Transcript International Economics

Foreign Direct Investment
Introduction
Ivar Bredesen
Associate Professor, Oslo University
College
Direct Foreign Investment and the
Multinationals
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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?
Definitions
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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
OECD – IMF Definition
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“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."
UNSNA Definition
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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."
FDI vs. Portfolio Investment
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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
FDI - preliminaries
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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
Macro vs. Micro
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We get information on FDI from
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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
Are MNCs important?
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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
MNE activity
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How do we measure MNE activity?
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FDI flows per year
FDI stock
Foreign sales of FDI
FDI as a share of capital formation
FDi Inflows 1980 - 2004
FDI share of gross fixed capital formation
FDI/Exports ratio
Indicators of FDI
FDI flows by regions (2003 and 2004)
FDI in Poland
FDI as a share of GFCF
Main entry modes
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Main modes of entry
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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 M&A
activities
FDI - preliminaries
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It is sometimes of interest to split flows into
components
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Equity capital
Reinvested earnings
Intra-company loans
FDI components
FDI inflows – top 20 economies
What does micro data tell us?
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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
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High level of R&D/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