Essay about FOREIGN DIRECT INVESTMENT

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FDI LECTURE:

LEARNING OBJECTIVES:
1. TRENDS FDI
2. THE DIFFERENT THEORIES OF FDI
3. POLICY USED BY GOVERNEMENTS TO INFUENCE FDI
4. ARTICULATE THE IMPLICATIONS FOR MANAGENT PRACTICE OF THE THEORU AND GOVERNMENT POLICIES ASSOCIATED WITH FDI
WHAT IS FDI:
Occurs when a firm invests directly in new facilities to produce/or market in a foreign country, the main characteristic of FDI is significant ownership that gives you the power to condition the policies of the acquired firm or with who you merged. So basically with FDI firms ten d to have high control over the market.
FDI can take form of:
Greenfield investments: the establishment of a wholly new operation in a foreign country
Acquisition or mergers with existing firms in a foreign country.
The data shows that the major of cross-border investment is in the form of mergers or acquisitions rather than Greenfield investments
-UN estimates indicates that 40-80% of all FDI inflows were from mergers and acquisition between 1998-2005
-However FDI flows in developing and developed nations vary:
In developing nation only 1/3 of FDI is in the form of cross borders mergers and acquisitions, the reason to this is because in these countries there are fewer target firms to acquire or merge with. Beside this when merging firms need to respect some Gov. policies, which can cause issues to the company: minimum wage, 5 of locals working within the company

Furthermore, the reason why companies prefer to acquire or merge rather than Greenfield investment is because:
1. Mergers and acquisitions are quicker to execute than Greenfield investments. Many firms believe that if they do not acquire the target firm their rival will.
2. Acquire to possess the valuable assets the firm has (brand loyalty, customer relationship patents, etc.). It easier and less risky to acquire the assets than build them from scratch.
3. Firms believe they can increase the efficiency of the acquire unit by transferring capital, technology or management skills, however evidence show that many mergers and acquisition fail to realize their anticipated gains.

When discussing FDI between the flow of FDI and the stock of FDI
FDI flow: refers to the amount of FDI taken over a given time period (usually a year) Beside this we also talk about outflow and inflow. Outflow: flow out off the country, and inflow flow into the country.
FDI stock: refers to the total of accumulated value of foreign-owned assets at a given time. Basically flow is what comes in and the stock is the reserves.

WHAT IS THE SOURCE OF FDI?
Since World War II, the U.S. has been the largest source country for FDI
The United Kingdom, the Netherlands, France, Germany, and Japan are other important source countries
Together, these countries account for 60% of all FDI outflows from 1998-2011
Cumulative FDI Outflows 1998-2011 ($ billions)
WHAT ARE THE PATTERNS OF FDI?
FDI Outflows 1982-2012 ($ billions)

Both the flow and stock of FDI have increased over the last 35 years
Most FDI is still targeted towards developed nations - United States, Japan and EU
But South, East, and South East Asia (especially China) – and Latin America are emerging
FDI has grown more than world trade and world output due to the following reasons:
Despite the decline in trade barriers over the past 30 years, business firms still fear the threat of protectionist. So firms tend to use FDI to avoid future trade barriers.
FDI have been encouraged due to the shift to democratic institutions and free market that have been occurring in many developing countries.
New bilateral investment treaties designed to facilitate investment.
Globalization is forcing firms to maintain presence around the world.
FDI AND GROSS FIXED CAPITAL FORMATION:
Gross fixed capital formation - the total amount of capital invested in factories, stores, office buildings, and the like
The greater the capital investment in an economy, the more favorable its future
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