Foreign Direct Investment
FDI = overseas investments in physical capital by transnational corporations
Foreign Direct Investment brings private (i.e. non-government) funds into a country for investments in the primary, secondary and tertiary sectors of teh economy.
The rapid explansion of the Chinese,Indian and Brazilian economies over the last decaade or so has much to do with very considerable FDI.
Recently, there has been a greater flow of FDI into developing countries, as well as to South-East Europe and the CIS (Commonwealth of Independent States)
FDI outflows increases by 18%in 2004 over the previous year. Almost half of all FDI came from three countries: the USA, the UK and Luxembourg
Types of FDI
The three main forms of FDI, financed by TNCs, are:
- Equity investment : the building and equipping of a new factory in another country. This category also includes the purchase of majority shareholdings in a company based in another country.
- Intra-company loans : moving funds from the country where the company headquarters is located to its operations in an LEDC.
- Reinvested earnings : using profits made in another country to expand operations there.
Equity capital is the largest component of world FDI inflows, accounting for about two-thirds of total FDI flows over the last ten years.
FDI vs. ODA
TNCs may begin economic activity in a new country through:
- Greenfield investment
- Merger and acquisition
The type of entry often depends on the nature of the industry and the laws and regulations of the country concerned.
ODA = Official Development Aid
FDI continues to be greater than any other private capital flows to LEDCs, as well as flows of Official Development Assistance.
However, FDI is concentrated in a relatively small number of LEDCs, while ODA remains the most important source of finance in many poor countries
The Globalisation of Research and Development
Large TNCs are increasingly establishing research and development facilities in selected developing countries:
- Motorola set up the first foreign-owned R&D facility in China in 1993. Today the number of foreign R&D units is 700.
- From virtually zero in the mid-1990s, the contribution of South-East and East Asia to global semiconductor design reached almost 30% in 2002
TNCs are increasing R&D facilities in such countries to:
- Enhance efficiency
- Access expanding pools of scientists and engineers
- Meet increasingly sophisticated demand in these countries
The UK: Cases Study
In 2004/05, FDI was up 31% on the previous year with 1,066 foreign companies investing in the UK - almost half of these projects to locate or expand in the UK were by American companies.
The largest growth was in services, but there were also considerable increases in headquarters, R&D and distribution activity.
The greatest number of projects were in IT, which increased by about two-thirds.
Overall, new investment created 39,592 jobs, 55% up on the previous year.
Hundreds of thousands of jobs in the UK depend on foreign investors. Many of these jobs are in economically depressed areas such as the North East and South Wales.
In 1963, only 7% of the stock market was owned by overseas investors, now it is over 32%
182 out of the 247 authorised banks in the UK are foreign
Unfortunately, clusters of foreign branch plants are vunerable to closure