Foreign

INVEST
Direct

MENT
Group 5
I. Meaning of
FDI
Foreign Direct Investment (FDI) is defined
as an investment made by an investor of
one country to acquire an asset in
another country with the intent to
manage that asset (IMF, 1993).
 II. International
Investment
1 2 Theories
Monopolistic Advantage
Product and Factor
Market
Theory
Stefan Hymer saw the role of Imperfection
Caves (1971) expanded
firm-specific advantages as a Hymer’s theory and
way of marrying the study of
hypothesized that the
direct foreign investment with
ability of firms to
classic models of imperfect
competition in product differentiate their
markets. He argued that a products - particularly
direct foreign investor high-income consumer
possesses some kind of goods and services - may
proprietary or monopolistic
 International
Investment
Cross Investment
3 Theory 4 Theories
The
E. M. Graham postulated
Internalization
that such investments It is an extension of the
would permit the Theory
market imperfection
American subsidiaries of theory. By investing in a
European firms to foreign subsidiary rather
retaliate in the home than licensing, the
market of U.S. companies company is able to send
if the European the knowledge across
subsidiaries of these borders while maintaining
companies initiated some it within the firm, where it
aggressive tactic, such as presumably yields a
 d i r e c t
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 Despite growing FDI inflow levels, the Philippines continue to lag behind regional
peers, in part because the Philippines' constitution limits foreign investment, and also
due to the threat of terrorism in some parts of the country. This can be partially
explained by the fact that the country is evolving into a service society with low
capital strength, which means that it needs only minimal equipment. In addition, the
government favours subcontracting agreements between foreign companies and local
enterprises rather than FDI in the strict sense of the term. Lastly, factors such as
corruption, instability, and inadequate infrastructure, high power costs, lack of juridical
security, tax regulations and foreign ownership restrictions discourage investment.
Nonetheless, the country offers many comparative advantages, including an English-
speaking and well-skilled workforce, a strong cultural proximity to the U.S., exposure
to an emerging market, and a geographical location in a dynamic region. While FDI in
South-East Asia contracted by 31% in 2020, FDI in the Philippines rose by 29% during
the same period, mainly due to M&A deals in agriculture and energy, reaching USD 6.4
billion. Last year, the government launched the 2020 Investment Priorities Plan, which
includes qualified activities relating to the COVID-19 pandemic response and aims to
modernize the Philippine economy, generate several jobs across the country, help
solve societal issues on employment, housing, transportation, and safe and secure
travel. Furthermore, the Philippines substantially improved its business climate in
2020: starting a business is now easier due to the abolishment of the minimum capital
 What to consider if
you invest in the
StrongPhilippines
Points Weak Points
The country's main strong points in terms of The main weaknesses of the country
FDI attractiveness include: include:
·A skilled young English-speaking workforce ·Political instability
·A large domestic market (with a population
·Poor quality of its infrastructure
of over 108 million people)
·Restrictions on foreign investment in
·A gateway to other countries in the region
facilitated by the country's membership in certain sectors
ASEAN The main weaknesses of the country
·An economy that has successfully integrated include:
enterprise outsourcing (BPO) ·Political instability
·A very advanced legal system ·Poor quality of its infrastructure
·Considerable natural wealth ·Restrictions on foreign investment in
certain sectors
 a s u r e s
e n t M e
o v e rn m s t r i c t
G o r R e
ti v a t e
to M o u p m o r e a r e a s
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a s
in e b th
u s ve s t o r s h e g o a d s ,
a l i z i n g i n v e re s . T r e ( ro
l i b er o r e ig n c e d u t r u c t u l
l a t i o n t i n g f g p ro i n f r a s s o c i a
L e g i s , g r a n p l i f y i n r o v e u r a g e
m e n t e s i m o i m p e n c o i o n o f
i n v e st s w h il e n t s t n d t o x t e n s
fo r m b er e s t m t i o n ) a l i e s , e
N m e s e i n v d u c a f a m i
AS E A n c r e a a n d e r p o o r o n ) .
d t o i e a l t h o r t f o u c a t i a l l o w
e h p e d L )
p la n n r a i l w a y s ,
t i o n s , s u p
p r i m a r y
e L i s t ( F I N
s s e s
d g e s , c c in a r a ge , g a t iv u s i ne
b r i i l d v a c o v e n t N e n e t b t
s ( c h r a n c e s t m e i n t e r t m e n
o g r a m h i n s u n In v e e n t i n i n v e s
pr healt F o r e ig v e s t m fi r m s ,
s w e l l
o t h e 0 % i n m e n t re s ; a
n g e s t e a 1 0 a d j u st s c e n t
th e
n t c h a t o h a v r a n c e e l l n e s o r k s (
Re c e a n i e s ) , i n s u a n d w b l i c w
c o m p m e d i a n i e s , e d p u
g n as s p a n d
forei a r t o f m a n c e c o m
f l o c a l l y f u
ta p d fi n a ir o ).
 IV.
Factors
Infl uenc
ing FDI
 Factor
Demand
Condition:
A na tion may ha ve
T h is is
comparative advantage over Condition:aa ls o
others because of certain significant factor in
factors of production. deciding the level of
Organizations will shift their
production base to those FDI. Higher the
countries where the critical demand higher will the
factors of production of their
industry specific are
FDI.
economical.
 Related and
MNCs prefer to go to the destination
Supported
where there is wellIndustry:
developed Rivalry and
supported industry (ancillaries’ units)
for the specific industry. Infrastructure
plays a critical role in a selection of
Firm Strategy:
site. It is well said that take care of The Competitive
roads and electricity investment will environment in a nation
take care of itself. Well-developed also plays a critical role.
ancillaries’ units facilitate the FDI. As
now organization don’t have to invest
Organizations like to
in ancillaries. Not only ancillaries but invest in countries where
other supported industry as the there is no stiff
availability of well-developed financial competition
market, distribution network, etc. also
 V. Costs and Benefits
Associated with FDI
Costs and benefits associated with FDI
can be discussed from two point-of-
views: host country’s point-of-view and
home country’s point-of-view.
 Benefi t
s to the
Host
Country
1. Resour
ce-transf
er 2. Employment
Effects
Effects

