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Fa Corporation

In: Business and Management

Submitted By thminhphuong
Words 3981
Pages 16
1. Meaning of FA corporation……………..…..…………………………………..3

2. Definition of FDI………………………………..………………………………..3

3. Role of FDI………………………………………………………………………..4

4. Benefits……………………………………………..……………………………..5

5. Costs of FDI on home country…………………………………………………...6

Definition of group’s name and FDI

1.Name of the group: F.A Corporation
This name has a variety of meanings, which are:
- We are all Forever Alone, that's the reason why you always should look for us when you need somebody to love because we are Forever and Fully Available
- We are also Fascinatingly Adorable, Fantastically Amazing
b.Connection to the subject:
- The name F.A refers to Financial/Foreign Aid, a very important part of International Economics, involved in International Trade as well as International Movements of Factors (which are, in this case, International Investment and International Technology Transfer), when capital and other resources flow to the less developed countries for help.

2. Definition of FDI:

There are two concepts of FDI and two matching ways of measuring it. One is that FDI is a particular form of the flow of capital across international boundaries from home countries to host countries. These flows give rise to a particular form of international assets for the home countries, specifically, the value of holdings in entities, typically corporations, controlled by a home country resident or in which a home country resident holds a certain share of the voting rights.

The other concept of direct investment is that it is a set of economic activities or operations carried out in a host country by firms controlled or partly controlled by firms in some other (home) country. These activities are, for example, production, employment, sales, the purchase and use of intermediate goods and fixed capital, and the carrying out of research.

3.Role of FDI

1. Stability: For a given expected rate of return, risk averse investors favour an environment with less uncertainty. Political, economic and social stability is therefore a critical factor in attracting foreign investment.

2. Liberal trade regime: In an early stage of economic development, a country’s main location advantage is likely to be low labour costs (rather than a large domestic market). Hence, foreign investors will typically seek to export most of what is produced in the foreign affiliate.

3. Access to large and growing markets: Geographical, and perhaps historical and cultural, proximity to large and growing markets is an important advantage for a less developed economy. In order to keep transaction costs low, firms seeking to decentralize the production chain by locating labour intensive operations in low-cost countries, will typically favour countries that are not too far away.

4. Infrastructure: Access to good communication networks is of key importance to many MNEs seeking new investment opportunities.

5. Economic development can be achieved without FDI inflows: The case of South Korea shows with full clarity that impressive growth rates can be achieved with very little foreign direct investment. The country has relied on high domestic saving rates and foreign loans for investment, domestic R&D, reverse engineering, and import of foreign experts in upgrading local technology and know-how.

6. FDI may be important for sustained growth: Sustained economic growth requires technological change, where new firms with new ideas can enter and where old firms with old ideas may disappear. Easy entry and exit of firms is therefore important in the development process. Foreign entry may be particularly important in promoting competition, since foreign owners are less likely to be part of informal networks that may serve to limit domestic competition.

7. Profit shifting may be a problem, particularly when local markets are shielded from international trade: Foreign firms entering a market and competing with local firms in markets for output and/or inputs may cause local firms to exit the market.

8. Linkages and spillovers: Local suppliers may be able to provide intermediates to foreign affiliates, and over time, these supplies may become more and more skill intensive. Extensive linkages with local firms represent one way in which techno-logical spillovers may be transmitted to the local economy.

4. Benefit to home countries

First, and perhaps most important, the capital account of the home country's balance of payments benefits from the inward flow of foreign earnings.
Second, benefits to the home country from outward FDI arise from employment effects. As with the balance of payments, positive employment effects arise when the foreign subsidiary creates demand for home-country exports of capital equipment, intermediate goods, complementary products, and the like. Thus, Toyota's investment in auto assembly operations in Europe has benefited both the Japanese balance-of-payments position and employment in Japan, because Toyota imports some component parts for its European-based auto assembly operations directly from Japan.
Third, benefits arise when the home-country MNE learns valuable skills from its exposure to foreign markets that can subsequently be transferred back to the home country. This amounts to a reverse resource-transfer effect. Through its exposure to a foreign market, an MNE can learn about superior management techniques and superior product and process technologies. These resources can then be transferred back to the home country, contributing to the home country's economic growth rate.13 For example, one reason General Motors and Ford invested in Japanese automobile companies (GM owns part of Isuzu, and Ford owns part of Mazda) was to learn about their production processes. If GM and Ford are successful in transferring this know-how back to their US operations, the result may be a net gain for the US economy.

5.Costs of FDI

***While all these advantages are well and good, the fact is that there are certain drawbacks that come along with them as well. Every industry, and every country, deals with these cons differently, and are also affected in varying degrees, so they are not meant to discourage foreign investors in any way. But every parent enterprise should be aware of these points.

