Foreign Direct Investment

Foreign Direct Investment (FDI) is capital provided by a foreign direct investor, either directly or through other related enterprises, where the foreign investor is directly involved in the management of the enterprise. Development of a new business or acquisition of at least 10% interest in a domestic company or a tangible assets, (purchase of bond & stock). Foreign direct investment is the transfer by a multinational firm of capital, managerial, and technical assets from its home country to a host country. FDI has three components: equity capital, reinvested earnings and intra-company loans. FDI flows are recorded on a net basis (capital account credits less debits between direct investors and their foreign affiliates) in a particular year. Outflows of FDI in the reporting economy comprise capital provided (either directly or through other related enterprises) by a company resident in the economy (foreign direct investor) to an enterprise resident in another country (FDI enterprise). Inflows of FDI in the reporting economy comprise capital provided (either directly or through other related enterprises) by a foreign direct investor to an enterprise resident in the economy (called FDI enterprise). Foreign direct investment (FDI) includes significant investments by foreign companies, such as construction of production facilities or ownership stakes taken in U.S. companies. FDI not only creates new jobs, it can also lead to an infusion of innovative technologies, management strategies, and workforce practices. The ultimate flow of foreign involvement is direct ownership of foreign- based assembly or manufacturing facilities. The foreign company can buy part or full interest in a local company or build its own facilities. If the foreign market appears large enough, foreign promotion facilities offer distinct advantages. First, the firm secures cost economies in the form of cheaper labor or raw material, foreign government incentives, and freight savings. Second, the firm strengthens its image in the host country because it creates jobs. Third, the firm develops the recent relationship with the government, customers, local suppliers, and distributors, enabling it to adapt its product better to the local environment. Forth, the firm retains full retain over its investment and therefore can develop manufacturing and marketing policies that serve its long-term international objectives. Fifth, the firm assures itself access to the market in case the host country starts insisting that locally purchased goods have domestic content..

1)types of foreign direct investment

The first type of FDI is taken to gain access to specific factors of production, e.g. resources, technical knowledge, material know-how, patent or brand names, owned by a company in the host country. If such factors of production are not available in the home economy of the foreign company, and are not easy to transfer, then the foreign firm must invest locally in order to secure access. The second type of FDI is developed by Raymond Vernon in his product cycle hypothesis. According to this model the company shall invest in order to gain access to cheaper factors of production, e.g. low-cost labour. The government of the host country may encourage this type of FDI if it is pursuing an export-oriented development strategy. Since it may provide some form of investment incentive to the foreign company, in form of subsidies, grants and tax concessions. If the government is using an import-substitution policy instead, foreign companies may only be allowed to participate in the host economy if they possess technical or managerial know-how that is not available to domestic industry. Such know-how may be transferred through licensing. It can also result in a joint venture with a local partner. The third type of FDI involves international competitors undertaking mutual investment in one another, e.g. through cross-shareholdings or through establishment of joint venture, in order to gain access to each other's product ranges. As a result of increased competition among similar

products and R&D-induced specialisation this type of FDI emerged. Both companies often find it difficult to compete in each other's home market or in third-country markets for each other's products. If none of the products gain the dominant advantage, the two companies can invest in each other's area of knowledge and promote sub-product specialisation in production. The fourth type of FDI concerns the access to customers in the host country market. In this type of FDI there are not observed any underlying shift in comparative advantage either to or from the host country. Export from the companies' home base may be impossible, e.g. certain services, or the capability to request immediate design modifications. The limited tradability of many services has been an important factor explaining the growth of FDI in these sectors. The fifth type of FDI relates to the trade diversionary aspect of regional integration. This type occurs when there are location advantages for foreign companies in their home country but the existence of tariffs or other barriers of trade prevent the companies from exporting to the host country. The foreign companies therefore jump the barriers by establishing a local presence within the host economy in order to gain access to the local market. The local manufacturing presence need only be sufficient to circumvent the trade barriers, since the foreign company wants to maintain as much of the value-added in its home economy.

