Foreign Direct Investment



Foreign Direct Investment

Introduction

The purpose of this study is to expand the boundaries of our knowledge by exploring some relevant information relating to the analysis of FDI or Foreign Direct Investment. Foreign direct investment (FDI) is a category of international investment made by a resident of one country (called "direct investor" or "parent company") with the intention to exercise long-term control in the company in another country. By "long-term control" means there is a long term relationship between the direct investor and the direct enterprise. To be considered as FDI investment, the minimum threshold for a direct equity investor in the direct investment company was set at 10%. The literature and empirical evidence identifies FDI as an important catalyst for development, as it has the potential to generate employment, increase savings and foreign exchange earnings, stimulate competition, encourage the transfer of new technologies and boost exports; positively affecting all productive and competitive environment of a country (Kim, 1992, 29-53).

The Directorate General of Foreign Investment (DGFI) is the administrative unit of the Ministry of Economy. Their role is to issue administrative decisions under the Foreign Investment Law; manage and operate the National Registry of Foreign Investments, develop and publish statistics on the behavior of FDI in the country, assist in the promotion and investment attraction; disseminate information and investment studies in the country and implement public policy guidelines on FDI (Hofstede, 1989, 390-397).

Part 1: influence of institutional factors on inward and outward FDI

The developing, emerging and transition countries increasingly consider FDI as a factor of economic development and modernization as well as the increase in national income and employment. They have liberalized the FDI environment and other steps made in order to attract investment.

There are different institutional factors that influence inward and outward FDI in a country. For instance, Greenfield investment involves establishing a new plant with its own production abroad. Mergers and Acquisitions (M&As) occur when two existing companies legally join under a single ownership. Another way is through the establishment of a Joint venture (JV), which implies a partnership between the foreign firm and a firm from the host country. A number of push (from host country) and pull (from home country) factors have been responsible for the overall increase of FDI inflows in a country. Among the push factors are the financial crisis, saturation of host market and increase of international prices of raw materials, making those countries more attractive producing such commodities. On the other hand, pull factors include investment friendly environment, supportive business environment, low interest rates, attractive exchange rates, and effective government policies. Those countries that provide the most profitable factor would attract more FDI as compared to the ones that fail in the intent. The neoclassical theory of investment represented by Kojima (1973), in a macroeconomic approach proposes that FDI takes place when a transfer of factor endowment between countries (from source country to host country) is needed. Furthermore, the investment in general would be directed to industries in which ...