BY SALEEM ULLAH BAIG BM35115 Institute of Business & Technology Karachi(BIZTEK)

Who? (is the investor)

What? (kind of FDI)

Why? (are we investing)

Where? (is the FDI going) When? (do we invest) How? (the mode of entry)

Capital market theory

One of the oldest theories of FDI (60s) FDI is determined by interest rates

Dynamic macroeconomic FDI theory

FDI are a long term function of TNC strategies The timing of the investment depends on the changes in the macroeconomic environment hysteresis effect

FDI theory based on exchange rates Analyses the relationship of FDI flows and exchange rate changes FDI as a tool of exchange rate risk reduction
FDI theory based on economic geography Explores the factors influencing the creation of international production clusters Innovation as a determinant of FDI Greta Garbo effect

Gravity approach to FDI The closer two countries are (geographically, economically, culturally ...) the higher will be the FDI flows between these countries
FDI theories based on istitutional analysis Explores the importance of the institutional framework on the FDI flows Political stability key factor

Raymond Vernon 1966

It can be used to analyse the relationship of product life cycle and possible FDI flows FDI can be seen mostly in the phases of maturity and decline

The conclusions of this theory are questionable nowadays

Were initially developed in the 70s of the last century

Main representant Terumoto Ozawa He analysed the relationship of FDI, competitiveness and economic development based on the ideas of Michael Porter He identified three main phases of development when he analysed the waves of FDI inflow and outflow from a country

I. phase of economic growth The country is underdeveloped and is targeted by foreign companies wanting to use its potential advantages (especially low labour costs) Almost no outgoing FDI
II. Phase of economic growth New FDI is drawn by the growing internal markets and by the growing standards of living Outgoing FDI are motivated by the raising labour costs

III. Phase of economic growth The competitiveness of the country is based on innovation

The incoming and outgoing FDI are motivated by market factors and technological factors

Stage 1 Low incoming FDI, but foreign companies are beginning to discover the advantages of the country No outgoing FDI no specific advantages owned by the domestic firms
Stage 2 Growing incoming FDI do the advantages of the country - especially the low labour costs The standards of living are rising which is drawing more foreign companies to the country Still low outgoing FDI

Stage 3 Still strong incoming FDI, but their nature is changing due to the rising wages The outgoing FDI are taking off as domestic companies are getting stronger and develop their competitive advantages Stage 4 Strong outgoing FDI seeking advantages abroad (low labour costs)

Stage 5 Investment decisions are based on the strategies of TNCs

The flows of outgoing and incoming FDI come into equilibrium

Existence of firm specific advantages (Hymer) Access to raw materials Economies of scale Intangible assets such as trade names, patents, superior management etc Reduced transaction costs when replacing an arm's length transaction in the market by an internal firm transaction
FDI and oligopolistic markets In oligopolistic markets the companies follow the actions of the market leader Mutual threats game theory

Theory of internalisation

Due to market imperfections, there may be several reasons why a firm wants to make use of its monopolistic advantage itself (or organise an activity itself) Buckley and Casson (influenced by Coase), suggested that a firm overcomes market imperfections by creating its own market - internalisation

he theory of internalisation was long regarded as a theory of why FDI occurs By internalising across national boundaries, a firm becomes multinational

 John

Dunning attempts to integrate a variety of strands of thinking

draws partly on macroeconomic theory and trade, as well as microeconomic theory and firm behavior (industrial economics)

He

Some firms have a firm specific capital known as knowledge capital: Human capital (managers), patents, technologies, brand, reputation This capital can be replicated in different countries without losing its value, and easily transferred within the firm without high transaction costs

Producing close to final consumers or downstream customers

Saving transport costs

Obtaining cheap inputs Jumping trade barriers Provide services (for most services production and delivery have to be contemporaneous)

The eclectic, or OLI paradigm, suggests that the greater the O and I advantages possessed by firms and the more the L advantages of creating, acquiring (or augmenting) and exploiting these advantages from a location outside its home country, the more FDI will be undertaken Where firms possess substantial O and I advantages but the L advantages favor the home country, then domestic investment will be preferred to FDI and foreign markets will be supplies by exports

Why don't a firm just sign a contract with a subcontractor (external agent) in a foreign country? Because contracting out is risky: it implies transferring the specific capital outside the firm and revealing the proprietary information (e.g. how to use the technology or the patent).

