Definitions and types of FDI. Foreign direct investment (FDI) is also called "direct foreign investment (DFI)", "direct investment", or "foreign investment. FDI is primarily a long-term strategy. Companies usually expect to benefit through access to local markets and resources, often in exchange for expertise. Direct investment. SIFUFOREX TOOLS OF THE MIND Expiration policy can be established globally, short supply, and two different modes an acoustic electric. Users to join. Q: What exactly both options as.
Such arrangements are not cost-free; partners must invest not only in making the relationship work but also in costs such as relabeling and rebranding. Just as organizations exchange marketing services, they can also exchange production facilities. Rather than shipping finished products to a distant market, an organization can enter into an alliance with a local manufacturer to assemble components or manufacture a complete unit according to original specifications.
Again, this can be a cost-effective way of entering a market, but it requires an investment in the relationship as well as in the transfer of knowledge, skills, and design. Perhaps the loosest form of strategic alliance occurs when organizations enter into a consortium to bid on a project that none of them could carry out individually. Such consortia are very common in large international infrastructure projects. Even though the organizations retain their distinct identities, entering into a consortium does require some longer-term commitments, especially if the bid is successful and the winners are obliged to work together for several years.
The simple fact of participating in a bid can require a significant investment of time, human resources, and money, especially if bid bonds are required. My background is in copywriting, content strategy, content marketing, and content management. Passionate about stories with purpose and meaning, I connect readers to writing that's engaging, useful, and informative. View all posts by Sheena Koo. Email address:.
What information would you like to receive? Contact us at: www. Trending topics:. Ownership-based investments One type of foreign direct investment is based on establishing an ownership position over an asset or assets. The following are some of the most common types of ownership-based investments: Greenfield The investing organization establishes a completely new operation in a target market, building it from the ground up.
Brownfield Similar to Greenfield, this is an aggressive market entry strategy. Acquisition The investor purchases an existing operation in the target market. Joint venture The investor identifies a partner with complementary capabilities, and they set up an entirely new operation in the target market, each of them owning a stake proportional to the value of their original contribution.
Merger The investor identifies an operation with complementary capabilities, and the two organizations abandon their original distinct identities to join forces into a single, combined new firm. Situational Analysis Want to know more about this topic? Looking to determine if your new trade opportunities are viable?
Click to learn more! Investments based on strategic alliances This is a category of investment in which resources are contributed directly but do not create a distinct asset. Investments based on strategic alliances are as follows: Supplier alliances Many organizations are investing in stable long-term relationships with suppliers of parts, technology, equipment, or other key inputs.
Research consortium There is a growing number of organizations in particular sectors pooling their R and D efforts to improve their ability to face related challenges. Co-production alliance Just as organizations exchange marketing services, they can also exchange production facilities.
Bidding consortium Perhaps the loosest form of strategic alliance occurs when organizations enter into a consortium to bid on a project that none of them could carry out individually. About the author. The first hypothesis says: invest. The second says: improve domestic capability. The third says: invite as much FDI as possible. At present, economists cannot say for sure which explanation is most convincing in the context of East Asian dynamism.
In the second and third hypotheses, the role of s upporting industries is particularly important. Supporting industries also called parts industries, ancillary industries, etc are upstream industries that supply intermediate inputs to the final producer. Final assembly is usually easy but producing high-quality parts with high-quality materials is much more difficult. The value of the product is mostly determined by the quality of the upstream industries.
Developing countries usually start with final assembly, and try to develop supporting industries later. But very few have succeeded so far. Thailand has accumulated automobile parts industries Japan is the key investor and Southern China has an accumulation of electronics parts industries Taiwan is the major investor.
Even in these cases, the host countries remain highly dependent on foreign technology, marketing and management. Key parts and materials often continue to be imported. The development of supporting industries is a big challenge for developing countries opting for FDI-driven growth. Southeast Asia Singapore, Thailand, Malaysia, etc. Instead of protecting local firms, these countries invited foreign firms to become the core industrial base.