2)types of fdi
Types of FDI By Direction InwardInward foreign direct investment is when foreign capital is invested in local resources.Inward FDI is encouraged by:> Tax breaks, subsidies, low interest loans, grants, lifting of certain restrictions> The thought is that the long term gain is worth short term loss of incomeInward FDI is restricted by:> Ownership restraints or limits> Differential performance requirementsOutwardOutward foreign direct investment, sometimes called "direct investment abroad", is whenlocal capital is invested in foreign resources.Outward FDI is encouraged by:> Government-backed insurance to cover risk Outward FDI is restricted by:> Tax incentives or disincentives on firms that invest outside of the home country or onrepatriated profits> Subsidies for local businesses By Target Greenfield investmentMain article: Greenfield investmentDirect investment in new facilities or the expansion of existing facilities. Greenfieldinvestments are the primary target of a host nations promotional efforts because theycreate new production capacity and jobs, transfer technology and know-how, and canlead to linkages to the global marketplace. The Organization for International Investmentcites the benefits of greenfield investment (or insourcing) for regional and nationaleconomies to include increased employment (often at higher wages than domestic firms);investments in research and development; and additional capital investments. Criticism of the efficiencies obtained from greenfield investments include the loss of market share for competing domestic firms. Another criticism of greenfield investment is that profits are perceived to bypass local economies, and instead flow back entirely to the multinational'shome economy. Critics contrast this to local industries whose profits are seen to flow back entirely into the domestic economy. Mergers and Acquisitions Main article: Mergers and AcquisitionsTransfers of existing assets from local firms to foreign firms takes place; the primary typeof FDI. Cross-border mergers occur when the assets and operation of firms from differentcountries are combined to establish a new legal entity. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Unlikegreenfield

investment, acquisitions provide no long term benefits to the local economy--even in most deals the owners of the local firm are paid in stock from the acquiring firm,meaning that the money from the sale could never reach the local economy. Nevertheless,mergers and acquisitions are a significant form of FDI and until around 1997, accountedfor nearly 90% of the FDI flow into the United States. Mergers are the most commonway for multinationals to do FDI.Horizontal FDIInvestment in the same industry abroad as a firm operates in at home.Vertical FDIBackward Vertical FDIWhere an industry abroad provides inputs for a firm's domestic production process.Forward Vertical FDIWhere an industry abroad sells the outputs of a firm's domestic production. By Motive FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm:Resource-SeekingInvestments which seek to acquire factors of production that are more efficient than thoseobtainable in the home economy of the firm. In some cases, these resources may not beavailable in the home economy at all (e.g. cheap labor and natural resources). Thistypifies FDI into developing countries, for example seeking natural resources in theMiddle East and Africa, or cheap labor in Southeast Asia and Eastern Europe.MarketSeekingInvestments which aim at either penetrating new markets or maintaining existing ones.FDI of this kind may also be employed as defensive strategy;[2] it is argued that businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one.[3] This type of FDI can becharacterized by the foreign Mergers and Acquisitions in the 1980s by Accounting,Advertising and Law firms.[4]EfficiencySeekingInvestments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested thatthis type of FDI comes after either resource or market seeking investments have beenrealized, with the expectation that it further increases the profitability of the firm.[3].Typically, this type of FDI is mostly widely practiced between developed economies;especially those within closely integrated markets (e.g. the EU).[3].Strategic-Asset-SeekingA tactical investment to prevent the loss of resource to a competitor. Easily compared tothat of the oil producers, whom may not need the oil at present, but look to prevent their competitors from having it

Advantages of Foreign direct investment has many advantages for both the investor
and the recipient. One of the primary benefits is that it allows money to freely go to whatever business has the best prospects for growth anywhere in the world. That's because investors aggressively seek the best return for their money with the least risk. This motive is color-blind, doesn't care about religion or form of government. This gives well-run businesses -- regardless of race, color or creed -- a competitive advantage. It reduces (but, of course, doesn't eliminate) the effects of politics, cronyism and bribery. As a result, the smartest money goes to the best businesses all over the world, bringing these goods and services to market faster than if unrestricted FDI weren't available. Investors receive additional benefits. Their risk is reduced because they can diversify their holdings outside of a specific country, industry or political system. Diversification always increases return without increasing risk. Businesses benefit by receiving management, accounting or legal guidance in keeping with the best practices practiced by their lenders. They can also incorporate the latest technology, innovations in operational practices, and new financing tools that they might not otherwise be aware of. By adopting these practices, they enhance their employees' lifestyles, helping to create a better standard of living for the recipient country. In addition, since the best companies get rewarded with these benefits, local governments have less influence, and aren't as able to pursue poor economic policies. The standard of living in the recipient country is also improved by higher tax revenue from the company that received the foreign direct investment. However, sometimes countries neutralize

that increased revenue by offering tax incentives to attract the FDI in the first place. Another advantage of FDI is that it can offset the volatility created by "hot money." Short-term lenders and currency traders can create an asset bubble in a country by investing lots of money in a short period of time, then selling their investments just as quickly. This can create a boombust cycle that can wreak economies and political regimes. Foreign direct investment takes longer to set up, and has a more permanent footprint in a country.

