Typical motivations of governments in attempting to influence FDI flows - Assignment Example

As a definition in itself foreign direct investment is an investment that gives the investor a controlling interest in a foreign country. Production facilities abroad comprise a large part of international companies, activities and strategies.

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We can give an example here of Bridgestone and whether they wanted to serve foreign markets. Bridgestone had to sell new products domestically or had to sell abroad if it was to renew its growth. This would pose risks. Bridgestone’s plan was to sell its products because there was more of a competitive advantage in producing the tyres than to know the Japanese market as a whole.

(International Business E & O 9th edition 2001, Daniels & RadeBaugh)

This figure above shows how FDI is set in international business.

Governments and investors have concerns about control and here are some factors to consider. Critics say that a host’s country’s national interests will suffer if a multinational makes hasty decisions on the basis of its objectives globally and nationally. Investors also have their concerns about control. Foreign countries are sometimes reluctant to transfer their vital resources for example capital, and management know-how to any organisation that can make operating decisions by itself. The company receiving the resources can thus gain a competitive advantage over the foreign company passing them on. We can go back to Bridgestone and say that they were reluctant to give product or process technology in their tyres to other companies.

Control can decrease operating costs and increase the rate at which companies move technology.

This is because:

* There is a sharing of corporate culture amongst the parent and subsidiaries.

* Managers understand objectives, which a company can use.

* Negotiations can keep to a minimum with other companies.

* Agreement problems can be avoided.

FDI most of the time is an international capital movement. It crosses borders when the anticipated return is higher overseas than at home. Although transferring international capital is one form of FDI, an investor can also transfer different assets. There are two other ways of obtaining foreign investments, which are not capital movements.

1. A company’s earnings in a foreign country can be used to set-up an investment e.g. using a settlement to obtain investment.

2. Companies in different countries could trade equity for example obtaining a share by giving stock to another country.

(International Business E & O 9th edition 2001, Daniels & RadeBaugh)

As we know there are two ways companies can invest in foreign countries. The way this happens is by obtaining an interest in the existing operations or constructing new facilities.

Due to large privatisation programs, hundreds of companies have been put on to the market and the multinational enterprises exploit this opportunity to invest abroad. We can use an example of Allied Irish purchasing two Polish funds. Here is what you call a privatisation program where Central and Eastern Europe have gained in FDI.

Companies seek acquisitions because:

* There is a difficulty of transferring resources to foreign operations. It is difficult for foreign companies to hire personnel especially when there is low local unemployment.

* A company can buy other existing companies, which gives the buyer a ‘ready made’ organisational structure and labour and management. This may make workers want to leave their old jobs.

* A company can gain brand image, which is very important of marketing consumer products especially when costs are high in this field.

* A company can gain access to local capital for it’s financing.

Potential investors may not always be able to realise an acquisition. Companies make foreign investments where there is merely any competition therefore to buy a certain company is difficult. Local governments sometimes prevent acquisitions because they want an increase in competition and not have dominance by foreign markets. Managers may not work well together therefore the decisions made in acquiring certain companies may not be well undertaken.

Factor movement is an alternative to trade. Saying this however, it may not be more efficient in the allocation of resources. If trade didn’t occur and the production factors could not move internationally a country would have to stop consuming certain goods and produce them in a different way. This would decrease output worldwide and also lead to higher prices.

There are pressures that exist among countries to move to countries of even greater scarcity. Here they may be a better return. Where there is a high concentration of labour compared to the capital there will more likely be unemployment and a poorly paid workforce. Therefore the labour force will move to other countries where they can have better salaries. Capital flows will move from plentiful to where there is scarcity.

If output from an FDI were sold locally rather than export markets world trade would be stimulated by the FDI. A third of exports is among controlled entities e.g. from parent to subsidiary of the same company. Overseas investment has to occur otherwise there would be no exports.

Objectives that may influence companies to undertake international business are:

1. A company may want to expand its sales

2. A company may want to acquire resources

3. A company may want to minimise risk

However governments have political motives therefore try and influence they home countries to set up FDI. Companies can also import and export from another company in which case no FDI has taken place. This is less risky than FDI because there is no exposing of an investment in a foreign country. Also the environment is familiar to your home country so you know the management structure.