FOREIGN DIRECT INVESTMENT

- according to OECD any foreign investors possessing 10

percent or more ownership in a foreign organization is labeled
as lasting interest. Why is it lasting interest differentiates fdi to
fpi? Simply because FDI is for long term while FPI is for short
term only. So when we say FPI it refers to investing to investing
in the financial assets of a foreign country, such as stocks and
bonds.
Unlike FDI, the investor does not have direct access to, or control over, the
assets of the company in which they have invested. FPIs are thus categorised as
indirect and hands-off investment techniques meant solely for greater returns.

- can be inward and outward. Inward refers to investment

coming into the country. Outward refers to investments made
by companies from that country into foreign companies in other
countries.
GREENFIELD INVESTMENT
Suppose there is a company ABC Inc. which is having its
headquarters in the US. The company conducts research to
know the demand for its product in the country of India. After
conducting the research in the Indian market, it is found that
there is a huge demand for the product of the company in India,
and it can get a good customer base over there. So, the
management of the company decided to expand its business
by creating its subsidiary company in India and starts the
operations there from the ground level by constructing new
production facilities, distribution hubs, and the offices.
This investment by the company ABC Inc. in the other
country by creating a subsidiary over there will be considered
as the greenfield investment as the company starts its
operations there from the ground level by constructing new
production facilities, distribution hubs, and the offices. Also, the
company will be managing all the operations using its own staff
and not just investing its money, unlike in case the other type
of foreign direct investment where the day to day operations
are being managed is not managed by the investing company.
So, this is the example of the Greenfield Investment.

Brown Field Investment

The alternative to this is a greenfield investment, in which a

new plant is constructed. The clear advantage of a brownfield
investment strategy is that the buildings are already
constructed. The costs and time of starting up may thus be
greatly reduced and the buildings already up to code.

Brownfield land, however, may have been abandoned or left

unused for good cause, such as pollution, soil contamination,
or the presence of hazardous materials .

Brownfield investing covers both the purchase and the lease of

existing facilities. At times, this approach may be preferable, as
the structure already stands. Not only can it result in cost
savings for the investing business, but it can also avoid certain
steps that are required to build new facilities on empty lots,
such as building permits and connecting utilities.

While additional equipment may be required, or existing

equipment may need to be modified, this can often be more
cost-effective than building a new facility from the ground up.
This is especially true in cases where the previous use is
similar in nature to the new intended use.

The addition of new equipment is still considered part of a

brownfield investment, while the addition of any new facilities
to complete production do not qualify as brownfield. Instead,
new facilities are considered greenfield investing.
Brownfield vs. Greenfield Investing

While brownfield investing involves the use of previously

constructed facilities that were once in use for another
purpose, greenfield investing covers any situation in which new
facilities are added to previously vacant land. The term
greenfield relates to the idea that, before the construction of a
new facility, the land may have literally been a green field, such
as an empty pasture, covered in green foliage prior to use.

A brownfield investment is often undertaken when a company

wants to invest and start operations in a new country but does
not want to incur the high start-up costs associated with
a greenfield investment (a greenfield investment is a foreign
direct investment where, instead of using existing businesses in
the foreign country, the investor opens their own new business
there – basically, a “from the ground up” approach). The
underlying rationale behind a brownfield investment is to enter
into a new foreign market through businesses that already have
a presence there.

Typically, there are two main types of FDI: horizontal and

vertical FDI.

Horizontal: a business expands its domestic operations to a

foreign country. In this case, the business conducts the same
activities but in a foreign country. For example, McDonald’s
opening restaurants in Japan would be considered horizontal
FDI.

Vertical: a business expands into a foreign country by moving

to a different level of the supply chain. In other words, a firm
conducts different activities abroad but these activities are still
related to the main business. Using the same example,
McDonald’s could purchase a large-scale farm in Canada to
produce meat for their restaurants.

However, two other forms of FDI have also been observed:

conglomerate and platform FDI.
Conglomerate: a business acquires an unrelated business in a
foreign country. This is uncommon, as it requires overcoming
two barriers to entry: entering a foreign country and entering a
new industry or market. An example of this would be if Virgin
Group, which is based in the United Kingdom, acquired a
clothing line in France. Virgin Group is an investment company focused
on leisure, travel, tourism, mobile, broadband, TV, radio, music, finance, and health
sectors.

