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Wednesday, May 25, 2011

FDI in Global, Developing Asian, LDCs and Cambodian Context

FDI in Global, Developing Asian, LDCs and Cambodian Context
Meaning of FDI
In the globalize world, the contribution of FDI to development is widely recognized.
FDI transmits capital, managerial skill and technical knowledge to the host country.
WTO: FDI occurs when an investor based in   one country acquires an asset in another   country with the intent to manage that   assets. 

OECD:  FDI as an ownership of   assets in     one   country by residents   of   another for   purposes of   controlling the use of those assets.
IMF:  FDI as the category of   international   investment that   reflects   the objective of   obtaining a lasting   interest by a   resident entity in one   economy,   in an   enterprise resident in   another economy.
FDI implies that the investor exerts a   significant degree of influence on the   management of the enterprise resident   in the other economy.
FDI is undertaken by both individuals   and business entities.
Types of FDI
Three types or methods of investments which constitute  FDI are:

  i.   Green-field investment

  ii.  Acquisition

  iii.  Joint Venture

i.  Green-field investments

  Involves an investment where the production facilities are built afresh  and established fully by the company.

ii.  Acquisition

  Involves purchase of an existing company and it assets abroad in order to gain control of it. Enables the investor to quickly gain production capacity in the foreign country.

iii.  Joint Venture

  Involves a business enterprise which is partly owned by a firm together with one or more partners.

General Determinants of FDI 
(Factors influencing FDI)

Economic fundamentals of the host countries relative to the home countries.
Market related variables

  - Current market size

  - Potential market size
Other variables
  - Skilled manpower

  - Cost of labour

  - Cost of Capital

  - Availability of infrastructure

  - Political and macroeconomic stability

Research on the impact of selective government policies on FDI inflows was mixed.
i.Investment incentives were less important and secondary to fundamental determinants.

ii.Policies relating to FDI also assumed greater importance.

iii.Fiscal incentives and removal of entry restrictions are important determinants of FDI.
Effects of FDI on Growth
Research made clear that:
i.FDI as an important vehicle for the transfer of technology.
ii.FDI flows a bundle of resources – capital, technology, organizational and managerial skills, marketing know-how etc.
FDI helps in modernizing the poor economies and promoting economic development.
Finally the skills spillover to domestic firms.

FDI and knowledge Spillovers
positive Spillover
Research made clear that:
i.Multinational corporations contribute to efficiency by breaking supply bottlenecks.
ii.Introduce new know-how by new technology.
iii.Training to workers who later take employment in local firms.
iv.Breakdown monopoly and stimulate competition and efficiency.
v.Forced local firms to increase their managerial efforts.
vi.Transfer techniques for inventory and quality control and standardization to their local suppliers and distribution channels.

Negative Spillover
Research found that:
i.Foreign firms technology and know-how take the market of the domestic firms and make them produce in less efficient scales.
ii.Significant transfers of modern technology and rate of productivity growth did not occur.
i.Host industry and host country characteristics influence the incidence of spillovers.
ii.Ability and motivation of local firms to absorb foreign knowledge and skills are important determinants of spillovers.

FDI ensures  - Additional capital
  - Access to foreign technology and     knowledge
  - Access to international markets
  - Upgrading the productive capacity of LDCs
  - Integration of the economy into the global economy
  - Economic development
FDI Stimulates  - Competition
  - Innovation
  - Savings and capital formation
  - Employment opportunities

To be continued...

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