Disadvantages of Foreign Direct Investment

Too much foreign ownership of companies can be a concern, especially in industries that are strategically important. Second, sophisticated foreign investors can use their skills to strip the company of its value without adding any. They can sell off unprofitable portions of the company to local, less sophisticated investors. Or, they can borrow against the company's collateral locally, and lend the funds back to the parent company. (Source: IMF, Finance and Development Magazine, Prakash Loungani and Assaf Razin, How Beneficial Is Foreign Direct Investment for Developing Countries?, June 2001) Free Trade Agreements and FDI Free trade agreements encourage foreign direct investment. For example, the largest free trade agreement is NAFTA, or the North American Free Trade Agreement. This increased FDI between the U.S., Canada and Mexico to $594.2 billion. Foreign Direct Investment Statistics Who keeps track of FDI statistics? Apparently, everyone. Here's a guide to the most important agencies. United Nations - The United Nations Conference on Trade and Development (UNCTAD) publishes the Global Investment Trends Monitor. This summarizes FDI trends around the world. For example, UNCTAD reported that FDI in 2012 declined to $1.3 trillion, instead of rising to $1.6 trillion as it had forecast. This was after setting a record of $1.5 trillion in 2011. OECD - These FDI statistics are released quarterly for the developed countries within the OECD. It reports on both inflows and outflows, so the only statistics it doesn't capture are those between the emerging markets themselves. IMF - In 2010, the IMF published its first Worldwide Survey of Foreign Direct Investment Positions. This annual worldwide survey is available as an online database. It covers investment positions from 2009 on for 72 countries. The IMF assembled this information with the help of the European Central Bank, Eurostat, OECD, and UNCTAD. BEA - This agency reports on the FDI activities of foreign affiliates of U.S. companies. This provides the financial and operating data of these affiliates, as well as which U.S. companies were acquired or created by foreign companies. It also describes how much investment U.S. companies have made overseas. Multinational Corporation A country that maintains significant operation in multiple countries but manages them from the base in the home country.3 The MNCs are playing an important role in economic development of developing countries. First, the investment made by MNCs help in filling the saving investment gap. Secondly, it fills the foreign exchange or trade gap. Thirdly, the govt. of the developing countries is able to fill up the reserves gap by taxing the profits of MNCs. Fourthly, MNCs fill the gaps in management entrepreneurship, technology and skills in the developing countries.

FDI in US

The United States is the largest investor abroad and the largest recipient of direct investment in the world .The global financial crises had a limited impact on FDI flows in 2007, but will begin to bite in 2008 But rebounded in 2010 .Provides jobs, but relatively high-paying jobs indeed, up to 30% higher-paying During the last ten years, majority-owned U.S. affiliates of foreign companies have employed between 5-6 million workers. Some observers believe U.S. direct investment abroad is harmful to U.S. workers because it shifts jobs abroad, skills and knowledge. Leading countries by FDI in US Belgium 20% Switzerland 13% Luxembourg 9% Japan 9% Canada 9% All other countries 28% FDI IN INDIA

Worlds largest democracy 2nd most populous country 4th most attractive destination for FDI in the survey's global ranking. UNCTAD survey - 2nd most imp. FDI destination (after China) Worlds 12th largest economy in market exchange rates 3rd biggest economy in purchasing power parity capital of India - New Delhi financial capital Mumbai Well trained software professionals and skilled talent is a unique advantage for FDI Starting from a baseline of less than $1 billion 1990 2010 - $44.8 billion & 2011 - $50.8 billion according to Ernst and Young India to see highest foreign remittances in 2011 US $ 58 billion

