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Group

FOREIGN DIRECT INVESTMENT


Prita Nanda Utami Tenny Yanutriana

[Type the company address]

Definition
Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development. Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. The direct investment in buildings, machinery and equipment is in contrast with making a portfolio investment, which is considered an indirect investment. In recent years, given rapid growth and change in global investment patterns, the definition has been broadened to include the acquisition of a lasting management interest in a company or enterprise outside the investing firms home country. As such, it may take many forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic alliance with a local firm with attendant input of technology and licensing of intellectual property. In the past decade, FDI has come to play a major role in the internationalization of business. Reacting to changes in technology, growing liberalization of the national regulatory framework governing investment in enterprises, and changes in capital markets profound changes have occurred in the size, scope and methods of FDI. New information technology systems, decline in global communication costs have made management of foreign investments far easier than in the past. The sea change in trade and investment policies and the regulatory environment globally in the past decade, including trade policy and tariff liberalization, easing of restrictions on foreign investment and acquisition in many nations, and the deregulation and privatization of many industries, has probably been the most significant catalyst for FDIs expanded role.

Foreign Direct Investment

Objectives
Foreign Direct Investment considers as an important act of business because it enables companies to accomplish several tasks: 1. Avoiding foreign government pressure for local production. 2. Circumventing trade barriers, hidden and otherwise. 3. Making the move from domestic export sales to a locally-based national sales office. 4. Capability to increase total production capacity. 5. Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc; There is simply a difference in perspective between executives of multinational corporations and small and medium sized companies. Multinational corporations are almost always concerned with worldwide manufacturing capacity and proximity to major markets. Small and medium sized companies tend to be more concerned with selling their products in overseas market, in particular they are now focusing on access to markets, access to expertise and most of all access to technology.

Key Success Factors


Depending on the industry sector and type of business, a foreign direct investment may be an attractive and viable option. With rapid globalization of many industries and vertical integration rapidly taking place on a global level, at a minimum a firm needs to keep abreast of global trends in their industry. From a competitive standpoint, it is important to be aware of whether a companys competitors are expanding into a foreign market and how they are doing that. At the same time, it also becomes important to monitor how globalization is affecting domestic clients. Often, it becomes imperative to follow the expansion of key clients overseas if an active business relationship is to be maintained. Group IV Business Law 3

New market access is also another major reason to invest in a foreign country. At some stage, export of product or service reaches a critical mass of amount and cost where foreign production or location begins to be more cost effective. Any decision on investing is thus a combination of a number of key factors including: 1. Assessment of internal resources, 2. Competitiveness, 3. Market analysis, 4. Market expectations

FDI Flows
The most profound effect has been seen in developing countries, where yearly foreign direct investment flows have increased from an average of less than $5 billion in the 1970s to a yearly average of less than $10 billion in the 1980s, to explode in the 1990s from $34.8 billion in 1990 to $257.6 billion in 2000 and now comprise a large portion of global FDI. (Source: UNCTAD)

Developing Countries, 2000, 257625 Developing Countries, World, 1990, 1990, 34853 207455 Developing Countries, World, 1980, 1980,54078 7479 Developing Countries, World, 1970, 1970, 3854 13346

Developing Countries, 2010, 573568

World, 2010, 1243671

Developing 1402680 Countries World

World, 2000,

in million dollar

Foreign Direct Investment

Case I
The first case regarding the FDI happened In India in between Zipper Karamchari Union vs. Union of India, which is commonly known as the YKK Case. In Zippers Karamchari Union vs. Union of India, the Supreme Court of India refused to set aside the approval granted to the Japanese giant YKK Corporation for setting up an integrated plant in India for the manufacture of zip fasteners which were: 1. Considered as low technology items; 2. The industry was reserved for the small scale sector; 3. The approval by the Government of India was for a hundred percent wholly owned subsidiary in India; and 4. There were no export obligations on YKK's part.

Since 1973 the zip fasteners were reserved for the small-scale industry and consequently big corporations could not manufacture such products. In 1986 the Government of India had come out with a notification striking a distinction between small-scale industries and those, which used "integrated plants". The latter were exempted from the embargo. In the year 1991 there was a new Industrial Policy, which eased foreign investment in select areas where the Government felt that they would provide access to high technology or world markets.

Under normal circumstances the Government of India permits foreign corporation to set up wholly owned corporations only where there is high technology or there are export obligations. This was an unusual situation where there were no such commitments. Consequently, the indigenous industry through trade unions, challenged the Government's action on the following grounds: 1. That the notification striking a distinction between small-scale industries and integrated plants was not rational and consequently being discriminatory and arbitrary was ultra vires Article 14 of the Constitution of India.

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2. The new Industrial Policy itself was bad since without any export obligations there was no question of the investment proposal 'providing access to world markets'.

The court rejected these contentions and Held: 1. In the field of trade and commerce the courts should not lightly interfere with the wisdom of the government unless the policy is contrary to the Constitution or to any law or is wholly arbitrary; 2. The distinction between zip fasteners manufactured by small-scale industries and those manufactured by integrated plants was rational as integrated plants were known to improve the quality of the product and in such industries the investment was 'heavy'. 3. The approval did result in "... access to high technology or world markets" since YKK had acquired a worldwide reputation in the manufacture of zip fasteners and was known to use high technology.