Loss of Employment: Companies which invest abroad in production and marketing facilities hire labor of the foreign country, in this case, it leads to a loss of employment in the home country. Many -a-times it is seen that MNC even close plants in their home countries and move these production facilities to third world countries in order to benefit from cheaper labor and material sourcing costs.

- With regard to employment effects, the most serious concerns arise when FDI is seen as a substitute for domestic production. This was the case with Toyota's investments in Europe. One obvious result of such FDI is reduced home-country employment. If the labor market in the home country is already very tight, with little unemployment (as was the case in both Japan and the United States during the 1980s), this concern may not be that great. However, if the home country is suffering from unemployment, concern about the export of jobs may arise. For example, one objection frequently raised by US labor leaders to the free trade pact between the United States, Mexico, and Canada (see the next chapter) is that the United States will lose hundreds of thousands of jobs as US firms invest in Mexico to take advantage of cheaper labor and then export back to the United States market.

- There is a wide divergence of views concerning the effect of direct investment abroad on domestic employment. Labor unions maintain that there is a loss of actual or potential jobs when firms invest abroad as well as when either exports fall or imports rise. In contrast, multinational firms contend that much of their foreign direct investment is induced by the growing competitiveness of foreign producers and, thus, that domestic jobs would be lost even if they did not invest abroad. Indeed, they contend they are able to maintain domestic employment in high-skill activities by transferring their labor-intensive activities abroad. In addition, these firms point to the increased demand by their subsidiaries for domestically-produced intermediate products and capital goods, as direct foreign investment takes place.17

- The view of most economists seems to be that no firm conclusion is warranted about the net employment effects of direct foreign investment. Broad generalizations are difficult because of the very different employment effects one obtains from various plausible alternative assumptions about what will happen in the absence of foreign investment and what the magnitude of increased imports by the host country from the investing country will be. For example, one well-known study by Bergsten, Horst and Moran (1978) finds that modest levels of foreign direct investment are positively correlated with US exports, while higher levels are less related to exports and may even begin to substitute for them.

Problem of Repatriation: Many countries especially those which have scarce foreign exchange reserves tend to restrict the outflows of profits, dividends and royalties of the MNCs in order to save their foreign exchange for other more important purposes. In such cases, the profits or gains made in the foreign countries remain there and cannot be deployed elsewhere in the event that there are more profitable opportunities available

- When foreign currency is converted back to the currency of the home country it is referred to as repatriation. An example would be an American converting British pounds back to U.S. dollars.

Repatriation also refers to the payment of a dividend by a foreign corporation to a U.S. corporation. This happens often where the foreign corporation is considered a "controlled foreign corporation" (CFC), which means that more than 50% of the foreign corporation is owned by U.S. shareholders. Generally, foreign direct investment in CFC's are not taxed until a dividend is paid to the controlling U.S. parent company, and is thus repatriated. The foreign direct investment income of the CFC is taxed only by the country where it is incorporated until repatriation. At that time, income is subject to the (typically higher) U.S. tax rate minus the Foreign Tax Credits. (FN: See IRC 951-965) There are currently hundreds of billions of dollars of Foreign direct investment in CFC's because of the disincentive to repatriate those earnings.
- For instance, after the war of liberation in 1971, the flow of FDI started to come to newly independent Bangladesh from 1973. However, the FDI flow was very much insignificant at that time. Since then Bangladesh has been trying to attract foreign investment to underwrite its savings-investment gap as well as to redress its export-import imbalance. Recently in Bangladesh FDI inflow in each year shows a positive rising trend but not at a satisfactory level. Moreover, almost 65% of FDI has been repatriated over the last 10 years. The Bangladesh Bank published a trend of FDI inflows to and outflows from Bangladesh over the period (1997-98 to 2006-07), which is shown diagrammatically in Graph 1.

Bangladesh received more than 5.5 billion dollar of FDI over the last ten years out of which 804 million dollar were received in 2004-05 which is the highest amount and 284 million dollar in 2003-04 which is the lowest amount respectively during the study period. The foreign investors have repatriated 2.72 billion dollar at home in the form of dividends and profits during the period. In addition, 30 million dollars were repatriated by winding up businesses. Analyzing these statistics it is vivid that almost 65% of total FDI has been repatriated over the last 10 years. Profits and dividends were repatriated as per law because Bangladesh allows the foreign investors to repatriate their invested capital and dividends. Over the last 10 years, the highest amount of repatriation took place in 2006-07 which was 570 million dollars. And the lowest amount of repatriation was 40 million dollars in 1998-99. Generally, repatriation starts after the inflow of FDI and the volume of repatriation increases with the expansion of business. Sector-wise figures show that 40% of the total investment went to infrastructural sectors

Possibility of Losing Competitive Advantage:

This problem is especially true for technologically advanced developed countries. Development of new technology is a costly affair along with it requiring a significant investment of time and effort. Many-a-times, these technologically advanced developed countries have to license these technologies to the developing countries as a part of their FDI strategy, this gives these countries access to vital information on these technologies which can be imitated by the host country. Although one may argue that there exist Intellectual Property Rights (IPRs) governing transfer and protecting of technologies through patents and trademarks; however, developing countries seldom have the machinery and the funds to uphold such protection as guaranteed by the various IPR laws, act and legislations.

