The origin of the investment does not impact the definition, as an FDI: the investment may be made either "inorganically" by buying a company in the target country or "organically" by expanding the operations of an existing business in that country.
Broadly, Foreign Direct Investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans". In a narrow sense, foreign direct investment refers just to building new facility, and a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.[2] FDI is the sum of equity capital, long-term capital, and short-term capital as shown in the balance of payments. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. Stock of FDI is the net (i.e., outward FDI minus inward FDI) cumulative FDI for any given period. Direct investment excludes investment through purchase of shares.[3]
FDI, a subset of international factor movements, is characterized by controlling ownership of a business enterprise in one country by an entity based in another country. Foreign direct investment is distinguished from foreign portfolio investment, a passive investment in the securities of another country such as public stocks and bonds, by the element of "control".[1] According to the Financial Times, "Standard definitions of control use the internationally agreed 10 percent threshold of voting shares, but this is a grey area as often a smaller block of shares will give control in widely held companies. Moreover, control of technology, management, even crucial inputs can confer de facto control."[1]
According to Grazia Ietto-Gillies (2012),[4] prior to Stephen Hymer’s theory regarding direct investment in the 1960s, the reasons behind Foreign Direct Investment and Multinational Corporations were explained by neoclassical economics based on macro economic principles. These theories were based on the classical theory of trade in which the motive behind trade was a result of the difference in the costs of production of goods between two countries, focusing on the low cost of production as a motive for a firm’s foreign activity. For example, Joe S. Bain only explained the internationalization challenge through three main principles: absolute cost advantages, product differentiation advantages and economies of scale. Furthermore, the neoclassical theories were created under the assumption of the existence of perfect competition. Intrigued by the motivations behind large foreign investments made by corporations from the United States of America, Hymer developed a framework that went beyond the existing theories, explaining why this phenomenon occurred, since he considered that the previously mentioned theories could not explain foreign investment and its motivations.
Facing the challenges of his predecessors, Hymer focused his theory on filling the gaps regarding international investment. The theory proposed by the author approaches international investment from a different and more firm-specific point of view. As opposed to traditional macroeconomics-based theories of investment, Hymer states that there is a difference between mere capital investment, otherwise known as portfolio investment, and direct investment. The difference between the two, which will become the cornerstone of his whole theoretical framework, is the issue of control, meaning that with direct investment firms are able to obtain a greater level of control than with portfolio investment. Furthermore, Hymer proceeds to criticize the neoclassical theories, stating that the theory of capital movements cannot explain international production. Moreover, he clarifies that FDI is not necessarily a movement of funds from a home country to a host country, and that it is concentrated on particular industries within many countries. In contrast, if interest rates were the main motive for international investment, FDI would include many industries within fewer countries.
Another observation made by Hymer went against what was maintained by the neoclassical theories: foreign direct investment is not limited to investment of excess profits abroad. In fact, foreign direct investment can be financed through loans obtained in the host country, payments in exchange for equity (patents, technology, machinery etc.), and other methods.
The main determinants of FDI is side as well as growth prospectus of the economy of the country when FDI is made. Hymer proposed some more determinants of FDI due to criticisms, along with assuming market and imperfections. These are as follows:
Firm-specific advantages: Once domestic investment was exhausted, a firm could exploit its advantages linked to market imperfections, which could provide the firm with market power and competitive advantage. Further studies attempted to explain how firms could monetize these advantages in the form of licenses.
Removal of conflicts: conflict arises if a firm is already operating in foreign market or looking to expand its operations within the same market. He proposes that the solution for this hurdle arose in the form of collusion, sharing the market with rivals or attempting to acquire a direct control of production. However, it must be taken into account that a reduction in conflict through acquisition of control of operations will increase the market imperfections.
Propensity to formulate an internationalization strategy to mitigate risk: According to his position, firms are characterized with 3 levels of decision making: the day to day supervision, management decision coordination and long term strategy planning and decision making. The extent to which a company can mitigate risk depends on how well a firm can formulate an internationalization strategy taking these levels of decision into account.