Initially protection and localization requirement were in place. Later, they were gradually removed. Their big problem is how to link local firms still weak with FDI firms, as supporting industries and receivers of international technology and management skills. In the current situation, the Japan-Korea type industrialization has become almost impossible.
The main reason is that the pressure for globalization is so strong that no country can maintain high tariffs in order to protect domestic industries. Latest comer countries must open up even faster than Thailand or Malaysia, even before they accumulate sufficient FDI base. The second reason is that local firms of most developing countries including ASEAN are generally much weaker than Japanese or Korean firms of a few decades ago. Today, industrialization has become synonymous with inviting FDI.
To receive more FDI, developing countries compete with each other by offering more attractive FDI environment and incentives, concluding free trade agreements, sending commercial missions to invite more investment, and so on. This is a big change from a few decades ago, when FDI by multinational corporations was regarded as economic invasion and exploitation. There were often violent popular protests against Japanese and Western firms investing in Southeast Asia. Now we have much less opposition.
Another reason is that foreign companies have learned to behave more carefully and respect local cultures and sensitivities compared with earlier times. Trade liberalization is considered to be very important for inviting FDI although I am not sure if this assumption is always valid empirically, or even theoretically.
In East Asia, as in other areas, there are many frameworks for promoting free trade, at various levels including global, regional and bilateral. WTO is a global organization. However, its effectiveness is seriously questioned in recent years. Its trade negotiations seem to proceed too slowly, and many developing countries feel that they are not receiving enough benefits while being asked to liberalize their trade regimes too quickly.
Many officials and economists pay customary lip service to the importance of WTO, but they seem to have little trust on multilateral trade negotiations. I believe this is a sad state of affairs. It set the trade liberalization goal of for developed countries and for developing countries. But the momentum of APEC has been lost almost completely.
The main reason for this is that it admitted too many countries with different interests. The "Three" here means Japan, China and Korea. Malaysia's former prime minister proposed this framework under a different name earlier, but it was rejected at that time. At present, China has emerged as a very strong competitor and the "factory of the world," at least in the eyes of observers outside China.
Not only are its products cheap, but the quality is also improving. But China itself faces a serious challenge of domestic restructuring SOEs, farm products, automobiles, consumer electronics, etc as it implements WTO commitments. How serious and permanent is the Chinese threat? This is a hotly debated topic today. Since late , China's economic boom some say bubble in construction and consumer goods is causing a worldwide shortage of energy and materials leading to price hikes in oil, steel, mineral ore, etc.
The Chinese economy now greatly affects global prices and markets. Recently, China has begun an aggressive economic diplomacy in Southeast Asia. It has targeted this region as an export market and an FDI destination. The Chinese government offers selective economic aid to the region since China is not a member of the OECD Development Assistance Committee DAC , it is not bound by the international code of conduct for ODA providers, including information disclosure, untying of aid, and aid coordination.
The third FDI hypothesis mentioned above also suggests that the government wishing to receive a great amount of FDI must understand the forces behind FDI dynamics very well. Recent research on trade and FDI points to two forces at play. Agglomeration : this is an extension of trade theory with spatial external economies scale merit in geographical concentration. Similar producers tend to gather in one place. For example, Silicon Valley in California attracts high-tech firms, while Akihabara in Tokyo is a huge collection of electronic outlets.
Bangalore in India has accumulated software programmers while Guangdong in China has a concentration of garment and electronics industries. The importance of agglomeration as a source of locational advantage is now clearly recognized, although its microeconomic foundation why they gather like that, theoretically?
The important and in a sense very shocking thing about this is that the trade and investment pattern is determined mainly by wise FDI policy. Even a country with little capital and low educational achievements can attract FDI and industrialize. In other words, locational advantage is not a given thing, but it can be created relatively easily if the government has the will and the skill.
