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| Author: Ranganai Chiwara |
There was a rapid increase in foreign direct investments during the early years of the post-war period till late 1970s as many countries imposed trade restrictions on each other. That was largely due to the fact that, former enemies were reluctant to open their market to each other thereby imposing trade barriers. Faced with trade restrictions, firms were forced to open foreign affiliates to reach both existing and potential customers in the host markets. This phenomenon was common in communist states and trade between the free world were virtual impossible as soviet bloc preferred to trade among themselves. In addition to that, trade barriers were so severe that foreign firms which had market base in those communist states would find it difficult to do business there since the state dictated what to import or export and quotas of certain commodities were imposed by the states. Therefore, most firms with capitalist base had little advantage to trade in those regions so they had to invest in those particular economies to serve their markets interests. Also apart from that, trade barriers were there to protect domestic markets and ease pressure on the balance of payments since an excess of imports against exports can cause huge balance of payments deficit.
Furthermore, multinational enterprises were operating under high market exposure in the early post-war period as transportation merely collapsed dues high risk in freight as companies feared their vessels would be sunk in sea by the enemy. It was most likely that companies encountered both high shipping and insurance cost because of the risk with international trade in the 1940s through early 1970s.Among other few problems faced by multinational firms could range from extreme delays on supplies which have a greater impact on production activities and consumer satisfaction. Furthermore, the existence of trade restriction made exports too expensive than domestically produced goods making foreign produced goods uncompetitive in the host markets. Therefore because of the complexity associated with international trade firms preferred to produce in foreign markets rather than export and imports oriented business. For instance, the British government in the 1950s under Winston Churchill imposed severe exchange control on the outflow of the US dollar which resulted in some British companies opting to set up production facilities to in the United States to reach out the US market. Also besides that, the revival of anti-trust policy along with higher production costs and technological advancement among the triad (US, Europe and Asia ) motivated companies to set up R & D production units in foreign countries but however such investment were mainly carryout within the triad.
Furthermore, there was an experimental of economic integration among countries in the late 1950s such as the creation of the European Economic Community (EEC), The European Free Trade Association (EFTA), The Latin American Free Trade Association (LAFTA) and others. The main reasons of forming regional blocs were to improve trade relations and the basis for economic cooperation among member states. These economic co operations were largely due to the mere collapse of trade in the first decade of the post-war period because of protectionism policies among countries; hence the main goals of economic integration was to ease trade restrictive measures deemed unfavourable to business. The creation of trade blocs had a greater impact on foreign direct investments as lots of firms rushed to invest in those new economic arrangements to access a large market share and hence there was a rapid trend in world FDI throughout the end of the 1950s up to 1970s. In addition to that, there was growing importance of human capitals skills such as managerial, marketing and technological skills in the first three decades of the post-war period. In this regards, multinational firms were eager to invest or setting up a production unit in host countries with technological and skills abundance. For example, the US was both the largest recipient and outward foreign direct investment among the triad mainly because of managerial and technological advantage and core investors were Japanese and British Firms.
Determinants
Foreign investments continued to grow at an escalating rate in the last two decades but is mainly concentrated within advanced economies and developing countries account for about 40% of the world’s foreign direct investments in the 1990s (Noorbahsh.F, Paloni,A and Youssef.A,2001). Though ,there was such a rapid flow of private capital into developing countries since the 1980s,the distribution varies with countries or regional grouping .For example, Asian countries were the largest beneficiary of inward FDI close to $100 billion followed by Latin American country while Africa has the least inflows foreign capital (Alsan.M, Bloom.D.E, Canning.D, 2006) . Globalisation seemed to have been the main driver in world FDI because it allows the process of worldwide economic integration. Hence are liberalised global economy enable flows of capital, spreading technological advancements and trade as well as labour mobility in the form of migration. As the world economy began to integrate in the early 1980s more countries started easing restrictions on foreign direct investments and hence, encouraged competition among multinational corporations. Furthermore, firms started to develop new business strategies such as setting up new R&D, packaging units and global sourcing. The main aim was to achieve sustainable competitive advantage in world market to ensure product innovations and cheaper manufacturing practices as well as enhance customer satisfactions. Subsequently, world wide foreign direct investments have been escalating at a faster rate since then. Therefore, global economic integration in this way seems to play a greater role in determining the volume of world FDI inflows as firms seek to improve their competitive advantage.
