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Module 5
• Foreign investment is when
a company or individual
from one nation invests in
assets or ownership stakes
of a company based in
another nation
• Eg: if you live in the U.S and
you invest money into a
company that is in Spain,
which is outside of the U.S
Types of Foreign Investments
Kindleberger proposes the model of market imperfections as a reason for the FDI
existence.
The author finds four types of imperfections that generate FDI: imperfections on
the goods market, due to product differences and different marketing techniques;
Imperfections on the factors market, due to different access to the capital market,
the property over technology (patents, know-how) and differences relating to
managerial expertise;
the distortions caused by government intervention (tariff and non tariff barriers,
taxes, price controls and profits, antitrust regulations, etc.) and
economies of scale as they are contributing to increased production efficiency.
In this way, Kindleberger emphasize important FDI determinants for host countries,
such as the effect of the governmental intervention, the product differentiation,
new technologies
Internalisation Theory
• According to this theory, foreign investment results
from the decision of a firm to internalize a superior
knowledge (i.e.., keeping the knowledge within the
firm to maintain the competitive edge)
• This theory explains the process by which firms
acquire and retain one or more value-chain
activities inside the firm, minimizing the
disadvantages of dealing with external partners and
allowing for greater control over foreign operations.
Location Specific Advantage Theory
• According to Hood and Young, there are 4 factors
which are pertinent to the location specific theory.
• They are:
1. Labour costs
2. Marketing factors such as market size, market
growth, stage of development and local
competition
3. Tariff barriers
4. Government policy
Eclectic paradigm
• The concept of the eclectic paradigm was presented for the first time in 1976
by Professor John Dunning
• It is a holistic economic model to determine whether a business should expand
abroad through foreign direct investment
• The eclectic paradigm is a theory that provides a three-tiered framework for
companies to follow.
• They follow the frameworks when deciding whether they should invest abroad.
• The eclectic paradigm theory posits three kinds of advantages for a
multinational company:
1. ownership advantages (O),
2. location advantages (L) and
3. internalization advantages(I)
• The ownership advantage (O) regards both the tangible assets of a company
(such as the natural resources at its disposal, the labour force and the
available capital) and the intangible ones (information and technology,
managerial and entrepreneurial skills, organizational systems, the brand
awareness).
• The location advantage (L) is mainly due to the differences between the
home and the host country as regards the factors’ endowment, the market
structure, legal system, political and cultural environment, market access and
so on.
• The company will invest on a foreign market given that the attractions of the
foreign market are higher than the ones of the home market
The product life cycle theory
This theory was developed by Raymond Vernon
• There are three stages in the life cycle of a product.
• In the first stage, the new and innovative product is sold on the
internal market.
• In the second stage, the product is exported due to standardization
and scale economies.
• In the third stage, the company will decide to have subsidiaries in
other counties in order to find cheaper inputs and lower production
costs, as its objective is to reduce the costs.
• More specifically, Vernon analyses the evolution and the interactions
from three different views: the demand for the product, the
competitive environment and the location of production.
Factors affecting International Investment
• Resources:
Availability and therefore exploitation of resources in the
host country.
• Markets:
FDI largely flows to the countries which have large markets
with comparatively good infrastructure and political stability.
• Efficiency:
Low cost of production, derived from cheap labor is the
driving force of many FDIs in developing countries.
• Rate of interest:
Difference in the rate of interest acts as a stimuli to attracting
foreign investment. Capital has a tendency to move from a country
with a low rate of interest to a country where interest rate is higher.
• Exchange rate :
A weak exchange rate in the host country can attract more FDI
because it will be cheaper for the multinational to purchase assets.
However, exchange rate volatility could discourage investment.
• Profitability:
Private foreign capital is largely influenced by the profit motive.
It is attracted to countries where the return on investment is higher.
• Economic conditions:
Economic conditions particularly market potential and
infrastructural facilities influence foreign investment
• Government Policies and Political Factors:
Policies encouraging FIIS and FDIs and a stable Government
largely encourages the movement of foreign capital into the country
Foreign Portfolio Investment
• Portfolio investment is defined as cross-border transactions
and positions involving equity or debt securities, other than
those included in direct investment or reserve assets
• Portfolio investments are investments in the form of a group
(portfolio) of assets, including transactions in equity,
securities, such as common stock, and debt securities, such
as banknotes, bonds, and debentures.
• The characteristic feature of securities is their negotiability.
ie, their legal ownership is readily transferable from one unit
to another unit by delivery or endorsement.
Some benefits that come to investors from
utilizing foreign portfolio investments include
• Portfolio diversification: FPI gives investors a fairly simple way to
diversify their portfolio internationally.
• International Credit: FPI gives investors a larger credit base
because they are able to access credit in the foreign countries
that they have large amounts of investment in.
• Benefits from the Exchange rates: If an investor has an FPI in a
foreign country with a stronger currency than their own country
the difference in exchange rates between the two countries can
benefit the investor
• Access to a larger market: Investors can take advantage of the
less competitive markets internationally by using these Foreign
portfolio investments.
Foreign Direct Investment By Indian Companies
• Government of India’s Public Sector Undertakings (PSUs) have invested over US$
15 billion in Russia’s oil and gas projects and are planning to undertake more
investments in the country’s oil and gas fields.
• The RBI, encouraged by adequate forex reserves, has relaxed the norms for
domestic companies investing abroad by doing away with the ceiling for raising
funds through pledge of shares, domestic and overseas assets
• The RBI also liberalised/ rationalised guidelines for foreign investments abroad
by Indian companies. It raised the annual overseas investment ceiling to US$
125,000 from US$ 75,000 to establish JV and wholly owned subsidiaries.
• The government's supportive policy regime complemented by India Inc.’s
experimental outlook could lead to an upward trend in OFDI in future.
• The Union Cabinet has permitted ONGC Videsh to acquire 11 per cent stake in
Russian oil company JSC Vankorneft from Rosneft Oil Co. for US$ 930 million.
Transfer of Technology
Definition
• Technology transfer is a process that permits the flow of
technology from a source to a receiver. The source is the
owner or holder of knowledge while the recipient is the
beneficiary of such knowledge.
• Technology transfer is a process by which science and
technology are transferred from one individual or group to
another that incorporates this new knowledge into its way
of doing things - Jain and Triandis
• It is the process of providing the technology developed
from one organisation for other potentially useful purposes
- NASA
Categories of technology transfer
Reasons for Technology Transfer:
1) Due to lack of manufacturing capacity: A production of similar products
are producing with minimum quantity so they need to transfer for larger
manufacturing.
2) Due to lack of resources: Transfer of technology because there need of
such resources which are not available to him/her.
3) Due to lack of marketing distribution and distribution capability:
May have fully developed technology and even has approvals for
launching the products but it may not have marketing and distribution
channels.
4) Forming alliances with partners: that leads technology to take it to
market. It forms marketing and distribution with partners and increases
distribution capability.
5) Exploitation in field of transferring technology: If the inventing
organization is a government laboratory, that laboratory is forbidden in
general by law or policy (in the United States) from competing with the
private sector by selling products or processes. Therefore, the technology
can only be brought to market by a private firm.
• In the passive mode only the knowledge part of technology is
transferred.
The skills surrounding the technology are not transferred.
These mechanisms can include presentations in a report.
• In the semi-active mode there is intervention from a third party in
the transfer process.
This is usually in the form of a transfer agent.
In the semi-active mode the role of the transfer agent is limited
to that of adviser.
• The transferring process is carried out to
demonstrate by the transfer agent or the consultant.
Agent fully involved and acts as a bridge in
technology transfer from enterprise.