start their FDI decisions at
the regional or city level. This emphasis on cities as
drivers of investment decisions has grown as the
age of multi-localism has taken hold, with 58
percent of investors saying they place more
emphasis on the city as the basis of selecting FDI
destinations now than they did just two years ago.
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5. Governance and regulatory factors
The factors that investors prioritize in their city-level
investment decisions vary somewhat from the
factors on which they focus at the country level.
For instance, economic performance is by far the
top-ranked factor driving investment decisions in
cities (see figure).
Other factors that rank highly at the city level
include labor costs, labor force skills, market size,
security, and government tax incentives and other
investment promotion efforts.
Of course, internal transportation infrastructure,
environmental quality, and cultural amenities—
matter secondarily to companies, as such
characteristics play a role in attracting top talent to
a city.
And while some governance and regulatory factors
matter at the city level, there is clearly more
investor emphasis on market asset and growth
potential considerations. This tendency makes
sense, as the regulatory environment is set primarily
at the national level, but these other factors largely
determine investment returns at the city level.
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5. Governance and regulatory factors

 This rising concentration of urban

populations in large cities and
megacities reflects the tendency of
talent to attract more talent.
 Companies and sectors, in turn,
concentrate in cities with the largest
talent pools for their needs.
 In an increasingly digital-enabled
world, this continuing concentration
of talent, innovation, and economic
activity is likely to further favor
megacities and large cities over their
smaller counterparts.
 Indeed, the productivity gap within a
given county has widened in recent
years as top-performing cities become
more digitalized and have better
transportation connections than
others.

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 Individual task

 Use link below to prepare analytical review on selected country

https://www.atkearney.com/foreign-direct-
investment-confidence-index/2019-full-report

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Thank you for your attention!

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