n c e - o f- 4. Effect o
3. B a l a n
y m e n t s Competit
P a ion and
Economic
Effect Growth
 1. Resource-transfer
Effects
FDI can make a positive contribution to a host economy by supplying capital,
technology, and management resources that would otherwise not be available
and thus boost that country’s economic growth rate.

Many MNEs, by virtue of their large size and financial strength, have access to
financial resources not available to host-country firms. These funds may be
available from internal company resources, or because of their reputation, large
MNEs may find it easier to borrow money from capital markets that host-country
firms would.

Technology can stimulate economic development and industrialization. It can

take two forms, both are valuable. Technology can be incorporated in a
production process or it can be incorporated in a product.

Foreign managers trained in the latest management techniques can often help
to improve the efficiency of operations in the host country, whether those
operations are acquired or greenfield developments. Beneficial spin-offs effects
may also arise when local personnel who are trained to occupy managerial,
financial, and technical posts in the subsidiary of a foreign MNE leave the firm
 2. Employment Effects

The effects of FDI on employment are both direct

and indirect. Direct efforts arise when a foreign MNE
employs a number of host-country citizens. Indirect
effects arise when jobs are created in local suppliers
as a result of investment and when jobs are created
because of increased local spending by employees
of the MNE. The indirect employment effects are
often as large as, if not larger than, the direct
effects
 3. Balance-of-Payments
Effect
Given the concern about current account deficits, the
balance-of-payments effects of FDI can be an important
consideration for a host government. There are three potential
balance-of-payments consequences of FDI. First, when an MNE
establishes a foreign subsidiary, the capital account of the
host country benefits from the initial capital inflow (A debit will
be recorded in the capital account of the MNEs home country
since capital is flowing out of the home country).