Platform: a business expands into a foreign country but the

output from the foreign operations is exported to a third country.
This is also referred to as export-platform FDI. Platform FDI
commonly happens in low-cost locations inside free-trade
areas. For example, if Ford purchased manufacturing plants in
Ireland with the primary purpose of exporting cars to other
countries in the EU.

GOVERNMENT TRADE RESTRICTION

Trade restriction refers to the various barriers that make the

flow of goods and services between countries immobile. If the
barriers come from government policies, we call it trade
protection.

Trade restrictions affect the demand for and supply of goods

and services on international markets. Specifically, trade
protection prevents market forces from operating freely to
determine the equilibrium quantity and price. As a result,
protection results in an inefficient allocation of resources on a
global scale.

Reasons for trade restriction

Without barriers, international trade allows for efficient

allocation of resources. Goods, services, and production factors
flow freely to various countries.
 Proponents argue that free trade brings prosperity to society
because people have a greater choice of products to meet their
needs. Workers also move easily to countries that offer better
opportunities. And for companies, the market for their products
is broader, not only domestic.

Import tariffs

Import tariffs are taxes on imported goods from abroad. The

tariff’s effect is to increase the price of imported products when
they enter the domestic market.

Tariff can take the form of:

 Ad-valorem tariff. The value is based on a certain percentage

of the original price of the imported product. Although the
percentage is fixed, if the price changes, the nominal import
tariff will also change.
 Specific tariff. It is based on a fixed nominal. An example is
$100 per tonne of the imported product.
As the price of imported products rises, domestic buyers may
be less interested in buying them. The hope is that they will
switch to domestic products.

For domestic producers, import tariffs bring benefits to them.

That reduces the competitive pressure on them. It also allows
them to capture higher sales.

Furthermore, for the government, tariffs are a source of income.

The higher the tariff, the greater the government revenue.

However, tariffs also raise another problem. Domestic

consumers bear a higher price. They may not want to switch to
domestic products because they can only get some features
from imported products.
Import quota

Quotas limit the quantity of goods entering the domestic

market. Quotas reduce supply. If domestic producers cannot
compensate by increasing output, quotas create shortages
(excess demand). As a result, the price of domestic goods
rises.

Domestic producers benefit from less pressure on imported

goods. But, for domestic consumers, they have to bear higher
prices as the market faces a shortage.

Embargo

An embargo is a political decision to stop transactions with

individual countries, including export or import activities.
Embargoes may only apply to some products. Or, it may
include all goods and services.

Embargoes are often for political rather than economic reasons.

For example, the United States banned arms sales to
Indonesia from 1999 – 2005 because it considered Indonesia to
have committed human rights violations in the East Timor case.

Embargoes are more likely to come from economically strong

countries such as the United States than from developing
countries. It becomes a form of political punishment to isolate a
country.
License

Some countries use import or export licenses to restrict trade.

To ship foreign goods into the domestic market, importers must
obtain a license.

The government can limit the granting of import licenses. The

government may not issue licenses for certain products from
certain countries for specific purposes.

Meanwhile, export licenses reduce shipments of goods abroad.

It is usually to restrict trade in certain products or to keep
domestic prices from rising.

Producers may be more interested in selling abroad at a higher

price. They then increased their exports. An increase in exports
reduces supply in the domestic market. If, at the same time,
producers do not compensate by increasing production, it is
likely to lead to a shortage, pushing prices up.

Standardization

Standardization can take many forms, including standards for

health, environmental safety, and local content requirements.
To limit imports, the government can raise standards and
reduce the number of products that fulfill them.

Subsidy

Subsidies work in reverse with import tariffs. Instead of

imposing import duties, the government provides grants to
domestic producers to encourage exports.

Subsidies can take many forms, including reduced production

costs, cheaper access to credit, or subsidies on the price of
goods exported.
Subsidies make domestic goods more competitive when
entering international markets. Manufacturers charge low prices
for their export products.

The source of subsidy payments is tax revenue. So, indirectly,

it is not the government that pays taxes, but the taxpayers.
Households or businesses may not use the product.

Negative effects of trade restriction

Trade restrictions benefit one party and raise costs for the
other. The main problems caused by trade restrictions are
higher prices for consumers, lower quantities of supply,
and deadweight losses.

Higher price

Trade barriers increase costs and selling prices. For example,

when tariffs apply to consumer products, domestic buyers have
to pay more. If that applies to imports of raw materials and
capital goods, production costs will be more expensive.
Manufacturers are likely to pass the increase in costs to the
selling price of the product.

