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Foreign Direct Investment Introduction

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Direct Foreign Investment and the Multinationals ... Foreign Controlled enterprises include subsidiaries with more than 50% owned by ... 690 000 foreign affiliates ... – PowerPoint PPT presentation

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Title: Foreign Direct Investment Introduction


1
Foreign Direct InvestmentIntroduction
  • Ivar Bredesen
  • Associate Professor, Oslo University College

2
Direct Foreign Investment and the Multinationals
  • What do we mean by Foreign Direct Investment, FDI
  • Who are the major sources and recipients of FDI
  • How is FDI financed?
  • What are the entry modes of FDI?

3
Definitions
  • Multinational Enterprises (MNEs) are firms which
    own a significant equity share (typically 50 or
    more) of another company operating in a foreign
    country
  • The most common definition of FDI is related to
    the compilation Balance on Payment accounts and
    has been originally provided by IMF (1993) and
    subsequently endorsed by the OECD (1996). It is
    based on the ideas of lasting interest and
    influence on management

4
OECD IMF Definition
  • Foreign direct investment reflects the objective
    of obtaining a lasting interest by a resident
    entity in one economy (direct investor) in an
    entity resident in an economy other than that of
    the investor (direct investment enterprise).
    The lasting interest implies the existence of a
    long-term relationship between the direct
    investor and the enterprise and a significant
    degree of influence on the management of the
    enterprise. Direct investment involves both the
    initial transaction between the two entities and
    all subsequent capital transactions between them
    and among affiliated enterprises, both
    incorporated and unincorporated."  

5
UNSNA Definition
  • The United Nations System of National Accounts
    focuses on the concept of control.
  • Foreign Controlled enterprises include
    subsidiaries with more than 50 owned by a
    foreign parent. Associates of which foreign
    ownership is 10-50 ... may be included or
    excluded by individual countries according to
    their qualitative assessment of foreign control."

6
FDI vs. Portfolio Investment
  • FDI is different from portfolio investment, which
    can de divested easily and do not have a
    significant influence on the management of the
    firm
  • Thus, to create, acquire or expand a foreign
    subsidiary, MNCs undertake FDI

7
FDI - preliminaries
  • Home country (outward FDI) vs. Host country
    (inward FDI) both flows are registered in the
    balance of payments
  • Flows are measured every given time interval,
    stocks are the sum of flows
  • Horizontal FDI same sector, arises to access
    the markets for example due to some restrictions
    on exporting to the same market
  • Vertical FDI upstream/downstream integration of
    suppliers or customers in order to take advantage
    of international factor price differentials

8
Macro vs. Micro
  • We get information on FDI from
  • Macroeconomic data (GDP, Balance of Payments etc)
  • Microeconomic data at the firm level (employment,
    sales for every firm etc)
  • Models of FDI should be consistent with some of
    these facts

9
Are MNCs important?
  • In 2004, there are about 70 000 MNCs with 690
    000 foreign affiliates
  • The most multinationalised countries in the
    world are Belgium, Luxembourg and Hong Kong, and
    India is among the lowest

10
MNE activity
  • How do we measure MNE activity?
  • FDI flows per year
  • FDI stock
  • Foreign sales of FDI
  • FDI as a share of capital formation

11
FDi Inflows 1980 - 2004
12
FDI share of gross fixed capital formation
13
FDI/Exports ratio
14
Indicators of FDI
15
FDI flows by regions (2003 and 2004)
16
FDI in Poland
17
FDI as a share of GFCF
18
Main entry modes
  • Main modes of entry
  • Merger and Acquisitions( M A) is the most
    common modality in developed economies
  • Greenfield Investments (GF) dominate in
    developing nations, partly due to restrictions on
    MA activities

19
FDI - preliminaries
  • It is sometimes of interest to split flows into
    components
  • Equity capital
  • Reinvested earnings
  • Intra-company loans

20
FDI components
21
FDI inflows top 20 economies
22
What does micro data tell us?
  • There are large differences across industries in
    the degree to which production and sales are
    accounted for by MNCs
  • In particular, MNCs tend to be of greater
    importance in technology intensive industries,
    with indicators such as
  • High level of RD/sales ratios
  • Large share of professional and technical workers
    in their work force
  • Products which are new or technically complex
  • High level of product differentiation or
    advertising
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