FDI in CHINA
Definitely, governments policy towards FDI plays an important role in attracting FDI. Now lets discuss the policy governing FDI in China. In 1950s and 1960s, due to the well known political reasons, China was isolated from western countries, logically, China shut up the door to western investors. Since 1978 , China has adopted reform and opening up policy. To develop Chinas economy, Chinese government encourages FDI. In 1979, China promulgated Sino-China Equity Joint Venture Law; in 1986, China promulgated Foreign Capital Venture Law. In order to attract

foreign investment, China gave foreign investors a variety of favorable treatments, such as tax reduction, cheaper land etc. In addition, nearly all local governments set up investment promotion agencies. To compete for foreign investment, many local governments even gave more favorable treatment to foreign investors some of which were illegal. Furthermore, After China joined the WTO in 2001, China reduced or abolished some performance requirements and other restrictions on FDI . 1. Emphasis on Quality rather than Quantity Recently, Chinese government is increasingly emphasizing the quality rather than the quantity of inward FDI. China encourages FDI with advanced technology or managerial expertise. At the same time, China increasingly restricts the FDI with high energyconsumption and environment-pollution. Why does China alter the policy governing the FDI? In the past three decades , China has witnessed rapid economic growth, however, such growth was on the cost of natural resources and environment pollution, Chinese government realizes such an economic growth model can not last long. Additionally, after 30 years of economic development, especially due to the consecutive trade surplus, China has accumulated astronomical foreign reserves. Unlike 30 years ago, the lack of capital is no longer a problem for the development of Chinese economy Prospect: Optimistic Nonetheless, in my view, the prospect of inward FDI to China will still be optimistic. There are several factors to support my judgment. 1. Globalization First of all, globalization is an irresistible trend in 21st century, no one can change the trend of it. No country can isolate itself from the world. Every nation can only adapt to the tendency. Globalization will involve all economies and integrate them into a single global economy. Transnational companies in developed countries will continue to invest abroad. What is more, developing countries will become more and more important sources of FDI 2.China: A Huge Market with Great Potential Secondly, China has a huge market with great potential. China has a population which is more than 1.3 billion, and the middle class has grew quickly after 30 years of development of Chinese economy.

China will remain a magnet for FDI , especially for market-seeking FDI. 3.Affluent Human Resources Furthermore, China has ample human resources. Every year , more than 6 million students graduate from universities and colleges. In rural area, there exist a huge pool of potential labor. Such human resources reserve can meet all demands of FDI. 4. The Investment Environment will Continue to Be Improved In addition, the investment environment will continue to be improved. In foreseeable future, Chinese government will hold the policy of utilization of FDI.Although China will control cross-border M&A, (Actually, it is international customs in FDI regime, even USA, the only economy superpower, still restricts some cross-border M&A by the reason of national security), China regards cross-border M&A as a higher form of FDI and welcome the M&A without harm to Chinese economy. To attract FDI, it is reasonably expected Chinese government will continue to improve governance and legal environment . B.Chinas Policy towards Outward FDI 1. Going Global Strategy In 2000, China outlined the going global strategy. Under the strategy, Chinese government encourages Chinese enterprises to expand abroad to make good use of both domestic and overseas markets and resources. Correspondingly, Chinese government dismantled some outward FDI barriers and loosened some restriction on outward FDI. The Chinese Government has abolished quotas on the purchase of foreign exchange for overseas investment since 1 July 2006. It is becoming easier and easier for Chinese domestic enterprises to obtain approval from authorities to invest abroad. In addition, Chinese enterprises have accumulated some international market knowledge's and experiences, they are capable of overseas expansion now. Encourage Private-owned Enterprises to Invest abroad Private-owned enterprises now are easy to access foreign exchange and can easily get the approval from the authorities to invest abroad. Some local governments improve their public service for these outward FDI enterprises and even provide some stimulus measures for them. Additionally, Chinese government also seeks to improve the overseas investment environment for Chinese enterprises by diplomatic ways . In the past decade or so , China has signed a good number of International Investment Agreements ( IIA ) with other countries.