Hymer's importance in the field of International Business and Foreign Direct Investment stems from him being the first to theorize about the existence of Multinational Enterprises (MNE) and the reasons behind Foreign Direct Investment (FDI) beyond macroeconomic principles, his influence on later scholars and theories in International Business, such as the OLI (Ownership, Location and Internationalization) theory by John Dunning and Christos Pitelis which focuses more on transaction costs. Moreover, “the efficiency-value creation component of FDI and MNE activity was further strengthened by two other major scholarly developments in the 1990s: the resource-based (RBV) and evolutionary theories" (Dunning & Pitelis, 2008)
[5] In addition, some of his predictions later materialized, for example the power of supranational bodies such as IMF or the World Bank that increases inequalities (Dunning & Piletis, 2008).
Types of FDI
Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI.[6]
Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country.
Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country.[6]
derogation from regulations (usually for very large projects)
Governmental Investment Promotion Agencies (IPAs) use various marketing strategies inspired by the private sector to try and attract inward FDI, including diaspora marketing.
by excluding the internal investment to get a profited downstream.
The rapid growth of world population since 1950 has occurred mostly in developing countries.[citation needed] This growth has been matched by more rapid increases in gross domestic product, and thus income per capita has increased in most countries around the world since 1950.[10]
An increase in FDI may be associated with improved economic growth due to the influx of capital and increased tax revenues for the host country. Besides, the trade regime of the host country is named as a important factor for the investor's decision-making. Host countries often try to channel FDI investment into new infrastructure and other projects to boost development. Greater competition from new companies can lead to productivity gains and greater efficiency in the host country and it has been suggested that the application of a foreign entity’s policies to a domestic subsidiary may improve corporate governance standards. Furthermore, foreign investment can result in the transfer of soft skills through training and job creation, the availability of more advanced technology for the domestic market and access to research and development resources.[11] The local population may benefit from the employment opportunities created by new businesses.[12] In many instances, the investing company is simply transferring its older production capacity and machines, which might still be appealing to the host country because of technological lags or under-development, in order to avoid competition against its own products by the host country/company.
A 2010 meta-analysis of the effects of foreign direct investment (FDI) on local firms in developing and transition countries suggests that foreign investment robustly increases local productivity growth.
[13]
The Commitment to Development Index ranks the "development-friendliness" of rich country investment policies.
FDI in China, also known as RFDI (renminbi foreign direct investment), has increased considerably in the last decade, reaching $19.1 billion in the first six months of 2012, making China the largest recipient of foreign direct investment and topping the United States which had $17.4 billion of FDI.[14] In 2013 the FDI flow into China was $24.1 billion, resulting in a 34.7% market share of FDI into the Asia-Pacific region. By contrast, FDI out of China in 2013 was $8.97 billion, 10.7% of the Asia-Pacific share.[15]
FDI into the Chinese mainland maintained steady growth in 2015 despite the economic slowdown in the world’s second-largest economy. FDI, which excludes investment in the financial sector, rose 6.4 percent year on year to $126.27 billion in 2015.[17]
During the first nine months of 2016, China reportedly surpassed the US to become the world’s largest assets acquirer, measured by the value of corporate takeovers. As part of the transition by Chinese investors from an interest in developing economies to high-income economies, Europe has become an important destination for Chinese outward FDI. In 2014 and 2015, the EU was estimated to be the largest market for Chinese acquisitions, in terms of value.[18]
The rapid increase in Chinese takeovers of European companies has fueled concerns among political observers and policymakers over a wide range of issues. These issues include potential negative strategic implications for individual EU member states and the EU as a whole, links between the Chinese Communist Party and the investing enterprises, and the lack of reciprocity in terms of limited access for European investors to the Chinese market.[18][1]
