FDI Flows into Developing Countries: Impact of Location and Gov policy

SEZs as a source of FDI  SEZs -> (FDI) Investment -> Economic Growth  SEZs As a gateway or platform of attracting FDI

Benefits of FDI in general  A valuable source of capital  An access of Western technology, Managerial Know-how  A new way to create and update human capital  A platform for increasing national exports (China and India)

Evidence  $350 billion from capital market access  Δ5% in GDP  Econ Growth Formula 1% Δ in FDI/GDP bring about 0.4% Δ in GDP growth  The ratio of FDI/GDP, 7%-> 21% in 1990s in Developing countries  Total econ growth effect is _______%

Forms of Capital Inflows  FDI  Debt  Portfolio Equity Investment

Compare the forms of capital flows  Foreign currency  Interest rate  Maturity  Capital flight (herding behavior)  Time horizon  Risk sharing

Which region is the most dominant?  A Type From Developed to Developing or Less Developed  B Type From Developed to Developed  C Type From Developing to Developed

EU vs. USA vs. Japan in FDI

3 Key Questions  What factors motivate overseas expansion by MNCs overseas?  Why some countries receive the lion’s share of FDI? (China, USA) Location advantages?  Whether or to what extent FDI inflow is a function of a country’s policy regime? (India vs. China)

Why this gap between China and India?

Determinants of the Expansion of FDI abroad  From wealthy to wealthy countries, Triad area are dominant in FDI  Asia’s upward trajectory in FDI China

Behind these changes Asia’s econ growth Liberalization policy Substitution of debt for FDI

Factors for a firm to undertake FDI  The size of the firm  The nature of its business  The type of industry  Its international orientation  The level of its INT experience and its corporate strategy

The Use of “Intangible” Special Assets by MNCs(1)  Proprietary technology  Advanced MKT capabilities  Brand names  Key Question: these are intangible or proprietary?

Theory of Product Life Cycle (by Raymond Vernon)

Developing country’s MSNs to undertake international production  Investment in other neighboring regions. Why? Down-scaling of tech (to smaller markets) Leverage their cost advantages Technological trickle-down of mature technologies

Developing country’s MSNs to undertake FDI in advanced nations  Developing country’s MSNs’ FDI investment in advanced nations Wipro, Infosys, and Satyam from India Many MSNs from Korea  Core competencies building (cf PLC) Adapt to host country’s needs after mastery of original tech pursue process innovations

Key Location Attributes  To take advantage of lower factor costs of production In Manufacturing, esp in IT industries In India and China Amount vs. Quality of labor, skilled and unskilled More and more important as pressure of competition is increasing

(to be continued)  To capture economies of scale, rationalize operations International operation Vertical and Horizontal integration

(to be continued)  To gain access to and to develop secure and critical raw materials supplies Japanese MSNs to use strong Yen and rising costs in home country US companies to exploit Middle Eastern oils

Host Country “Location Advantages”(2)  Dunning’s OLI Model’s focus on Macro- economic determinants  O (Ownership) proprietary advantages based on ownership  L (Location advantage) Cheap & skilled labor, large market size, econ growth, political stability, stable macro- econ environment, etc.  I (Internalize FDI Operation)

Key Location Factors  The size of the domestic market  A sustainable moderate-to-high rate of growth  Macroeconomic stability (inflation & exchange rate)  Low level of macro-political risk  Low level of micro-political risk (open & transparent policies)  Well developed Infrastructure

WEF survey in 1997  Market size  Rate of growth in the size of the market  Infrastructure  National competitiveness Index  Productivity  Work habits of workers

Open FDI Regime: Permitting the Free Flow of Capital  Developing nations’ lagging behind in capital mobility and the integration of capital markets  liberalizations of FDI regime in developing nations in 1990 Opening in protected industries, incentives to attract FDI  More BITs: 163 countries have 1,330 BITs in 1997, threefold increase in 5 years  Allow MSNs to repatriate capital and remit profit

China’s experience  A model of openness  SEZs set up to provide a package of everything,….  Policies enabled China to leverage its location advantages to attract FDI  A. T. Kearney survey: the top destination

Indonesia’s  Since 1960, policies reformed to attract inward FDI  1967 Foreign Investment Law: Pro- business, pro-foreign investment  Before 1997 Asian crisis, one of the largest recipients

Nigeria’s  Liberalization of the regulatory regime and policy incentives  Availability of Natural Resources as a key anchor & Cheap labor (compare with South Africa’s rule of law, property rights, low level of corruption, etc. )  A success story of a mid-size African underdeveloped country

Paraguay and Bolivia  Restriction of foreign ownership to 40 and 50 percent respectively  Discourage FDI inflow

India’s poor performance and potentials  Restrictive regime (ownership restriction)  High import tariffs  Exit barriers for firms  Stringent Labor Laws  Poor Quality Infrastructure  Centralized Decision-making process  A limited scale of EPZ

(to be continued)  Top FDI destination of major IT and biz process companies  Potential in these and R&D investment  Think about Other advantages Man power English Population and market Rule of law World center of Outsourcing

A case: Annual payroll cost savings in India