Introduction to Banking 26th March’09

Topic: Foreign Direct Investment

TABLE OF CONTENTS
S.N DESCRIPTION PAGE NO.
O.
1 Foreign Direct Investment 3

2 Why FDI is important 4

3 Reasons for FDI 5

4 Benefits of FDI 7

5 Direction of FDI 7

6 FDI – Benefits to the host country 8

7 FDI – Cost to the host country 9

8 FDI – Benefits to the home country 10

9 APPENDIXES 11

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Introduction to Banking 26th March’09
Topic: Foreign Direct Investment

“ACKNOWLEDGEMENT”

“We would like to thank my respected

instructor of the course of Introduction to
Banking Miss Nabiha, who provides us
the platform and the opportunity to give
the presentation and report on Foreign
Direct Investment.

Her encouragements and efforts in this

course will be beneficial in our future.

Regards
Ammad Shakil
Sheikh Abdullah

Foreign Direct Investment:

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Introduction to Banking 26th March’09
Topic: Foreign Direct Investment

Foreign direct investment (FDI) in its classic form is defined as a

company from one country making a physical investment into building a
factory in another country. It is the establishment of an enterprise by a
foreigner. Its definition can be extended to include investments made to
acquire lasting interest in enterprises operating outside of the economy of
the investor. The FDI relationship consists of a parent enterprise and a
foreign affiliate which together form a multinational corporation (MNC). In
order to qualify as FDI the investment must afford the parent enterprise
control over its foreign affiliate. Foreign direct investment can include:

 Production, Distribution & R&D Facilities.

Companies often do FDI for to open their own flagship stores,
production centres, R&D centres, & Distribution centres etc.
This FDI can be obtain by purchasing the existing firm in the
particular country.

Example: When Eastman Kodak USA, start their operations in

Japan, so the company had done on the largest FDI, and had
opened their own production centre, distribution centre, and that
largest R&D lab.

 Marketing Division.
Most of the firms open their own marketing division, whose
responsibility is just to market the company’s products, and this
divisions also searches for the new markets.

Example: Volvo Corporation Sweden, have open their marketing

division in Lahore, Pakistan by the name of Volvo Pakistan Limited,
this division’s responsibility is just to market the Volvos’ buses,
trucks, and commercial vehicles to the potential customers.

 Sales & Service Centres.

Companies often likes to open their own sales and service centres
in order to achieve the maximum customer satisfaction, and to
provice one window operation to the customer.

Example: The Malaysia’s largest car manufacturer Proton, have

start their operation in Pakistan by making the joint venture with a
local partner. The company have opened their own sales and
service centre in all major cities of the country.

 Parent Firms Extending Loans To Their Foreign Affiliates.

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Introduction to Banking 26th March’09
Topic: Foreign Direct Investment

Parent Firms provide loan to their affiliates in the host country for to
extend their operations and capabilities, this is also another type of
foreign direct investment.

 Mergers & Acquisitions with an existing firm.

Most of the large MNE do FDI by acquiring or merging with the local
competitor in the country, as a result the company size in terms of
Technology, Land, Labor, Capital, R&D and market values enhance
rapidly, while the rate of competition decrease.

Example: ‘Chrysler’ the third largest car manufacturer of USA, had

started their operation in Germany, so Chrysler merger with the
‘Daimler-Benz group’ manufacturer of Mercedes-Benz cars and
commercial vehicles, and as a result, both jointly shared their
expertise for increase their market share in Europe.

WHY F.D.I. IS IMPORTANT ?

Making a direct foreign investment allows companies to accomplish
several tasks:

 Firms want presence in the foreign market.

 Firms want control over growth of these foreign markets.
 Circumventing trade barriers.
 Making the move from domestic export sales to a locally-based
national sales office.
 Capability to increase total production capacity.
 Opportunities for co-production, joint ventures with local partners,
joint marketing arrangements, licensing, etc

REASONS FOR F.D.I.:

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Introduction to Banking 26th March’09
Topic: Foreign Direct Investment

Increase
Sales & Profits
Acquire Tech.
Enter Rapidly & Managerial
Growing Markets Know-How

Reduce Costs
FDI Protect Foreign
Markets

Gain Foothold
in Economic Protect Domestic
Blocs Markets

There are seven basic reasons for MNE to FDI in other countries.