Chinas outwards FDI will continue to rise quickly. There are many factors supporting this judgment.
To Expand abroad in the Extractive Industries to Meet the Huge Demand of Natural Resources in China Firstly, to safeguard the further economic development, stateowned enterprises will continue to expand abroad in the extractive industries to meet the huge demand of natural resources in China, such as oil, gas, metal mineral etc. Chinese state-owned enterprises will continue to merger or acquire overseas enterprises in these sector. Such deal is usually high risky and need astronomic capital injection. However, such cross-border M&A is sensitive, Chinese government and stateowned enterprises should carefully handle them Market-seeking Market-seeking will drive Chinese enterprises to expand abroad. The competition in Chinese market is now quite heated, to survive and develop, Chinese enterprises ,both state-owned enterprises and private enterprises, will consider to explore overseas market, and the outward FDI is one of the effective way to seek overseas market. Bypassing Trade Barriers Bypassing trade barriers is another important factor driving Chinese enterprises to invest abroad. Due to the consecutive trade deficit and trade imbalance with China, some countries, Especially some developing countries, impose severe restriction against Chinese exports. For example, Mexico has laid astonishingly high anti-dumping tariff on some Chinese goods , such as shoes and garments. Under such high tariff, it is virtually impossible to enter the market for Chinese goods. Trade barriers will drive Chinese enterprises to shift their production in other countries by the way of outward FDI. The Rising Production Cost The rising production cost will force Chinese enterprises to expand abroad. In China, the production cost is rising quickly. Actually, some enterprises in coastal area consulting us about overseas investment now are facing such difficult position, many an enterprise in labor-intensive industries are considering to shift their production in less developed countries, such as Viet Nam,Laos ,Cambodia etc. Market Network Seeking , Technology and Managerial Expertise Seeking etc.

 Of course , there exist some other factors stimulating Chinese enterprises invest abroad. Such as market network seeking , technology and managerial expertise seeking , such outward FDI will usually be located in developed countries. Actually, there have already existed such outward FDI in USA, including Lenovo acquiring IBMs computer sector, and Hair establishing plants in USA Why is FDI needed?
FDI plays a major role in developing countries like India . They act as a long term source of capital as well as a source of advanced and developed technologies. The investors also bring along best global practices of management. As large amount of capital comes in through these investments more and more industries are set up. This helps in increasing employment. FDI also helps in promoting international trade. This investment is a non-debt, non-volatile investment and returns received on these are generally spent on the host country itself thus helping in the development of the country. Some of the sectors that attract high FDI inflows in India are the hotel and tourism industry, insurance sector, telecommunication, real estate, retail, power, drugs, financial services, infrastructure and pollution control etc. FDI is not permitted in the following sectors: Railways Atomic energy Defence Coal and lignite An investor has to take a decision regarding the following aspects while investing: Exchange Rate - The stronger the foreign currency is in comparison to that of the host country, lesser will be the amount of investment required. In other words, depreciation of currency in the host country will lead to more investments. Market Size - This refers to the GDP growth. Developing and emerging countries are more likely to attract investments. Infrastructure - Investors will invest in a country if they think that the country has suitable infrastructure to support the business. Tax regime - MNCs are subject to tax in both the parent as well as host country. The host country which attempts to reduce this double taxation of MNCs will attract more FDI. Labour market conditions - The educational levels of the labour as well as the wage rates also play a major role in determining the flow of FDI. Financial and economic stability Political stability Following are some of the sectors in our country which attract massive FDI investments: Retail Sector This industry accounts for 13% of countrys GDP. Retail outlets acts as an interface between the producers and the consumers of a good. Indian government liberalized FDI in 2005 in this sector to 100%, thus enabling foreign investors to set up retail companies in India. Retail industry is divided into organised and unorganised sectors. Organised sectors include hypermarkets and retail chains whereas unorganised sector include local kirana shops (mom and

pop stores). The latter is more prevalent in India. Due to massive development taking place, organised sector is increasing its foothold in the country. Since advanced technology and management structure is used with foreign investments the price of the goods in the organised retail industry falls and productivity of the firm increases. Today modern retail outlets provide everything from basic amenities to luxury goods. They also provide consumer with a wide variety. They have become the one-stop shop for customers. This trend is destroying the sales of unorganised retail sector. Therefore on one hand FDI helps in reducing prices of the manufactured goods and on the other, it is rendering our unorganized retail sector paralyzed. The government has recently made it mandatory for foreign investors in multi-brand retail sector to do their bulk sourcing from small farmers. With this move government is preventing wipe-out of shopkeepers and small retailers. Manufacturing Sector Government has allowed 100% FDI in this sector except in defence industry and cigarette manufacturing. Foreign investments in this sector will help in employment of semi-skilled labour by providing them with access to developed technology. Real Estate, Construction Development and Tourism Any countrys growth and development is determined by its infrastructure. Due to increasing population and migration of people from rural to urban areas, the real estate sector is booming. Tourism industry is one of the major earners of foreign exchange for the country. It has a huge potential for our economy. It is also one of the major sectors in employment. Large amount of investments are needed to build roads, bridges, infrastructure so as to promote overall economic development of the country. Power Sector Power is considered most crucial sector for development. Since public sector alone was not able to meet the demands, investments from private and foreign investors was encouraged. Power generation, transmission and distribution are main areas of consideration. India has a vast scope of development in hydel power, nuclear power, solar power, thermal energy as well as in wind energy. Renewable sources of energy require vast amount of investments for research and development. Conclusion FDI, thus on one hand helps in increasing the output through usage of advanced technology and management techniques and on the other it is a threat to local companies in the country. Government should take steps in the direction of integrating foreign investors with local businesses. This will help in overall economic development as well as preservation of countrys heritage. MNCs should be allowed to set up in such a manner that they help increase the standard of living of our country instead of sole profit making.