Less choice

Under free trade, consumers have access to more products.

The supply of some products such as luxury goods relies on
shipments from abroad because they are not produced
domestically. Therefore, they have more choices, either in
terms of price or quality.

Imposing trade restrictions will only have the opposite effect. It

reduces domestic consumer choices.

For example, the imposition of tariffs makes the selling price of

goods more expensive and less competitive. Importers see
these conditions as unfavorable, making them less interested in
importing goods.

The effect of the restriction on supply is more apparent in the

case of import quotas. Quotas reduce the quantity of goods that
enter the domestic market.

Reduced supply not only raises prices, but also reduces

options for domestic buyers. Some imported products may
have features or qualities they cannot find from domestic
products.

Damaging future competitiveness

Trade restrictions were initially intended to protect domestic

industries. However, sometimes, instead of becoming more
competitive and efficient, such protection makes domestic
producers lazy to innovate. Their competitiveness has not
improved over time. And, they become very dependent on
government protection.

Such situations do not lead to prosperity and better conditions.

It actually leads to increased monopoly power, political
lobbying, bureaucratic corruption by domestic companies.

Domestic firms have less incentive to invest in technological

advances or research and development. Because there is little
incentive to provide superior products, the quality of products in
the economy decreases over time.

Country of Origin Marking

All goods of foreign origin imported into the Philippines or their
containers must conspicuously indicate legibly, indelibly, and
permanently, as the nature of the goods or container will permit
and so as to indicate to an ultimate buyer in the Philippines, the
country of origin of the goods. If goods or their containers are
not marked at the time of importation, the importer will be
subject to a marking duty of 5% of the dutiable value of the
goods, which is deemed to have accrued at the time of
importation.
The BOC can also hold the release of the goods until the goods
or their containers have been marked and until the duty has
been paid. The goods will be deemed abandoned in the event
of failure to mark the goods within 30 days following due notice.
Non-Tariff Barriers
Trade barriers include various import licences and permits.
Imports are classified into three categories:
 Freely importable commodities.
 Regulated commodities.
 Prohibited or banned commodities.
All importers must apply for importer accreditation and
registration with the BOC. If the goods to be imported are
regulated goods, the importer must also secure the necessary
import permit from the regulating government agency.
Regulated imports include goods restricted for reasons of
public health and safety and the protection of domestic
industries. Notable products that require import clearance or
permits include:
 Animals and animal products (Bureau of Animal Industry
(BAI)).
 Used left-hand drive automobiles (Fair Trade Enforcement
Bureau (FTEB) of the DTI and Bureau of Internal Revenue
(BIR)).
 Used left-hand drive trucks and buses (FTEB).
 Cigars, cigarettes, e-cigarettes, and e-liquids (National
Tobacco Administration (NTA) and BIR).
  Mobile phones, laptops, and other wi-fi bluetooth-enabled
electronic gadgets and devices (National
Telecommunications Commission).
 Optical discs (Optical Media Board).
 New or used automobile parts (FTEB).
 Plants, planting materials, and plant products (Bureau of
Plant Industry).
 Frozen or fresh meat, including treated processed animal
products such as cured ham, hog casing, and natural
casings (BAI).
 Seeds for food or planting purposes (Bureau of Plant
Industry).
 Processed food products (Food and Drug Administration
(FDA)).
 Electric household appliances (Bureau of Philippine
Product Standards).
 Alcoholic beverages (FDA and BIR).
 Tobacco products (NTA and BIR).
 Cosmetics (FDA).
 Drugs, medicines, and medical devices (FDA).
The BOC maintains a Customs Regulated Imports List (CRIL)
that is updated on a regular basis. The CRIL lists all regulated
import products, their respective import regulations, and the
permits required from the relevant government agencies.
As a member of the WTO, the Philippines no longer imposes
quantitative or quota restrictions on imports of food products,
except for rice.
Any foreign corporation importing goods into the Philippines
may be considered to be doing business in the Philippines. A
foreign corporation that is doing business in the Philippines
must:
 Obtain a licence from the Philippine Securities and
Exchange Commission (through the registration of a
 representative office, a branch office, or the incorporation
of a subsidiary).
 Register with the BIR (as a taxpayer).
 Secure accreditation as an importer with the BOC.
Under the Government Procurement Reform Act and its
implementing rules and regulations (GPRA), only corporations
duly organised under the laws of the Philippines, and of which
at least 60% of the outstanding capital stock belongs to
Philippines nationals, can participate in bidding for government
procurement of goods. There are exceptions for goods that are
not available from local suppliers.
Sanction

a strong action taken in order to make people obey a law or

rule, or a punishment given when they do not obey: Without
realistic sanctions, some teachers have difficulty keeping order
in the classroom.