Similarly, concerns among low-income households within Australia have prompted several non formal inquiries into direct foreign investment activities from china. As a result numerous Australian political representatives have been investigated, Sam Dastyari[19] has resigned as a result.[20]
Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then finance minister Manmohan Singh. As Singh subsequently became the prime minister, this has been one of his top political problems, even in the current times.[21][22] India disallowed overseas corporate bodies (OCB) to invest in India.[23] India imposes cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.[24][25]
Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010–2012. As per the data, the sectors that attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, US and UK were among the leading sources of FDI. Based on UNCTAD data FDI flows were $10.4 billion, a drop of 43% from the first half of the last year.[26]
Nine from 10 largest foreign companies investing in India(from April 2000- January 2011) are based in Mauritius .[27] List of the ten largest foreign companies investing in India (from April 2000- January 2011) are as follows[27] --
TMI Mauritius Ltd. - Rs 7200 crore/$1600 million
Cairn UK Holding - Rs6666 crores/$1492 million
Oracle Global (Mauritius) Ltd. - Rs 4805 crore/$1083 million
Mauritius Debt Management Ltd.- Rs 3800 crore/$956 million
Vodafone Mauritius Ltd. – Rs 4000 crore/$801 million
Etisalat Mauritius Ltd. – Rs 3228 crore
CMP Asia Ltd. – Rs 2638.25 crore/$653.74 million
Oracle Global Mauritius Ltd. – Rs 2575.88 crore / $563.94 million
Merrill Lynch(Mauritius) Ltd. – Rs 2230.02 crore / $483.55 million
Name of the company not given (but the Indian company which got the FDI is Dhabol Power company Ltd.)
In 2015, India emerged as top FDI destination surpassing China and the US. India attracted FDI of $31 billion compared to $28 billion and $27 billion of China and the US respectively.[28][29] India received $63 billion in FDI in 2015.[30] India also allowed 100% FDI in many sectors during 2016.[citation needed]
Broadly speaking, the United States has a fundamentally "open economy" and low barriers to FDI.[31]
U.S. FDI totaled $194[32] Billion in 2010. 84% of FDI in the United States in 2010 came from or through eight countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg, the Netherlands, and Canada.[33] A major source of investment is real estate; the foreign investment in this area totaled $92.2 billion in 2013,[34] under various forms of purchase structures (considering the U.S. taxation and residency laws).[citation needed]
A 2008 study by the Federal Reserve Bank of San Francisco indicated that foreigners hold greater shares of their investment portfolios in the United States if their own countries have less developed financial markets, an effect whose magnitude decreases with income per capita. Countries with fewer capital controls and greater trade with the United States also invest more in U.S. equity and bond markets.[35]
White House data reported in 2011 found that a total of 5.7 million workers were employed at facilities highly dependent on foreign direct investors. Thus, about 13% of the American manufacturing workforce depended on such investments. The average pay of said jobs was found as around $70,000 per worker, over 30% higher than the average pay across the entire U.S. workforce.[31]
President Barack Obama said in 2012, "In a global economy, the United States faces increasing competition for the jobs and industries of the future. Taking steps to ensure that we remain the destination of choice for investors around the world will help us win that competition and bring prosperity to our people."[31]
Foreign direct investment by country[38] and by industry[39] are tracked by Statistics Canada. Foreign direct investment accounted for CAD$634 billion in 2012, eclipsing the United States in this economic measure. Global FDI inflows and outflows are tabulated by Statistics Canada.[40]
The UK has a very free market economy and is open to foreign investment. Prime Minister Theresa May has sought investment from emerging markets and from the Far East in particular and some of Britain's largest infrastructure including energy and skyscrapers such as The Shard have been built with foreign investment.
According to the World Bank, Armenia ranks 41st amongst CIS countries due to its FDI appeal. The government of Armenia has introduces some measures, such as free economic zones for high-tech industries that in turn facilitate the provision of preferential treatment to companies on VAT, property tax, corporate profit tax and customs duties. Alongside the reforms, significant mineral resources, relatively skilled and inexpensive labor and its geographic location are likewise factors that might attract FDI in Armenia.[41]
In 1991,[42] for the first time, Russia regulated the form, range and favorable policy of FDI in Russia.