THEORIES OF FOREIGN DIRECT INVESTMENT Theories play an important role in shaping legal attitudes both nationally and internationally. Theories of FDI assert that the basis for such investment lies in the transaction costs of transferring technical and other knowledge. Three important theories of FDI are discussed below.

Neoclassical Economic Theory of FDI

Neoclassical economic theory propounds that FDI contributes positively to the economic development of the host country and increases the level of social wellbeing [Bergten, et al. (1978)]. The reason behind this argument is that the foreign investors are usually bringing capital in to the host country, thereby influencing the quality and quantity of capital formation in the host country. The inflow of capital and reinvestment of profits increases the total savings of the country. Government revenue increases via tax and other payments [Seid (2002)]. Moreover, the infusion of foreign capital in the host country reduces the balance of payments pressures of the host country. The other argument favouring the neoclassical theory is that FDI replaces the inferior production technology in developing countries by a superior one from advanced industrialised countries through the transfer of technology, managerial and marketing skills, market information, organisational experience, and the training of workers [Kojima (1978)]. The MNCs through their foreign affiliates can serve as primary channel for the transfer of technology from developed to developing countries. The welfare gain of adopting new technologies for developing countries depends on the extent to which these innovations are diffused locally. The proponents of neoclassical theory further argue that FDI raises competition in an industry with a likely improvement in productivity [Kojima (1978); Bureau of Industry Economics (1995)]. Rise in competition can lead to reallocation of resources to more productive activities, efficient utilization of capital and removal of poor management practices. FDI can also widen the market for host producers by linking the industry of host country more closely to the world markets, which leads to even greater competition and opportunity to technology transfer [Bureau of Industry Economics (1995)]. t is also argued that FDI generates employment, influences incomes distribution and generates foreign exchange, thereby easing balance of payments constraints of the host country [Reuber, et al. (1973); Sornarajah (1994); Bergten, et al. (1978)]. Furthermore, infrastructure facilities would be built and upgraded by foreign investors. The facilities would be the general benefit of the economy [Sornarajah (1994)]. The Guidelines on the Treatment of Foreign Direct Investment incorporates the neoclassical theory when it recognises: that a greater flow of direct investment brings substantial benefits to bear on the world economy and on the economies of the developing countries in particular, in terms of improving the long-term efficiency of the host country through greater competition, transfer of capital, technology and managerial skills and enhancement of market access and in terms of the expansion of international trade. Kennedy (1992) has noted that host countries became more confident in their abilities to gain greater economic benefits from FDI without resorting to nationalization, as the administrative, technical and managerial capabilities of the host countries increased.

Dependency Theory of FDI

Dependency school theory argues that foreign investment from developed countries is harmful to the long-term economic growth of developing nations. It asserts that First World nations became wealthy by extracting labour and other resources from the Third World nations. It further argued that developing countries are inadequately compensated for their natural resources and are thereby sentenced to conditions of continuing poverty. This kind of capitalism based on the global

division of labour causes distortion, hinders growth, and increases income inequality in developing countries. Hence, Third World nations must develop independently without depending on foreign capital and goods. The influence of the dependency theory peaked in the 1970s; many authors advocated that dependency theory provided some useful qualitative methods to restrict foreign capital. Various countries adopted dependency theory perspectives in the 1970s, including East Asian and Latin American countries. A number of these countries adopted import substitution strategy and demonstrated a hostile attitude toward foreign investment. These policies had harmful effects on these economies [Hein (1992)]. During 1970s and 1980s East Asian countries also shifted their attention from dependency theory to more liberal policies to attract foreign investment.