- The larger the increase in foreign sales, the more likely it is that the export loss in terms of finished goods can be compensated for by an increase in the export of intermediate goods to the affiliate. By exploiting lower factor costs abroad, the MNC more competitive at home as well as abroad. If this increase in competitiveness reduces imports or raises exports, it may create sufficient new employment to compensate for the initial replacement effect. In addition, it is possible that the presence of MNC affiliates abroad facilitates the diffusion of information about other producers from the home country, with positive export and employment effects as a result. Hence, the net impact of outward FDI on domestic production and exports is largely an empirical question.

- A second problem is that it is hard to judge what would have happened to exports, employment, and investment if the MNCs had not been able to invest abroad. This is a particular problem if empirical results suggest that outward investment has been followed by job losses in the home country. Would the MNCs have been able to maintain (or even increase) the market share they had carved out exporting from the home country, or would they have been driven out of the market by their foreign competitors, leading to a reduction in home country exports and employment even without FDI? Similarly, would the MNC engaging in vertical FDI have been able to maintain its market share and output volume without foreign production, or would a decision to remain in the home country have led to weaker competitiveness? The empirical literature on the export substitution question has been addressed by business oriented analyses as well as econometric studies at different points in time in several countries, which means that there is quite some variation in methodology and generality of results. Typically, the more business-oriented or case-oriented authors have attempted to examine what would have happened in specific cases if investment abroad had not been possible, whereas the econometric studies have tried to detect the overall relationship between FDI and home country exports in larger samples of firms or industries.

The results rested on very specific assumptions about export survival rates, i.e. the fractions of the affiliates’ market share that could have been served by home exports: in both the Swedish and US cases, it was assumed that most of the foreign markets would have been lost in the absence of FDI.

The most comprehensive econometric analyses of the Swedish FDI-trade relationship are presented in Swedenborg (1979, 1982, 1985, and 2001), Blomström, Lipsey, and Kulchycky (1988), and Svensson (1996). The studies are all based on a detailed data set on Swedish multinationals collected by the Industrial Research Institute (IUI) in Stockholm, but there are significant differences regarding the specific time period and the methodology used. Yet, most of these studies conclude that there is no relation, or a small positive relation, between outward FDI and home exports. The exception is Svensson (1996), who focuses on the developments during the late 1980s and early 1990s. In particular, he argues that it is necessary to account for the foreign affiliates’ exports to third countries, because they are likely to substitute directly for parent exports. Doing this, he finds substitution between Swedish investment abroad and exports from Sweden. However, the quantitative impact is relatively small. Another possible explanation for divergence between Svensson (1996) and earlier authors could be that Swedish MNCs have increasingly relied on mergers and acquisitions rather than greenfield investments as their mode of foreign market entry. Since acquired affiliates already have local suppliers and subcontractors, they are less likely to need inputs from the home country, at least in the short run. Hence, the complementarity between Swedish exports and FDI may have declined over time.


- Many times, the cultural differences between different countries prove insurmountable. Major differences in the philosophy of both the parties lead to several disagreements, and ultimately a failed business venture. So it is necessary for both the parties to understand each other and compromise on certain principles. This point is directly related to globalization as well.

Risk of making a loss:

Investing in foreign countries is infinitely more expensive than exporting goods. So an investor should be prepared to spend a lot of money for the purpose of setting up a good base of operations. This is something that parent enterprises know and are well prepared for, in most cases.

Balance of payments:

The home country's balance of payments may suffer in three ways. First, the capital account of the balance of payments suffers from the initial capital outflow required to finance the FDI. This effect, however, is usually more than offset by the subsequent inflow of foreign earnings. Second, the current account of the balance of payments suffers if the purpose of the foreign investment is to serve the home market from a low-cost production location. Third, the current account of the balance of payments suffers if the FDI is a substitute for direct exports. Thus, insofar as Toyota's assembly operations in the United States are intended to substitute for direct exports from Japan, the current account position of Japan will deteriorate.