Problem:

If the agent interrupts the contract it can use the technology to compete with the mother company In the case of brands/reputation: if the agent damages the brand reputation

The typology of FDI was developed by Jere Behrman to explain the different objectives of FDI: Resource seeking FDI

Market seeking FDI

Efficiency seeking (global sourcing FDI)

Strategic asset/capabilities seeking FDI

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 To

seek and secure natural resources e.g. minerals, raw materials, or lower labor costs for the investing company For example, a German company opening a plant in Slovakia to produce and re-export to Germany

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To identify and exploit new markets for the firms` finished products
Unique possibility for some type of services for which production and distribution have to be contemporaneous (telecom, water supply, energy supply) Automotive TNCs have invested heavily in China

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To restructure its existing investments so as to achieve an efficient allocation of international economic activity of the firms

International specialization whereby firms seek to benefit from differences in product and factor prices and to diversify risk Global sourcing resource saving and improved efficiency by rationalizing the structure of their global activities. Undertaken primarily by network based MNCs with global sourcing operations.
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MNCs pursue strategic operations through the purchase of existing firms and/or assets in order to protect O specific advantages in order to sustain or advance its global competitive position

Acquisition of key established local firms Acquisition of local capabilities including R&D, knowledge and human capital Acquisition of market knowledge Pre empting market entrance by competitors Pre empting the acquisition by local firms by competitors
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FDI BENEFITS

FDI IS MUTULY BENEFICIAL AS INVESRTER PROFIT AND EXPANDING AND CONTRIBUTE TO THE HOST COUNTRY GROWRTH AND DEVELOPMENT.

RESOURCE GAP BETWEEN TARGETED INVESTMENT GENERATES ADDITIONAL TAX REVENUE TO GOVERNMENT SKILL AND KNOWLEDGE GAP BY DEVELOPING MORDERN
MANAGERAL SKILLS, TECHNOLOGY.

 INVOVATION IMPROVED PRODUCTION PROCESS. ACESS TO UNEXPORLED SOURCES OF FACTOR OF PRODUCTION. DECEASRE IN UNEMPOYMENT HIGHER GDP HELPS TO BRIGDE GAP IN CURRENT ACCOUNT BY INFLOW OF FORIEN EXCHANGE

FDI INFIOWS IN PAKISTN FROM 2001-02 TO 2012-13 (MILLIONS US$)

YEARS 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

FDI US$(MILLION) 485.00 789.00 949.00 1524.00 3521.00 5139.60 5409.80 3719.90 2150.80 1634.38 812.16 87.20

DIMENSIONS OF FDI IN PAKISTAN.

THE GROWTH OF FDI WAS NOT SIGNIFICANT UNTILL 1990

THE REGULATORY POLICY FRAMEWORK. HOWEVER FROM 90S TO 2005 FDI INREASE FROM US$ 216.2 MILLION IN 1990 T0 US$3521 MILLION IN 2005 @ GROWING ANNUAL COMPUND RATE OF 21.47%.

DECLINE TO US$322.5 MILLION IN 2000-01 DUE TO US SANCTIONS IMPOSED AFTER NUCLAER TESTS.

 THE FLOW PICKEDUP AFTER 2001-02 DUE TO THE REVIVAL

OF CLOSER US-PAK TIES.

IN 2007-08 FDI WAS US$ 5152.8 MILLION FOR YEAR2008-09 FDI INFLOW WAS DECREASE DUE TO THE GLOBL ECONOMIC SLOW DOWN.

YEARS
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

FDI INFIOWS IN PAKISTN FROM 1990-01 TO 2007-08

FDI(IN MILLION ANNUAL GROWTH FDI AS% OF US$) RATE GDP
246.0 335.1 306.4 354.1 442.4 1101.7 682.1 601.3 472.3 469.9 322.5 484.7 789.0 949.4 1524 3521 5139.6 5152.8 13.78 36.22 -8.56 15.57 24.94 149.03 -38.09 -11.85 -21.45 -0.51 -31.37 50.29 64.64 18.97 60.52 131.04 45.97 0.26 0.69 0.60 0.68 0.73 1.74 1.10 0.97 0.75 0.77 0.55 0.82 1.17 0.98 0.99 1.38 2.77 3.57 3.20

CONCLUSION AND RECOMMENDATIONS

FDI

BECOME AN IMPORNT GROWTH FACTOR IN THE GLOBALIZATION OF PAKISTAN ECONOMY

PAKISTAN

EXPERIENCED FASTER GROWTH OF GDP IN YEARS IN WHICH FDI IS HIGHER.

PAKISTAN

SHOULD TAKE EFFECTIVE POLICICES AND AGGRESSIVE ECONOMIC REFORMS TO ATTRACT FDI IN COUNTRY
REVISED

MONENTARY AND FISCAL POLICIES TO ATTRACT FDI IN PAKISTAN

MAINTAING LAW IN ORDER SITUTION AND INCRESEING INFRASTURE IN COUNTRY TO ATTRACT FDI.