Given the rapid growth of world foreign direct investments over the past two decades and also that these investments are unevenly distributed as some countries or region account for higher percentages of foreign inflows and other not. Although, countries have recently adopted friendly business policies, it seem as though much of the world’s FDI is concentrated in advanced economies followed by Asian countries and Sub-Saharan Africa is the least of all regions. Apart from globalization as an encouraging factor attracting world FDI, there are other variable may explain why other regions are so attractive to foreign capital inflows others. The role of foreign exchange rates is paramount especial for export-oriented foreign direct investments; thus differential in exchange rates between the source and host is positively correlated growth in FDI inflows. For example, it was noted that the depreciation of the Chinese currency is positively related to FDI inflow (Xing.Y, 2006) because domestic assets would be acquired cheap compare to home market. Empirical evidence carried out by Xing.Y, 2006 on Japanese multinational firms investing in China, showed that a depreciation of the Yuan encouraged Japanese firms to set up production affiliates. The devaluation of the Chinese currency led to reduction in production cost, increased the buying power of the Japanese yen as a result land and rents became cheaper in China. Furthermore the role of exchange rates in attracting FDI had been examined (Baek,I-M and Okawa.T,2001), their empirical analysis shows that exchange rates play an important role in firms’ decision process on where to invest. For example the study shows that Japanese outward FDI increased rapidly with the appreciation of the yen in the late 1980s and then slowed down in the 1990s due to weakening of Japanese currency. Therefore, exchange rates play any important role in attracting export-oriented foreign direct investments especial firms which manufacture for exports markets and maybe that is why Asian countries the largest recipients of world FDI than others.
The rapid growth in FDI has been accompanied by a significant shift towards service and technology-intensive manufacturing process. For example, in the first post war period FDI was more concentrated in primary sector and resources-based, hence the relative importance of these factors have been diminishing ever since the 1960s. Conversely, in the early 1980s sectorial composition of global capital inflows began to change to knowledge based For instance, the service sector accounted for about 25% in the1970s to 60% in the year 2002 world FDI stock (Noorbakhsh.F, Paloni. A and Youssef.A, 2001).Therefore, the presence of well trained workforce is increasing becoming more attractive to multinational enterprise as they face global challenge due to competition among business rivals. The absence of educated workforce can curb FDI inflows into the host country due to changing motive of foreign investments (Globerman.S and Shapiro.D, 2002).However; some of the important determinants such as infrastructure development, and higher return of capital have positive impact on other regions and to other show a negative relation. Empirical evidence by Asiedu,E (2002) on African FDI inflows shows that a number of variable failed prove if they had positive impact on FDI in Sub Saharan Africa. Determinants such as openness to trade and infrastructure development such as reliable public institutions, better legal framework to promoting property right were negative related to FDI inflows in this region but was positively correlated to other regional grouping.
Effects of FDI on host country
Host country may benefits from FDI as additional resources are being made available such as capital, technology, management and training of local laborforce. This is particularly important to developing countries where domestic investments are highly constraint due to lack of capital formation. Thus, inward foreign direct investments encourage economic growth country as additional capital inflows can boast output and income of the host country. Furthermore, FDI have a potential to benefit the host market by stimulating domestic enterprises and spreading the effects of technological change these are induced through spillover effects. Spillover effects occur through reverse engineering, labour mobility and demonstration effects and is mainly facilitated by R&D research activities as well as competition among foreign firms within the host country (Cheung, K and Lin.P, 2003).Also empirical studies by (Ruhul .S, Salim.A and Bloch.H, 2009) on Indonesian chemical and pharmaceutical sectors showed a positive relationship between FDI spillover and technological progress on Indonesian economy. Moreover, transnational enterprises may improve the export capability of the host country particularly in the case of export-oriented FDI. For example china enjoys economic prosperity as she runs a huge balance of payment surplus because most FDI operations there are destined for the exports. Besides FDI is a source of employment for the host country, the more FDI in flows the more local labour force will gain employment with foreign investors.