Fragmentation : this means splitting of the production process of one product from raw materials to final assembly into many steps "production blocks" which are undertaken in different locations. For example, to produce garment, cotton can be grown in Pakistan, spinning and weaving can be done in Taiwan, accessories may be produced in China, sewing and cutting can be done in Vietnam, and marketing can be done in the US.
Each country can participate in the process in which it excels namely, each country realizes its dynamic comparative advantage. But to do this, the costs of transportation, communication and production coordination these are summarily called "service links" across countries must be sufficiently low.
Otherwise, international division of labor will not be beneficial. Fragmentation is the opposite to vertical integration, where every process from upstream to downstream is undertaken within one country or even within one factory. Agglomeration creates concentration, while fragmentation creates decentralization. On the surface, it seems that these forces are contradictory. But in reality, both are working at the same time. One aspect of that is, some products are dominated by agglomeration while others are more strongly influenced by fragmentation.
It depends on the product. Another aspect is that situations change over time. As new products and new production methods are constantly introduced, the mix of agglomeration and fragmentation also shifts. This is particularly true for electronics and other high-tech industries. More importantly, the two forces can simultaneously operate even for the same product.
This is a case where each production process is concentrated in one country hard disks in the Philippines, electric motors in Vietnam, software in USA, etc , but they together cooperate to produce one product say, computers which are finally assembled in China. This is agglomeration at the level of each production process, but fragmentation among these processes. For each country, the key is to attract one slice of production process and create a large concentration of it domestically.
But this is an extremely dynamic and complex process, shifting from product to product, process to process and over time. Policy makers must have an understanding of this process, by closely working with foreign investors and getting latest information about changing industries and global markets.
The government does not have to predict the future dynamics of industries which is too difficult , but it must know how the trends are changing today and how businesses are responding. If you are unaware of industrial dynamics, you will waste a lot of money and time trying to attract industries which have no chance of coming.
For developing countries, what kind of policies are required in a world with free trade and fastidious FDI? I recommend the following. This advice comes from my experience of talking to the Vietnamese officials and enterprise managers in the last eleven years. It assumes a country which already receives a certain amount of FDI and hopes to receive more, above the critical mass, to industrialize and join the regional flying geese.
First, understand FDI dynamics from the viewpoint of foreign investors as discussed above. Too many officials think in terms of domestically set goals and requirements, and scare away potential investors. National goals and social concerns are certainly important, but they must be realized in a way that is consistent with FDI inflows.
Second, do not change rules after foreigners have already invested. Policy changes are fine, sometimes, especially for better. But for those who came earlier, the old rules should continue to apply so that they will not suddenly face an unfavorable situation "grandfather clause".
Policy uncertainty is the biggest problem in Vietnam. Third, do not try to have a vertically integrated industry , from raw materials to final assembly. In the age of globalization, no country can do that, not even developed ones. Target where your dynamic i. Fourth, do not try to use domestically available natural resources unless they are highest quality and lowest cost or nearly so in the world. From the viewpoint of competitiveness, it is better to import best raw materials from the most efficient producers in the world.
Fifth, building supporting industries and technical transfer will take time. They must be done in proper speed and sequence. Hasty requirement of local contents not only violates WTO but also drives away foreign investors. Six, accumulate assembly-type FDI first, without selectivity , even though domestic value-added is low. Next, as assemblers naturally desire to procure inputs domestically, promote or invite domestic and foreign parts suppliers.
If successful, a virtuous circle between assembly and parts will emerge. Technology transfer will come after this, not before. Seven, work cooperatively with foreign investors. Listen to their needs carefully you don't have to accept all of their complaints; sometimes they are selfish. Set agreed goals for technical transfer, domestic procurement, etc. Work with foreign investors toward these goals, and also solve any problems with them.
Eight, simple external opening free trade and investment is not enough. You must use targeted policies to create superior locational advantages and lower the costs of doing business in your country.
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