1. Internationalization

2. The Spectrum of Political Ideology Toward FDI
Radical
View
Pragmatic
Nationalism
Free
Market

3. the TRIAD World trade growth: average of 6.5% per year 1990 to 2000
Nearly half of the over $5 trillion in world trade is among the European union, the U.S., and Japan -- the TRIAD
1/3 of world’s private sector productive assets are owned by multinationals.

4. Radical View
Marxist view is that MNE’s enslave less developed countries.
Instrument of domination not development.
Popular from WWII to the 1980s.
Practiced by Eastern Europe, India, China, 3d World Countries.
Ended with the collapse of Communism.
Bad performance by those countries vs those with freer market approach

5. Free Market View
Sees FDI as way to disperse production and flow of goods and services in the most efficient manner.
Supported by Smith and Ricardo and ‘market imperfection’ explanations of FDI.
However, all countries impose some restrictions on FDI.

6. Pragmatic View Lies somewhere between radical and free market views.
Gov’ts should maximize national benefits and minimize costs of FDI.

7. Ideology and FDI Ideology Characteristics Host-Government Policy
Implications
Radical
Marxist roots
Prohibit FDI
Views the MNE as an
Nationalize subsidiaries of
instrument of imperialist
foreign-owned MNEs
domination
Free
Classical economic roots (Smith)
No restrictions on FDI
Market
Views the MNE as an
instrument for allocating
production to most efficient
locations
Pragmatic
Views FDI as having both
Restrict FDI where costs
Nationalism
benefits and costs
outweigh benefits
Bargain for greater benefits
and fewer costs
Aggressively court beneficial
FDI by offering incentives

8. Benefits of FDI to Host Countries
Resource-transfer effects.
Employment effect.
Balance-of-payments effect.
Economic growth.

9. Resource-Transfer Effects
Capital.
Technology.
Management.

10. Employment Effects Brings jobs that otherwise would not be created.
Direct: Hiring host-country citizens.
Indirect:
Jobs created by local suppliers.
Jobs created by increased spending by employees of the multi-national enterprise.
Questions remain on whether net jobs gained.

11. Balance-of-Payments Effects
Host country benefits from initial capital inflow when MNE establishes business.
Host country benefits if FDI substitutes for imports of goods and services.
Host country benefits when MNE uses its foreign subsidiary to export to other countries.

12. Economic Growth Increased:
productivity growth,
product and process innovation,
and greater economic growth,
Stemming from increased competition of MNE’s investments.

13. Host Country Problems With FDI
Drives out local competitors.
Can prevent the development of ‘local’ competitors.
Profits brought home ‘hurts’ (debit) a host’s capital account.
Parts imported for assembly hurt trade balance.
Can affect sovereignty and national defense.

14. Home Country FDI Benefits
Improves balance of payments for inward flow of foreign earnings.
Creates a demand for exports.
Export demand can create jobs.
Increased knowledge from operating in a foreign environment.
Benefits the consumer through lower prices.
Frees up employees and resources for higher value activities.

15. Home Country Problems with FDI
Negative effect on Balance of Payments
Initial capital outflow.
MNE uses foreign subsidiary to sell back to home market.
MNE uses foreign subsidiary as a substitute for direct exports.
Potential loss of jobs.

16. How Do Countries Encourage FDI?
Risk insurance.(Home)
Elimination of double taxation. (Home)
Tax incentives.(Host)
Low interest rates. (Host)
Stable government and stable policies.

17. How Do Countries Discourage FDI?
Limit capital outflows. (Home)
Manipulate tax code to encourage domestic investment. (Home)
Political restrictions on investing in certain countries. (Home)
Ownership restraints. (Host)
Performance requirements. (Host)