In this paper I will explain the changes in both volume and distribution of FDI Foreign Direct Investment in the world from 1990-2011. Analysing the various growth trends, determinants, risk affected with FDI. To do this, I will obtain and assess relevant data on FDI and the business environment, Identify and apply theoretical concepts and frameworks to assessing and comparing the business environment for different countries and/or regions. I will utilize analytical perspectives on factors affecting the attractiveness of countries for FDI. Develop a clear and well evidenced evaluation where necessary distinguishing between industries.
The liberalization of capital flows is an element of a global feedback against the Keynesian philosophy of the post-World War II period. Under the BrettonWoods regime, fixed exchange rates and capital controls sheltered countries from destabilizing exterior shocks. The counter-movement that began with the breakdown of the Bretton Woods system in the 1970s and accelerated in the 1980s sought to take away government controls and allow markets to function freely. This trend in the developing economies was called the “Washington Consensus” by Williamson (1990), who integrated the decontrol of foreign direct investment (but not portfolio flows) in the list of policy measures. J. P. Joyce and I Noy (2008).
Foreign Direct Investment (FDI) is a motion in which an investor occupant in one country obtains a long-term concern in, and a major control on the administration of, an entity occupant in another country. This may engage either creating a completely new venture (so-called “Greenfield” investment) or, more characteristically, altering the ownership of existing enterprises (via mergers and acquisitions). Other types of financial business between related enterprises, like reinvesting the income of the FDI enterprise or other assets transfers, are also defined as foreign direct investment. A great transformation over the past three decades has been that governments have become more encouraging towards FDI, and have liberalized their FDI policies consequently, even though at altered times, speeds and pits in different countries and regions.
Beginning around 1985-86, however, firms began a new wave of foreign direct investment (FD1) that is, foreign investment aimed not simply at securing future income but also at establishing control. K. A. Froot (1993). Over the past fifteen years, countries have looked at FDI progressively more as causative to their development strategies for the know-how and capital it provides. They have even have begun to compete for FDI. Investment policies have
Become more open at the national and regional level, but there is no widespread framework at the multilateral level. D. W. T. Velde (2006) .
DETERMINANTS OF FDI
Since 1990 there has been an explosion in regional trade agreement notifications, many involving the new transition economies (World Bank, 2006). The flows in FDI internationally increased incessantly during the 1980s and 1990s with the sharpest rise in the late 1990s. One key finding is that the flows increased at a geometric rate, then attaining a peak of $1,411.4billion in year 2000 from $58billion figure recorded in 1985. The trends took a striking turn by declining between 2001and 2003 thereby attaining a low level of $564.1billion in year 2003. Both developed as well as developing economies of the world experience this, but the developed nations were more affected during the global recession.
Earlier research by Rostas (1948), Frankel (1955) and some Anglo-American study teams1 had shown that the labour productivity in US manufacturing industry was, on average, 2 to 5 times higher than that in UK industry. This difference was questioned. Researchers tried to seek out its cause, was this difference in productivity a reflection of the superior indigenous (and immobile) resources of the US economy? Or was it due to the more proficient way in which the managers of US firms harnessed and organised these resources? Dunning (2001). And how this could be transferred along boundaries. Hymer (1960; 1976) and Dunning (2001) tried to explain why the affiliates of foreign firms could compete successfully with domestic firms in supplying the latter’s markets and explained why the former firms chose to supply their markets from a foreign, rather than from a domestic, base. Dunning used the OLI eclectic paradigm to explain this. Ownership, Location and Internalisation where the advantages which Multinational companies had, these help increase foreign direct investment. The describing events of the 1990s required a careful review of the L I component of the OLI Paradigm; and of how this affected both arriving scholarly thinking, and the boundary between the Location choices and competitive advantages of both firms and countries. Dunning (2008) .The growing importance of inter-developed country M&As as a form of FDI in the 1990s, the expansion of all kinds of service investment, the geographical spread of FDI in R&D, the appearance of China as one of the foremost recipients of FDI, the more convivial stance towards FDI taken by most developing countries as, for example, is witnessed by the elimination of many restrictions to such investment, and the stepping up of the work of the Investment Promotion Agencies (UNCTAD,2007) . All these, and others, have greatly affected and for the most part widened the choice of location for MN. It then follows that institutional variable (including entry, performance and exit requirements imposed on foreign direct investors, degrees of corruption, competition policy, innovatory and tax systems, environmental regulations, and human rights) are expected to vitally affect the location decision of firms mainly in cases where MNE activity crosses over very diverse cultural margins . Alternatively, the FDI wave may be driven by more fundamental factors but breed optimism, which would in turn lead to a neglect of risk. Investors observing the behaviour of their peers, and possibly the success of their investment decisions, would thus learn to be overconfident, following a pattern described by Gervais and Odean (2001). In both cases, periods of booming FDI and availability of capital would be associated with increased optimism or carelessness about political risk in host countries. As a result FDI flows would be less responsive to political risk too. If every country’s risk fell simultaneously, every country’s share would be predicted to rise, which is impossible since they add up to one. It was also related to depressed stock market sentiments and business cycles, both of which led to a massive decline in M&A investments especially in the developed countries(UNCTAD, 2007).