For this reason a large number of Indian exporters were using YKK zips to meet the standards required by international markets. Hence, the approval granted by the Government to YKK would overcome these hurdles and was therefore neither illegal nor contrary to the Industrial Policy of 1991. Before this judgment a proposal for manufacturing low technology items like zip fasteners by a wholly owned subsidiary of a multi national would not be allowed by the Government of India, unless there were major export obligations. However the court states that high technology may not only be with regard to the type of product but even in the size of the operation. Thus, for a product, namely zip fasteners which would normally be considered low technology the court considers the setting up of an integrated plant as heavy industry and this is seen as high technology giving the industry a potential to access world markets and consequently the Government has the freedom to get out of the shackles of restrictive provisions, which in the past would have limited zip fasteners to the small scale sector. Foreign Direct Investment

Case II
The second case is an FDI legal case in between AMCO and the Government of Indonesia. AMCO, an American company, made a consortium consisting of Amco Asia Corporation, Pan American Development and Amco Indonesia, signed cooperation with Wisma Kartika. This partnership firm, under the legal protection of the Government of Indonesia, began to establish a Lease and Management Agreement which stated that the AMCO would have the right to invest and manage the hotel complex and office for 30 years. Amco Indonesia agreed to build Kartika Plaza Hotel with a capital of U.S. $ 4 million. Both parties made profit sharing agreements and management contracts of Kartika Plaza Hotel. Amco Indonesia also had to pay half of the profits to Wisma Kartika.

As mentioned before, the cooperation that should end 30 years after the agreement cracked in the middle way. But, entering the ninth year, both parties disputed about the profits and capital gains, and Amco Indonesia must pay half of the profit to Wisma Kartika. The climax, Indonesia as represented by BKPM revoked the business license of Amco Indonesia and then Wisma Kartika took over Kartika Plaza Hotels Management. Wisma Kartika judged that Amco Indonesia had mismanaged the Hotel and had committed financial fraud. Then, Amco Indonesia stated that they had planted their funds to Kartika Plaza of U.S. $ 4 million and had distributed the profit to Wisma Kartika was Rp 35 million.

In brief: Wisma Kartika made cooperation with Amco Asia in generating Amco Indonesia. Amco Indonesia approved to build Kartika Plaza with a $4 million worth of capital. Both parties made a deal to share the profit and management contract based on lease and management of Kartika Plaza Hotel. And one of the clauses of Group IV Business Law 7

the agreement is if there in legal action, they would put the case to de ICSID (Arbitration tribunal). Amco Indonesia got the permission to manage Kartika Plaza Hotel for a period of 30 years, but entering its ninth year BKPM took out the permission. Later on, Wisma Kartika took over the management of Kartika Plaza Hotel because PT. Amco Indonesia was considered doing wrong management and financial fraud so that Indonesia didnt get the stock of kartika Plaza Hotel.

The Legal Action: Amco that made consortium consisting of Amco Asia Corporation, Pan American Development and Amco Indonesia had submitted a request to ICSID Arbitration Court that the Government of the Republic of Indonesia, in this case represented by the Capital Investment Coordinating Board (BKPM), had harmed and treated unfairly in relation to the implementation of foreign investment in Indonesia. Government of Indonesia had made foreign investment license revocation unilaterally without any prior notice in accordance with the treaty agreed upon by both parties.

The Legal Decisions: ICSD made a decision about the case of the dispute in between Amco and the Government of Indonesia. In the first level, ICSD constitution decided that the Government of Indonesia had violated the provisions of both international law and Indonesian law itself, which the Government of Indonesia (represented by the Investment Coordinating Board) had conducted a license revocation of foreign investment by foreign investors such as Amco Asia Corporation, Pan American Development and PT. Amco Indonesia.

In the second level, the decision of the ICSID ad hoc committee acted as a result of petition to overturn the decision of the Government of Indonesia (annulment) in the first level, in which stated that the Government of Indonesia was considered correct and in accordance with the laws of Indonesia for the revocation of licenses or permits to foreign investment was not obligated to pay damages losses. But in the second level the Government of Indonesia remained obligated to pay compensation Foreign Direct Investment

for damages vigilante actions (illegal self help) of foreign investment with the arbitrator Florentio P. Feliciano from Philipines and Andrea Giardina from Canada.

In the third level, ICSD decided that Indonesia remained obligated to pay for losses incurred due to revocation of licenses or permits of foreign investment to the investor of U.S., with the amount of $3.2 million by the arbitrator Arghyrio A. Fatouros from Greek and Dietrich from Switzerland.

In this dispute, the requirements to submit disputes to ICSD had been met, namely ; 1. The parties had agreed to submit disputes to ICSD; it was listed in one of the main clause in the agreement between Indonesia and Amco. 2. Indonesia and Amco are parties that had signed the convention. 3. Dispute between Indonesia and Amco is an investment dispute.

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Source of Information:
1. http://www.goingglobal.com/articles/understanding_foreign_direct_investment.ht m 2. http://en.wikipedia.org/wiki/Foreign_direct_investment 3. http://www.mondaq.com/article.asp?articleid=4766 4. http://indiankanoon.org/doc/211158/iii 5. http://www.indianexpress.com/Storyold/56655/ 6. http://binchoutan.wordpress.com/2008/07/22/amco-vs republik-indonesia-studi-kasus-icsid/ 7. http://saepudinonline.wordpress.com/2010/11/16/kasuskartika-plaza-vs-amco-asia-2/ 8. http://www.oppapers.com/essays/Amco-Vs-Ri/296091

Foreign Direct Investment