Foreign exchange risk:

This kind of risk occurs when the value of investment fluctuates due to changes in a currency's exchange rate. When a domestic currency appreciates against a foreign currency, profit or returns earned in the foreign country will decrease after being exchanged back to the domestic currency. Due to the somewhat volatile nature of the exchange rate, it can be quite difficult to protect against this kind of risk, which can harm sales and revenues.

Take an assumption that a Japan food company invests in U.K. If the British pound depreciates against the Japanese yen, any pound-denominated profits the company receives from its Britain operations will yield fewer Japanese yen compared to before the pound's depreciation.

Political stability:

War and political violence− on both the domestic and international level−deter foreign investment. Political violence, e.g., civil wars, insurrections, organized crimes and international conflicts, leads to “political instability, the disruption of the orderly economic process in the host country, and thus smaller profit,” and “such events may put host governments under political and economic pressure, which may result in nationalization and expropriation of foreign assets in order to alleviate short-term difficulties” . First, international conflict deters FDI, shows that the onset of fatal conflicts not only tends to reduce FDI stock with a delay of three years but FDI inflows, in turn, also decrease the war risk of host countries. Second, domestic instability and violence can also deter FDI. Ethnic tension and religious tension deter foreign investment. The recent study on Italy shows that organized crime is strongly and negatively correlated with FDI inflows since organized crime tends to limit corporations’ business activities and profitability through corruption and violence. Desbordes (2010) finds that MNCs weigh both the global, overall political risk of host countries measured by the ICRG, and diplomatic, dyadic political tension between a host country and the US when they make foreign investment. They increase the required return rate of investment as the overall political risk of a host country, measured by the ICRG, increases and diplomatic tension between the host country and the US worsens (Desbordes, 2010).

Political Risk:

-Political risk transpires when a country's government unexpectedly changes its policies, which now negatively affect the foreign company. Foreign investments are always risky because the political situation in some countries can change in an instant. These policy changes can include such things as trade barriers, which serve to limit or prevent international trade. Some governments will request additional funds or tariffs in exchange for the right to export items into their country. Tariffs and quotas are used to protect domestic producers from foreign competition. This also can have a huge effect on the profits of an organization because it either cuts revenues from the result of a tax on exports or restricts the amount of revenues that can be earned. The investor could suddenly find his investment in serious jeopardy due to several different reasons, so the risk factor is always extremely high. In certain cases, political changes could lead to a situation of 'Expropriation'. This refers to a scenario where the government can take control of a firm's property and assets, if it feels that the enterprise is a threat to national security. Although the amount of trade barriers have diminished due to free-trade agreements and other similar measures, the everyday differences in the laws of foreign countries can influence the profits and overall success of a company doing business transactions abroad.

- These policy changes can include such things as trade barriers, which serve to limit or prevent international trade. Some governments will request additional funds or tariffs in exchange for the right to export items into their country. Tariffs and quotas are used to protect domestic producers from foreign competition. This also can have a huge effect on the profits of an organization because it either cuts revenues from the result of a tax on exports or restricts the amount of revenues that can be earned. The investor could suddenly find his investment in serious jeopardy due to several different reasons, so the risk factor is always extremely high. In certain cases, political changes could lead to a situation of 'Expropriation'. This refers to a scenario where the government can take control of a firm's property and assets, if it feels that the enterprise is a threat to national security. Although the amount of trade barriers have diminished due to free-trade agreements and other similar measures, the everyday differences in the laws of foreign countries can influence the profits and overall success of a company doing business transactions abroad..

Obstacles from the policies of host countries:

- To reduce the influence of home countries, the host countries formulate some policies such as Restricting access to local markets, High taxation, Applying the quotas and/or other non-trade barriers, Prohibitions for FDI from some nations because of tension in diplomacy relations, politics.

- Corruption is one more concern of home countries whenever they invest. Corruption makes investment costs and business costs rise considerably and unpredictably, also makes investment opportunities become invalid. For instance, though having paid for the bureaucracies, investors still can’t make sure for their investment opportunities because there’s no legally bindings between the 2 sides.
- Meanwhile, to reduce the dependence on home countries, host countries will apply the policy that limit the approach to the market, high taxes or applying the quota or barriers to trade to the product. The conflict in diplomatic, the government of host countries can r restrict the home countries to invest on some specific areas.

Members of the group:

1. Nguyễn Thị Quỳnh Như

2. Nguyễn Nhật Toàn

3. Trần Hậu Minh Phương

4. Nguyễn Mạnh Tín

5. Ngô Vĩnh Toàn

6. Nguyễn Phan Hải Yến


Foreign Trade UnIVersity


Essay Assignment


Topic: Negative impacts of FDI on home countries

Subject: International economics

Class: K52 CLC2

Group: FA corporation


Trần Thị Phương Thuỷ

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