Political risk was assessed by the International Country Risk Guide (ICRG) index published by the Political Risk Services Group. It is published yearly and based on experts’ opinions.
The key point in using this index is that it can be used by firms to evaluate country risk. It is therefore a very good proxy of the information and beliefs of firms that want to invest
Abroad. The index ranges from 0 to 100, the latter corresponding to the lowest possible risk. To simplify the interpretation of the results, we re-coded the index so that an increase reflects higher risk (i.e., we multiplied it by _1). We therefore expect our ICRG index to be negatively related to FDI. Control variables are standard. We thus first control for the
Relative size of each country, which is measured by the ratio of that country’s GDP to the world’s GDP in percentage. We expect this control variable to be mechanically positively related to a country’s share in world FDI flows. MEON (2008)
The second control variable assesses country i’s level of economic development, measured by the per capita income in thousands of USD. An increase in per capita income being associated with higher purchasing power, it is likely to attract more FDI. At the same time, however, this variable may also proxy wages. Since wages are larger in richer countries, GDP per capita may then be negatively related to FDI flows, if their motivation is to seek cheap labour. Determining the sign of that variable is therefore an empirical matter. Third, we control for GDP growth in percentage. Faster GDP growth suggests that the economy is dynamic, and may attract more FDI. GDP growth should, therefore, correlate positively with a country’s FDI share.
The next control variable is openness to trade, defined as the percentage of country i’s exports plus imports to that country’s GDP. Countries that are more open to trade are also expected to be more open to foreign investments. We therefore expect this variable to exhibit a positive sign. The last control variable takes infrastructure quality into account. It is the number of telephone lines per 100 inhabitants. As foreign investment is known to be sensitive to infrastructure quality, we expect this variable to be positively related to a country’s share in world FDI flows.
As i discuss the various trends in FDI both on a global or regional base, i will focus on the magnitudes as well as the nature of the flows as a fraction share of different regions of the world .
In 2005/06, developing East Asia accounted for over two thirds of the total constituent trade of developing countries. Developing countries, accounted for over 70% of the spreading out in the global mechanism of trade during 1992/93–2006/7. Many factors emerge to explain this.
First, although fast economic growth, manufacturing income in many of the region’s economies remains considerably lower than those in Mexico and the European border (Athukorala and Menon 2010). Possibly more essentially, significant wage differences between economies in East Asia rose cross-border trade in components. -Second, the relative factor cost benefit of these economies has been added by more constructive trade and investment policies. (Carruthers et al., 2003).
Third, as the early-birds of global specialization, Southeast Asia (in particular Malaysia, Singapore, and Thailand) seems to suggest great agglomeration advantages for companies previously located there. Choosing the site for MNE assembly operations are powerfully influenced by the existence of other key market players in a given country or its neighbours. (Borrus et al., 2000; McKendrick et al.; 2000). In sum, the Asian skill substantiates the view that, the longer they stay, MNE affiliates tend to become ever more ingrained in their host countries mainly as longer-term reforms better the overall investment climate (Rangan and Lawrence, 1999).
Finally, China’s appearance as the first low-cost assembly hub for a broad ranges of electrical and electronics products have boosted component manufacture and assembly in other economies in the region. Here, China’s role is mainly important due to its neighbourhood advantage its huge supply of labour readily brought into production activities and its aptitude to meet altering international demand without causing large factor price turbulence (Jones 2000).
In 1996–97, the IMF targeted Ethiopia of all poor countries, of no interest to international investors and twisted the government’s arm to make it open its capital account and to establish a Treasury bill market, partly to signal to the rest of sub-Saharan Africa that everyone should move towards financial liberalization (Wade,2001).
The scoring criterion for the economic scope reflects the Washington Consensus. For example, a country could obtain the top score on its trade system only if it had a practically free trade regime with maximum tariff under 15%, a low average tariff, and no export subsidies or taxes.
This section discusses the fluctuation of the global volume of FDI, in spite of a secular upward trend. For instance, it rose from 0.93% of world GDP in 1990 to approximately 4.79% in 2000. However, in 2003, it was down to 1.57% of world GDP, less than its 1997 level, as Mody (2004) reports. From a global perspective, the world level of exposure to political risk would also fluctuate with the global volume of FDI. It would thus respectively increase or decrease if investors become more or less selective when choosing the location of their investments, with implications for the regulation of international investments. (Meon, 2012)