Evaluating the Impact of

FDI
 Learning Objectives

• To understand FDI
• Study the volatility of FDI
• Learn and evaluate the impact of FDI
Foreign Direct Investment
(FDI)
FDI refers to the flow of capital between
countries. According to the United Nations
Conference for Trade and Development (
UNCTAD), FDI is ‘investment made to acquire
lasting interest in enterprises operating outside
of the economy of the investor.’*
Foreign Direct Investment
(FDI)
 FDI is distinguished from ‘portfolio‘
investment in that, as well as being ‘lasting’,
it means that the investor has control over
the assets invested in. 
 FDI associated with cross-border mergers
 and aquisions can be horizontal, vertical and
conglomerate.
According to the World Investment Report, FDI
flows in 2013 increased to $1.45 trillion, with
developing countries increasing their share of
inflows to (a record level of) 54 per cent, with Asia
now ahead of both the EU and USA.
 Advantages & Disdvantages

Advantages –
❖Modifications can be made at any point of time
❖It is an easy mode of entry
Disadvantages-
❖The government policies may not be helpful
❖The return on investment may be low
 Investment income
Outward investment can lead to increased overseas
investment income for a country, including:
 Profits from overseas subsidiaries.
 Dividends from owning shares in overseas firms.
 Interest payments, from lending abroad, such as lending
by UK banks.
 FDI in the balance of payments
accounts appears in two ways:

 The initial outflow of FDI is entered as an

outflow (debit) on the capital account
 The resulting investment income is
entered as an inflow (credit) on the
current account
 Inward investment
Countries receiving inward investment gain in a number of
ways, including:
1. An increase in GDP
2. The creation of jobs.
3. Producers have access to the latest technology from abroad.
4. Less need to import because goods are produced in the
domestic economy.
5. The positive effect on the country’s capital account –  FDI
represents an inflow (credit) on the capital account.
6. FDI is a way of compensating for the lack of domestic
investment, and can help ‘kick-start’ the process of
The volatility of FDI
 The volatility of
FDI
 Fluctuations in monetary conditions
 Changes in the economic cycle
 Expectations
 Changes in business regulation
 Changes in the level of business taxes
 Wages
 Incentives
 Government
 Better alternatives
 Impacts of FDI

Creates New Jobs

Boosts Wages
Increases U.S. Exports
Strengthens U.S. Manufacturing and
Services
Brings in New Research, Technology,
and Skills
Contributes to Rising U.S. Productivity
 Foundation of
Ethical Behavior
Ethics, like philosophy, is in search of principles
and universals. Ethics reflects on a particular human
experience, namely, the experience of the good or of
being good, and sets it in the context of the whole.
One could also say that ethics reflects on what is the
good and how our lives are oriented towards it
 The Importance of
Ethical Behaviour
Make society better
Treat everyone equally
Secure meaningful employment
 Succeed at business
Lessen stress
International Trade and
Factor Mobility Theory
Governmental Influence
on Trade
 Learning Outcomes
By the end of this lecture, you should understand the
following:
• To explain the rationales for governmental policies that
enhance and restrict trade
• To show the effects of pressure groups on trade policies
• To describe the potential and actual effects of
governmental intervention on the free flow of trade
• To illustrate the major means by which trade is restricted
and regulated
• To demonstrate the business uncertainties and business
opportunities created by governmental trade policies
2
 Introduction
• Protectionism - policies that
– affect the ability of foreign producers to compete
in your home market
– limit or enhance your company’s ability to sell
abroad or acquire needed foreign supplies

21
 Introduction
Physical and Social Factors Affecting the Flow of Goods and Services

22
 Conflicting Results of Trade Policies

• Governments intervene in trade to achieve

economic, social, and political goals
• Policymakers are challenged by
– conflicting objectives
– interest groups

23
 The Role of Stakeholders
• Proposed policies on trade spark debate
• Stakeholders include
– Workers
– Owners
– Suppliers
– Local politicians

24
 Economic Rationales for Government
Intervention

Why Governments Intervene in Trade?

25
 Fighting Unemployment
• The unemployed are the most effective pressure group
• But, import restrictions
– may decrease export jobs because of price increases for
components
– may decrease export jobs because of lower incomes
abroad

26
 Protecting ‘Infant
Industries’
• The infant industry argument
– government protection of import competition is
necessary to help certain industries evolve from
high-cost to low-cost production
• Used by developing countries

27
 Developing an Industrial Base
Countries promote industrialization because it
– brings faster growth than agriculture
– brings in investment funds
– diversifies the economy
– brings more income than primary products do
– reduces imports and promotes exports
– helps the nation-building process

28
 Maintaining Essential Industries
• The essential industry argument
– protect essential industries so the country is not
dependent on foreign supplies during war
• Countries must
– determine which industries are essential
– consider costs and alternatives
– consider political consequences

29
 Promoting Acceptable
Practices Abroad
• Import trade controls can be used
– to promote changes in foreign countries’ political
policies or capabilities
– as a foreign policy weapon
– to pressure governments to alter their stances on
a variety of issues
• human rights
• environmental protection

30
 Preserving National Culture
In order to preserve national culture, countries
– limit foreign products and services in certain
sectors
• Canada’s cultural sovereignty
– prohibit exports of art and historical items
deemed important to national heritage

31
 Instruments of Trade Control
Two types of trade controls
– those that indirectly affect the amount traded by
directly influencing prices of exports or imports
– those that directly limit the amount of a good that
can be traded

32
 Tariff
•
s
Tariffs are also known as duties
– refer to a government levied tax on goods shipped
internationally
• Tariffs may be levied
– on goods entering, leaving, or passing through a
country
– for protection or revenue
– on a per unit basis or a value basis
• export tariffs
• transit tariffs
• import tariffs

33
 Dealing with Governmental Trade
Influencers
• Companies facing import competition can
– Move abroad
– Seek other market niches
– Make domestic output competitive
– Try to get protection

34
 Tactics For Dealing
With Import Competition
• Convince decision makers of the merits of
particular policies
• Involve the industry and stakeholders
• Prepare for changes in the competitive
environment

35
 Some ways to restrict international trade
• Impose a 100 Euro tax per imported computer (tariff)
• Impose a 12% tax per imported computer (ad valorem tariff)
• Restrict the number of imported computers (quota)
• Subsidize the production of domestically produced computers
• Require a “minimum content” before a computer may be
labeled “domestically produced”
• Prohibit the sale of computers to certain countries for safety
reasons

Page 27
 Concluding remarks Trade Policy
• There are many different types of trade restrictions (our
analysis is not exhaustive)
• Protection affects different agents in different ways,
hence conflicting interests in the same country (lobbying)
• Imposing a tariff benefits protected producers and
provides government revenue at the expense of a
welfare loss for the consumers
• Imposing a tariff always generates an overall welfare loss
for a ‘small’ country (protected sector expands at the
expense of a contraction in other sectors; double
distortion)
• A ‘large’ country might benefit from an ‘optimal’ tariff
• These benefits disappear with simultaneous moves and
retaliation; hence the need for international rules

Page 37
Prepared by:
Ms. Gemalyn D. Aguilar
Course Instructor, MGT 304