1. Increase Sales & Profits

Firms like to increase sales, profits and market share, and for that
large firms do FDI in other countries.

2. Enter Rapidly Growing Market

Large firms continuously seek to enter in those markets which has
rapid growth as compare with other markets, so that it helps the
firms get rapid return on investments.

Example: China, India, Mexico, Brazil.

3. Reduce Costs
Large firms continuously seek increase their profits and to reduce
their overall costs, thus most of the firms do FDI in those countries
from where they can enjoy comparative advantage in the form of
technology, labor, land, transportation, raw materials etc.

4. Gain Foothold on Economic Blocs

Economic blocs like European Union EU, NAFTA, ASEAN, these blocs
are suppose as barriers for those firms who does not belong to the

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Introduction to Banking 26th March’09
Topic: Foreign Direct Investment

member countries of these blocs, thus most of the large MNE do FDI
in these blocs in order to eliminate that barriers.

5. Protect Domestic Market

Another reason for FDI is to protect one’s domestic market. Many
MNE are now entering in international markets in order to attack
potential competitors and thus prevent them from expending their
operations in overseas.

6. Protect Foreign Market

Sometimes MNE will use FDI in order to protect their foreign
markets.

Example: in the US from 1981 to 1991 the total number of service

stations had decline by over 50%. British Petroleum which has
substantial investment in this market, realized that in order to
protect its investment it would be necessary to make a substantial
investment in order to upgrade its stations and to increase market
share.

7. Acquire Technological and Managerial Know-how

Still another reason for FDI is to acquire technological and
managerial expertise. One way of doing this is to setup operations
near those of leading competitors. This is why US firms have move
some of their research and development facilities to Japan.

BENEFITS OF F.D.I.:
 It helps in the economic development.

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Introduction to Banking 26th March’09
Topic: Foreign Direct Investment

 Permits the transfer of technologies.

 Promotion of the competition within the local. input market of a

country.

 Human capital resources.

 Helps in the creation of new jobs.

 Increasing the salaries of the workers.

 Development of the manufacturing sector of the host country.

 Bring in advanced technology and skill set in a country.

DIRECTION OF F.D.I.:

 FDI has grown sharply over the past two decades.

 Developed countries still account for the largest share of on FDI

inflows & outflows
 Examples: USA, Europe & Japan (Triad Countries)

 Their has been a recent increase in FDI to developing countries.

 Examples: Latin America, China, India, Estern
Europe

F.D.I. – BENEFITS TO THE HOST COUNTRY

 Resources transfer effect

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Introduction to Banking 26th March’09
Topic: Foreign Direct Investment

The benefit to the host country is that the FDI always bring
technological, managerial and capital, which is good for the
economic wealth of the country.
Example : Capital, Technology, Management

 Employment Effect
When ever the FDI is occurs in generates employment for the
citizens of the country.

 Balance of payment effect

FDI brings good results on the balance of payments of the country
in the fiscal year.

 Competition and Econimical Growth

FDI grown the competition and economic scale in the country,
because FDI creates competition in the industry and every firm like
to increase its sales and market share by offering competitive price.

F.D.I. – COST TO THE HOST COUNTRY

 Adverse effect on competition
FDI creates adverse effect on competition which is not good for the
local companies.

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Introduction to Banking 26th March’09
Topic: Foreign Direct Investment

 Adverse effect on Balance of Payments

Once firms do FDI that after getting their return on investment firms
send their profits to the parent company in home country, which
creates adverse effect on B.O.P.

 Soverignty & Autonomy

Some host governments worry that FDI is accompanied by some
loss of economic independence resulting in the host country’s
economy being controlled by a foreign corporation

F.D.I. – BENEFITS TO THE HOME COUNTRY

 Benefits form the inward flow of foreign earnings.

 Employment

 Technology & Skills

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Topic: Foreign Direct Investment

APPENDIXES
Appendix-A: FDI outflows, 1982-2002

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Introduction to Banking 26th March’09
Topic: Foreign Direct Investment

Appendix-B: FDI flows by region 1994-2004

Appendix-C: FDI outflows by developed country

1998-2001

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Topic: Foreign Direct Investment

Appendix-D

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Introduction to Banking 26th March’09
Topic: Foreign Direct Investment

Appendix-E: FDI Outflows by largest MNEs, 1999

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