The Political Economy of Foreign Direct Investment

USMAN

SOHAIL
GOHAR SHOAIB

WAQAS

Political Ideology and FDI
Radical View
Free Market

Pragmatic nationalism

Shifting Ideology

The Radical View
 Marxist view:
1. 2. 3. 4.

MNE’s exploit less-developed host Extract profits. Give nothing of value in exchange

countries.

Instrument of domination, not development. Keep less-developed countries relatively backward and dependent on capitalist nations for investment, jobs, and technology.

The Radical View
By the end of the 1980s radical view was in retreat.
1. Collapse of communism. 2.Bad economic performance of countries that

embraced the radical view.

3. Strong economic performance of countries who

embraced capitalism rather than the radical view.

The Free Market View
 Nations specialize in goods  Positive changes in laws

and services that they can produce most efficiently.
 Resource transfers benefit

and growth of bilateral agreements attest to strength of free market view.
 All countries impose some

and strengthen the host country.

restrictions on FDI.

Trinidad and Tobago, a recipient of substantial FDI inflows in its natural gas.
Lou Anne A. Barclay
 FDI

inflows in its natural gas industry for the last decade. development only occurs when governments in less-developed economies pursue credible, selective intervention policies.

 FDI-assisted

Pragmatic Nationalism
 FDI has benefits and costs.
 Allow FDI if benefits outweigh costs.
 Block FDI that harms indigenous

industry  Court FDI that is in national interest  Tax breaks  Subsidies

FDI: Home Country Benefits
 Improve Balance of Payment  Create Demand  Employment opportunity Example:

Japes VS. Europe  Increase Knowledge from operating in foreign environment  Example: General Motors VS. Ford

FDI: Cost of Home Country
 Out flow of capital
 Trade Balance  Employment effect

Example  U.S. VS. Mexico  China

FDI: Benefits to the Host Country
 Resource Transfer Effects

 Employment Effects  Balance of Payment Effects

 Effect on Competition

Resource Transfer Effects

Capital

Technology

Management

Employment Effects
 Direct: hire host-country citizens
 Indirect: jobs created by local suppliers

Balance of Payment Effects

 Initial Capital Inflow
 When a company invests in a foreign country, it brings

capital into that country

 Substitute for Imports
 To the extent that the goods/services produced by the

FDI substitute for imported goods/services, there is a positive effect on B-of-P

 Inflow of payments from export of goods and services
 To the extent that the goods/services produced by the

FDI are exported to another country, there is a positive effect on the host country’s B-of-P

Effect on Competition and Economic Growth
 FDI can increase competition which stimulates capital investment by domestic firms resulting in increased:
   

consumer choices and lower prices growth in productivity growth product and process innovations economic growth

Costs of FDI to Host Countries
 Adverse effects on competition
 Adverse effects on B-O-P  National Sovereignty and Autonomy

Adverse effects on competition
 MNEs may have “too much” power and kill of

competition
Example:  Hindustan Lever Ltd & Tata Oil mills & Ice Cream Co.

Adverse effects on B-O-P
 After initial flow of capital subsequently out flow of

capital from earning of FDI.
 FDI may import input from abroad Example:

 Japans Auto Company & U.S.

National Sovereignty and Autonomy
 Key Decision that effect the host country economy’s

may be made by foreign parent that has no real competent to host country.
Example:
 France & U.S.

HOME COUNTRY POLICIES

HOST COUNTRY POLICIES

HOME COUNTRY POLICES
• ENCOURAGING OUTWARD FDI • RESTRICTING OUTWARD FDI

HOME COUNTRY POLICIES
 Encourage Outward FDI
 


 

Govt backed insurable programs Special funds or bank loans Eliminate double taxation Political influence to relax restriction Toys “R” Us (Japan & US)

HOME COUNTRY POLICIES
 Restrict Outward FDI
Limit capital outflows & Balance of payment  Manipulate tax rules for local firms  Restrict on political reasons  Iran & Cuba & South Africa Example:  Britain used exchanged control regulations  Make difficult for local firms to FDI  Cooperation tax system on British companies

HOST COUNTRY POLICES
• ENCOURAGING INWARD FDI • RESTRICTING INWARD FDI

HOST COUNTRY POLICIES
 Encourage Inward FDI  Incentives (Tax , loan, grants or subsidies)  To gain resource transfer and Employment  To capture away from other countries

Example:
 

Toyota(Britain , France) US States Govts to FDI Kentucky offer Packages

HOST COUNTRY POLICIES
 Restrict Inward FDI  Ownership restraints  Excluded from specific fields  Significant proportion of equity of subsidiary

Example: Us airline , India media business
  

Resource transfer & employment Performance requirements Related to local content ,exports ,participation

INTERNATIONAL INSTITUTIONS AND THE LIBERALIZATION OF FDI
• WTO
• Push liberalization of regulations governing FDI • Two MNA reached to trade in telecommunication & financial services • Malaysia India rejects efforts

• OECD
• Wealthy nations • Share experience, discuss problems, seek solutions

• EU countries
• MAI • US refused restrict foreign TV programs, Music • Environmental and Labor groups

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