REASONS FOR FDI

 REASONS FOR FOREIGN DIRECT INVESTMENT
As we know, economic prosperity and the relative abundance of capital are necessary prerequisites for export of capital to other countries. Many economies and organisations have accumulation of huge mass of reserve capital seeking profitable use. The primary aim of economic agents being maximisation of their economic interests, the opportunity to generate profits available in other countries often entices such entities to make investments in other countries. The chief motive for shifting of capital between different regions or between different industries is the expectation of higher rate of return than what is possible in the home country. Investment in a host country may be found profitable by foreign firms because of some firm-specific knowledge or assets (such as superior management skills or an important patent) that enable the foreign firm to gainfully outperform the host country's domestic firms. There are many other reasons (as listed below) for international capital movements which have found adequate empirical support. Investments move across borders on account of:

(i) the increasing interdependence of national economies and the consequent trade relations and international industrial cooperation established among them

(ii) internationalisation of production and investment of transnational corporations in their subsidiaries and affiliates.

(iii) desire to reap economies of large-scale operation arising from technological growth

(iv) lack of feasibility of licensing agreements with foreign producers in view of the rapid rate of technological innovations

(v) necessity to retain direct control of production knowledge or managerial skill (usually found in monopolistic or oligopolistic markets) that could easily and profitably be utilized by corporations

(vi) desire to procure a promising foreign firm to avoid future competition and the possible loss of export markets

(vii) risk diversification so that recessions or downturns may be experienced with reduced severity

(viii) shared common language or common boundaries and possible saving in time and transport costs because of geographical proximity

(ix) necessity to retain complete control over its trade patents and to ensure consistent quality and service or for creating monopolies in a global context

(x) promoting optimal utilization of physical, human, financial and other resources

(xi) desire to capture large and rapidly growing high potential emerging markets with substantially high and growing population

(xii) ease of penetration into the markets of those countries that have established import restrictions such as blanket bans, high customs duties or non-tariff barriers which make it difficult for the foreign firm to sell in the host-country market by ‘getting behind the tariff wall’.

(xiii) lower environmental standards in the host country and the consequent relative savings in costs

(xiv) stable political environment and overall favourable investment climate in the host country

(xv) higher degree of openness to foreign capital exhibited by the recipient country and the prevalence of preferential investment systems such as special economic zones to encourage direct foreign investments

(xvi) the strategy to obtain control of strategic raw material or resource so as to ensure their uninterrupted supply at the lowest possible price; usually a form of vertical integration

(xvii) desire to secure access to minerals or raw material deposits located elsewhere and earn profits through processing them to finished form (Eg.FDI in petroleum)

(xviii) the existence of low relative wages in the host country because of relative labour abundance coupled with shortage and high cost of labour in capital exporting countries, especially when the production process is labour intensive.

(xix) lower level of economic efficiency in host countries and identifiable gaps in development

(xx) tax differentials and tax policies of the host country which support direct investment. However, a low tax burden cannot compensate for a generally fragile and unattractive FDI environment

(xxi) inevitability of defensive investments in order to preserve a firm’s competitive position

(xxii) high gross domestic product and high per capita income coupled with their high rate of growth . There are also other philanthropic objectives such as strengthening of socio-economic infrastructure, alleviation of poverty and maintenance of ecological balance of the host country ,and

(xxiii) prevalence of high standards of social amenities and possibility of good quality of life in the host country
                                                                     Table 4.5.2

                                 Host Country Determinants of Foreign Direct Investment

Economic Determinants Market -seeking FDI: Market size and per capita income Market growth Access to regional and global markets Country-specific consumer preferences Structure of markets Resource - or asset-seeking FDI: Raw materials Low -cost unskilled labour Availability of skilled labour Technological, innovative, and other created assets (e.g., brand names) Physical infrastructure

Policy Framework Economic, political, and social stability Rules regarding entry and operations Standards   of    treatment   of                    foreign affiliates Policies on functioning and structure of markets (e.g., regarding competition, mergers) International    agreements    on     FDI Privatization policy Trade policies and coherence of FDI and trade policies Tax policy Business Facilitation Investment promotion (including image building   and                  investment-generating

Efficiency -seeking FDI: Costs of above physical and human resources and assets (including      an       adjustment       for productivity) Other input costs (e.g., intermediate products, transport costs) Membership of country in a regional integration agreement, which could be conducive to forming regional corporate networks

activities    and    investment-facilitation services) Investment incentives "Hassle costs" (related to corruption and administrative efficiency) Social amenities (e.g., bilingual schools, quality of life) After-investment services

Source :International economics (7th ed) International Economics, Dennis R. Appleyard; Alfred J. Field; Steven L. Cobb(P237)

Factors in the host country discouraging inflow of foreign investments are infrastructure lags, high rates of inflation, balance of payment deficits, poor literacy and low labour skills, rigidity in the labour market, bureaucracy and corruption, unfavourable tax regime, cumbersome legal formalities and delays, small size of market and lack of potential for its growth, political instability, absence of well- defined property rights, exchange rate volatility, poor track-record of investments, prevalence of non-tariff barriers, stringent regulations, lack of openness, language barriers, high rates of industrial disputes, lack of security to life and property, lack of facilities for immigration and employment of foreign technical and administrative personnel, double taxation and lack of a general spirit of friendliness towards foreign investors.