Theories, strategies and practices
The Expansion of Foreign Capital Flows
As the Book says:
Foreign investment it’s made up of portfolio investment and direct investment.
The portfolio investment is when a foreign investor owns less than 10% of the equity in this kind of investment the control and management it’s not such an important issue to the foreign party.
Thedirect investment is when a foreign party owns 10% or more of the equity, in this kind of investment the control and management it’s important to the investor.
MW Klein, J Peek, ES Rosengren say in the Troubled Banks, Impaired Foreign Direct Investment: The Role of Relative Access to Credit
The role of foreign direct investment (FDI) in promoting growth and sustainable development has neverbeen substantiated. There isn't even an agreed definition of the beast. In most developing countries, other capital flows - such as remittances - are larger and more predictable than FDI and ODA (Official Development Assistance).
Several studies indicate that domestic investment projects have more beneficial trickle-down effects on local economies. Be that as it may, close to two-thirds of FDIis among rich countries and in the form of mergers and acquisitions (M&A). All said and done, FDI constitutes a mere 2% of global GDP.
Why is Foreign Direct Investment Increasing?
According to Jeremian J. Sullivan
The causes for the fast expansion could be the different interest rates and returns on investments around the world. Related to these are
important developments like:
*Trend Toward Diversification
* Capital Market
* Contagion and Strategic Effects
* Developing Country Growth
Elements of Foreign Direct Investments
The book tell us that:
FDI involves an initial investment and all subsequent flows, and it can
be accomplished by any or all of the following methods:
Equity Capital: the foreign investor purchases shares of an enterprise inanother country.
Reinvested Earnings: profits of a subsidiary can be distributed to the foreign owner in the form of dividends, or they can be retained and put back into the company. These retained earnings are considered to be FDI.
Intra-company loans: when foreign parents provide funds to their subsidiaries and affiliated firms, the loans are considered FDI.
FDI Types-- -* Greenfield- ---*M&AMost investors prefer:
M&A rather than Greenfield.
Sole rather than partial control.
Target firms in the same industry rather than in other industries.
Legal and Policy Issues
The GATT/WTO contains rules and principals regarding trade related investment measures (TRIMS) and trade related aspects of intellectual property rights but so far no multilateralagreements exist which contain legally binding rules for the treatment of FDI: Some principals are:
National treatment of FDI
Transparency of laws and policies uniform treatment for investing in different countries.
Easy repatriation of profits and convertability of currencies
FDI vs. Exporting and Non-equity Investments
Foreign Direct Investment
* Sale if goods/services in anothercountry
* Non-independent relationship in which foreign party has some level of control over the domestic party.
* Sale if goods/services in another country
* Exchange relationship between foreigner and the domestic party.
In the case of trade the importer is an independent party who engages in an exchange relationship with the foreign party. In FDI, the relationship isvertical, with the foreigner having some level of power over the actions of the domestic party.
FDI Trough Subsidiaries and Affiliates
The textbook show us that:
Most FDI, since the investors are seeking control, results in the purchase of all or a part of the equity of a company in the foreign market. If the company retains its own name, with foreign control restricted to overall...