Tariff

A tariff is a tax imposed by one country on the goods and

services imported from another country to influence it, raise
revenues, or protect competitive advantages.

RESTRICTIONS ON INTERNATIONAL TRADE

Restrictions on international trade are usually practiced by various countries,
whether developed or not, and are exchange-rate, fiscal (tariff) or merely sus
pensive. Among these restrictions we can relate the following:

1 – Prior Licenses for Import

These are restrictions whose purpose is to control or limit the flow of imports and
usually the tool used is the obligation of prior import licenses.

2 – Tariff Restrictions
They are fiscal restrictions, which aim at taxing certain products, according to the
interests of the country. This restriction is the most common as an instrument of
protectionism.

3 – Exchange Rate

It is the restriction made by the devaluation of the currency of the importing country,
making at the same time more expensive imported products and more competitive
products for export.

4 – Import Quotas

It is the restriction that limits imports to pre-established quotas, either by product or

by country, in value and quantity.

5 – Maximum Value or Minimum Value

These restrictions are based on the establishment of maximum and minimum values
for the products to be imported and/or exported.

6 – Prior Deposits

It is the requirement of previous deposits in currency, for a determined period, as

against starting for the release of the import licenses. It is an extra-fiscal measure.

7 – Financing Deadlines

Limitation of terms of foreign financing, to reduce and restrict the import facilities.

Restrictions on international trade.

The importance of knowing these restrictions to international trade before starting an

importation is due to the fact that they can directly influence the value of the imported
product, which can make importation unviable. Protectionism is an action that does
not aid international trade.
How Governments discourage or restrict and Encourage
FDI? Governments discourage or restrict FDI through
ownership restrictions, tax rates, and sanctions. Governments
encourage FDI through financial incentives; well-established
infrastructure; desirable administrative processes and
regulatory environment; educational investment; and political,
economic, and legal stability.
How Governments Discourage or Restrict FDI

In most instances, governments seek to limit or control foreign direct investment to

protect local industries and key resources (oil, minerals, etc.), preserve the national
and local culture, protect segments of their domestic population, maintain political
and economic independence, and manage or control economic growth. A
government use various policies and rules:

 Ownership restrictions. Host governments can specify ownership

restrictions if they want to keep the control of local markets or industries in
their citizens’ hands. Some countries, such as Malaysia, go even further and
encourage that ownership be maintained by a person of Malay origin, known
locally as bumiputra. Although the country’s Foreign Investment Committee
guidelines are being relaxed, most foreign businesses understand that having
a bumiputra partner will improve their chances of obtaining favorable
contracts in Malaysia.
 Tax rates and sanctions. A company’s home government usually imposes
these restrictions in an effort to persuade companies to invest in the domestic
market rather than a foreign one.

How Governments Encourage FDI

Governments seek to promote FDI when they are eager to expand their domestic
economy and attract new technologies, business know-how, and capital to their
country. In these instances, many governments still try to manage and control the
type, quantity, and even the nationality of the FDI to achieve their domestic,
economic, political, and social goals.
 Financial incentives. Host countries offer businesses a combination of tax
incentives and loans to invest. Home-country governments may also offer a
combination of insurance, loans, and tax breaks in an effort to promote their
companies’ overseas investments. The opening case on China in Africa
illustrated these types of incentives.
 Infrastructure. Host governments improve or enhance local infrastructure
—in energy, transportation, and communications—to encourage specific
industries to invest. This also serves to improve the local conditions for
domestic firms.
 Administrative processes and regulatory environment. Host-country
governments streamline the process of establishing offices or production in
their countries. By reducing bureaucracy and regulatory environments, these
countries appear more attractive to foreign firms.
 Invest in education. Countries seek to improve their workforce through
education and job training. An educated and skilled workforce is an important
investment criterion for many global businesses.
 Political, economic, and legal stability. Host-country governments seek
to reassure businesses that the local operating conditions are stable,
transparent (i.e., policies are clearly stated and in the public domain), and
unlikely to change.