Industrialization Theory on FDI

Caves (1971) and 1974) and Kindle Berger (1984) extended the industrial organization theory of FDI by emphasizing the behavior of the firms that deviate from perfect competition as the determinants of FDI. They are of the view that in comparison to the domestic firms, MNCs face a number of problems such as geographical distances in managing enterprises, linguistic, and cultural barriers. When a firm undertakes FDI in a foreign country, it must posses some special ownership advantages over domestic competitors. Such advantages include marketing and management skills, brand names, patent-protected superior technology, and cheaper source of financing, preferential access to markets and economies of scale [Haque (1992). Unlike portfolio investment, FDI entails a cross border transfer of a variety of resources including, process and product technology, managerial skills, marketing and distribution know how, and human capital.

Different type of Policies implemented by Governments to attract Foreign Direct Investment

There are different types of policies that governments can implement with the objective of attracting FDI.Transnational Corporations are always on the search of new places to establish their investment. Countries are typically in the lookout for these investments.This goes beyond the ideological point of view of the different countries. Such could be the case of the Bolivarian Republic of Venezuela. There have been a number of articles and comments regarding the hostility of Venezuela to FDI, but this hostility is mainly towards western countries with capital economic models. In 1996, 44% of the investment came mainly from countries such as Argentina, France, Japan, United Kingdom and United States of America. By 2004, these same countries had des-invested USD 243.7million, leaving to other non specified countries the investment (113%) as official figures reported by the Central Bank of Venezuela show2. The growth of investment from countries such as China, Iran and Russia contribute to the above hypothesis of the country of origin of FDI in

Venezuela. Official figures are not available since 2005 by country of origin; therefore, the above statement has been implied from press information. We could classify policies as Passive and Active. Passive Policies: These usually refer to the policies implemented by governments where they do not actively seek for FDI, leaving the possibility of flow to the comparative advantage of the nation, such as geographic position, natural resource availability, labor cost, amongst others, or to a general legal and administrative framework that will regulate FDI flows. Active Policies: Governments seek for FDI not only based on their comparative advantages, but in establishing a clear legal framework, macroeconomic stability, intellectual property and equity investment protection. The frameworks should be designed according to the countrys strategic objectives regarding their economic development with a positive effect over the level of foreign investment received. The results of focalized government policies, its high relationship with the development objectives of the country, the attraction of FDI and its effect on economic growth, can be seen in different emerging countries, such as Malaysia, South Korea, Singapore or Thailand or in transition economies, as is the case of Hungry or Check Republic.

Capital Markets and the importance to Foreign Direct Investment

International capital markets are usually referred to as places where securities, currencies and derivatives are transacted. The type of these markets could be grouped in: Stock Exchange: Trading of public company shares Money Market: Used for short term debt and investment Bond Market: Bond financial instruments are transacted Derivatives Market: Used for the transaction of instruments to cover financial risks Foreign Exchange: Facilitate trading of currencies The exchange of shares usually takes place in the capital markets, but the fact is that main corporate mergers and acquisitions happen outside of these markets, despite the fact they may be formalized within them, as was the case with de SAB-Miller Bavaria transaction in Colombia in year 2005.

Through the research carried on, there was no clear relationship between Foreign Direct Investment and the main international capital markets. These act as facilitators of the transactions, but do not determine flow, especially to developing economies. It is important to note that international capital markets are important in determining the flows of Portfolio Investment. What is clear, though, is that countries have to provide policies that facilitate free capital movement. For an investor, the possibilities of equity capital and dividend repatriation are important when deciding on the appropriate jurisdiction to do the investment (CEPAL (2006).

Conclusions
In terms of development, there is a general agreement of the potential benefits of Foreign Direct Investment. The relationship between GDP Growth and the increase of the relationship between FDI and GDP (FDI/GDP (%)) can be clearly established. These benefits though, depend on the alignment of a countrys strategies with those of Transnational Corporations. A country may design Passive as well as Active Policies. The later are ones that may align the needs of both parties. A country competitiveness which may attract Foreign Direct Investment from Transnational Corporations is determined by Comparative Factors, Economic Stability and Strong Institutions, the later taking in more importance year on year. For these reasons, countries have to implement active policies that can bring Economic Stability and that can build an appropriate investment environment for the country. Comparative reports for competitiveness are being published by institutions such as the The World Bank and the International Finance Corporation (IFC), where different areas are measured year on year and may form a quite good image of the conditions for investment in over one hundred and eighty one countries.