However, there are some criticisms about multinational enterprises` operation in developing countries that almost all of their profits out of the host country, thereby weakening its balance of payments. This argument appears to be true when considering the Asian and the Latin American economic crisis in the 1990s; these economies encounter huge capital flights which in turn threatened their current accounts. In addition to that, firms as economic agents accounting for most of FDI are being criticised for manipulating prices to evade taxes and also may cause political instability within the host country through funding opposition party or organisation to rise against the host government. Furthermore, multinational enterprises are constantly seeking to improve world worldwide profits, as such may relocate causing massive unemployment in host country. For example, Ford transferred the production of Sierras from its Dagenham plant in the UK to Gent in Belgium in 1990.Therefore; given that deregulation enable foreign firms to move capital freely mean, the perceived benefits of inward FDI is likely to be uncertain and creating unfavourable economic condition in future as firms relocate to other regional bloc.
Effects of FDI on home country
The main benefit from FDI for home country is that, multinational enterprise earns higher rate of return on their foreign investments and those profits can be repatriated to improve domestic economy. Also taxes levied on foreign income on firms can benefits home country by increasing income for the entire society in the form extra government spending on public services such as transport and health care. It was difficult to attain further benefits of FDI to home country; there seem to be very limited empirical evidences on the potential return to source country. However, it has been identified that, capital outflows can affect home country’s labour markets which is trade Unions tend to opposes FDI because it involves export of jobs, For example, many firms have been relocation to Asian economies in recent years pushing unemployment rate higher in source countries. Moreover, as China and India have become major centres for export-oriented FDI that, subsidiary firms are now producing to supply parent firms can cause balance of payment deficits fro the home country.
Conclusion
There has been a dramatic increase in global foreign direct investments since the early post-war period and these trends are set to continue as countries adopt free market orthodoxy policies. Therefore, the main driving forces or factors determining the extent of these worldwide economic activities beginning of the 1980s seemed to have been triggered by globalization which in turn encourages multinational enterprises to invest in foreign countries to gain competitive advantage. Besides that, foreign direct investment is not evenly distributed among regional or continental groupings, for example global FDI are mainly concentrated in the USA, Europe and Asia while Sub-Saharan Africa is trailing behind. However, recently China and India are increasingly becoming the world’s largest receivers of inward FDI chiefly because of a number of factors such as cheap production cost, exchange rates, markets size among others variables. There are no empirical evidences to explain why Africa receives very small portion of foreign direct investments over the past decades. Having discussed the changes in foreign direct investments over the post war period, I have come to the conclusion that, developed countries remained both main favourite of FDI whilst emerging markets such as China and India are the largest recipient of inward foreign direct investments
Reference
Ruhul .S, Salim.A and Bloch.H, (2009) Does Foreign Direct Investment Lead to Productivity Spillovers: World Development, xx (x), pge.xxx-xxx, Elsevier Ltd.
Cheung, K and Lin.P, (2003), Spillover effects of FDI on innovation in China: Evidence from the provincial data, China Economic Review, 15(2004), pge.25-44, North-Holland.
Alsan.M, Bloom, D.E and Canning.D, (2006), The effects of Population Health on Foreign direct Investment inflows to Low-and Middle-Income Countries: World Development, 34(4), pge.617-630, Elsevier Ltd.
Xing.Y, (2005), Why China so attractive for FDI? The role of Exchange rates: China Economic Review, 17(2006), pge.198-209, North-Holland.
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