Second, if the FDI is a substitute for imports of goods or

services, it can improve the current account of the host
country’s balance of payments.

A third potential benefit to the host country’s balance-of –

 4. Effect on Competition and
Economic Growth
When FDI takes the form of a green-field investment, the result
is to establish a new enterprise, increasing the number of
players in a market and thus consumer choice. In turn, this can
increase competition in a national market and thus consumer
choice. In turn, this can increase competition in a national
market, thereby driving down prices and increasing the
economic welfare of consumers. Increased competition tends to
stimulate capital investments by firms in plant, equipment, and
R&D as they struggle to gain an edge over their rivals. The long-
term results may include increased productivity growth, product
and process innovations and greater economic growth.

FDI’s impact on competition in domestic markets may be

particularly important in the case of services, such as
Costs of
FDI to
Host
Countri
 2. Adverse Effects
4. Perceived Loss of
1. Possible Adverse Effects on the Balance of
National Sovereignty
on Competition within the There are two
Paymmainents
areas of concern
Host Nation with regard to the balance of and Autonomy
Many host governments
Host governments worry that the payments. First, the initial capital
subsidiaries of foreign MNEs may inflow that comes with FDI must be worry that FDI is
have greater economic power the subsequent outflow of earnings accompanied by some
from the foreign subsidiary to its
than indigenous competitors. It is
parent company. Such outflows
loss of economic
a part of a larger international show up as a debit on the capital independence. The
organization, the foreign MNE may account. Some governments have concern is that key
be able to draw on funds responded to such outflows by
generated elsewhere to subsidize restricting the amount of earnings decisions that can affect
its costs in the host market, which that can be repatriated to a foreign the host country’s
could drive indigenous companies subsidiary’s home country.
economy will be made by
out of business and allow the firm a foreign parent that has
A second concern arises when a
to monopolize the market. This
concern tends to be greater in
foreign subsidiary imports a no real commitment to
substantial number of its inputs
countries that have few large from abroad, which results in a debit
the host country and over
firms of their own (generally less on the current account of the host which the host country’s
developed countries). It tends to country’s balance of payments. government has no real
Benefi ts
and
Costs of
FDI to
 1. Benefits of FDI to
The benefits of FDI to the home country arise from thr
ee sources.
2. Costs of FDI to the
the
First, the capita l Home
acc ount Country
of the home country’s balance-of-
Against these benefits there are apparent costs
payments benefits from the inward flow of foreign ear
nings FDI
ntry’s
Home Country
for the home (source) country. The mo
of FDI
can also benefit the current account of the home cou st important
d demands for concerns center around the balance-of-payments
balance of payments if the foreign subsidiary create and
cou ntr y exports of capita l equipment, intermediate goods, employment effects of outward FDI. The home
home
complementary products, and the like. country’s balance of payments may suffer in thr
ee
ways. First, the capital account of the balance of
FDI arise the
Second, benefits to the home country from outward payments suffers from the initial capital outflow
ents,
from employment effects. As with the balance of paym required to finance the FDI. This effect, however,
subsidiary is
positive employment effects arise when the foreign usually more than offset by the subsequent inflow
equipment, of
creates demand for home-country exports of capital foreign earnings. Second, the current account of
like the
intermediate goods, complementary products, and the balance of payments suffers if the purpose of the
rns valuable foreign investment is to serve the home market
Third, benefits arise when the home-country MNE lea from a
transferred low-cost production location. Third, the current ac
skills from its exposure to foreign markets that can be count
ourcetransfer of the balance of payments suffers if the FDI is a
back to home country. This amounts to a reverse res
MNE can learn substitute for direct exports.
effect. Through its exposure to a foreign market, an
products
about superior management techniques and superior
transferred With regard to employment effects, the most se
and process techniques. These resources can then be rious
try, contributing to the home country’s concerns arise when
thank
you!!!