In 1994,[42] a consulting council of FDI was an established in Russia, which was responsible for setting tax rate and policies for exchange rate, improving investment environment, mediating relationship between central and local government, researching and improving images of FDI work, and increasing the right and responsibility of Ministry of Economic in appealing FDI and enforcing all kinds of policies.
In 1997,[42] Russia starts to enact policies appealing for FDI on particular industries, for example, fossil fuel, gas, woods, transportation, food reprocessing, etc.
In 1999,[42] Russia announced a law named 'FDI of the Russian Federation', which aimed at providing a basic guarantee for foreign investors on investing, running business, earnings.
In 2008,[42] Russia banned FDI on strategic industries, such as military defense and country safety.
In 2014,[43] president Putin announced that once abroad Russian investment inflows legally, it would not be checked by tax or law sector. This is a favorable policy of Putin to appeal Russian investment to come back.
Direct investment: Investing directly with cash. Basically, investment more than 10% of the item is called Direct investment.
Portfolio investment: Investing indirectly with company loans, financial loans, stocks, etc. Basically, investment less than 10% of the item is called Portfolio investment.
Other investment: Except for direct and portfolio investment, including international assistance and loans for original country.
FDI of RF 1994-2012
Main item of inflow investment in Russian Federation
^Ietto-Gillies, Grazia (2012) Transnational corporations and international production: Concepts, Theories and Effects. Second Edition. Edward Elgar: Cheltenham, UK.
^Dunning, John & Pitelis, C.N. (2008). Stephen Hymer’s contribution to international business scholarship: and assessment and extension. Journal of International Business Studies, 39 (1), pp. 167-173
^U.S. States regularly offer tax incentives to inbound investors. See, for example, an excellent summary, written by Sidney Silhan, of state tax incentives offered to FDI businesses at: BNA Portfolio 6580, U.S. Inbound Business Tax Planning, at A-71.
The economy of Mauritius refers to the economic activity of the island nation of Mauritius.
Economy of Singapore
The economy of Singapore is a highly developed free-market economy. Singapore's economy has been ranked as the most open in the world, 3rd least corrupt, most pro-business, with low tax rates and has the third highest per-capita GDP in the world in terms of Purchasing Power Parity (PPP). APEC is headquartered in Singapore.
Economy of India
The economy of India is a developing mixed economy. It is the world's seventh-largest economy by nominal GDP and the third-largest by purchasing power parity (PPP). The country ranks 139th in per capita GDP (nominal) with $2,134 and 122nd in per capita GDP (PPP) with $7,783 as of 2018. After the 1991 economic liberalisation, India achieved 6-7% average GDP growth annually. Since 2014 with the exception of 2017, India's economy has been the world's fastest growing major economy, surpassing China.
Foreign direct investment in Iran
Foreign direct investment in Iran (FDI) has been hindered by unfavorable or complex operating requirements and by international sanctions, although in the early 2000s the Iranian government liberalized investment regulations. Iran ranks 62nd in the World Economic Forum's 2011 analysis of the global competitiveness of 142 countries. In 2010, Iran ranked sixth globally in attracting foreign investments.
Indian black money
In India, black money is funds earned on the black market, on which income and other taxes have not been paid. Also, the unaccounted money that is concealed from the tax administrator is called black money. The black money is accumulated by the criminals, smugglers, hoarders, tax-evaders and other anti-social elements of the society. Around 22000 crores of rupees are supposed to have been accumulated by the criminals for vested interests, though writ petitions in the supreme court estimate this to be even larger, at ₹90 lakh crores.
Make in India
Make in India, a type of Swadeshi movement covering 25 sectors of the economy, was launched by the Government of India on 25 September 2014 to encourage companies to manufacture their products in India and enthuse with dedicated investments into manufacturing. As a strategy, it is the road map to respond to glocal challenges through preparations for a World class manufacturing status & knowledge infrastructure that should create further knowledge for stepping on to global competitiveness.
