In a globalised world and economy, foreign direct investment (FDI) flows have boomed dramatically in recent decades. Factors contributing to the growth of FDI are rapid growth in technological advancement, low interest funds from development banks, bilateral investment treaties and the welcoming developing countries have given FDI its importance in helping the economy growth. This led to the rapid growth of FDI flows around the world in the last 20 years period. FDI outflows increase from $53.7 billion in 1980, to a staggering $1.4 trillion in the year 2000 (Brooks et al, 2003). Foreign direct investment (FDI) involves the real investments or ownership in the land, inventories, factories and capital goods in foreign countries where investor have control and authority over the invested capital. Examples of FDIs involves investors purchasing a minimum of 10% of the firm’s stock or more, setting up a wholly owned subsidiary company, joint venture with another firm and merging or acquisition of another company. Major market players who are always on the lookout for investing in foreign countries are multinational corporations (MNC). Multinational corporations (MNC) plays an important role in bringing capital and employment to the host countries and since a few decades back, MNCs took a great amount of interest in investing their business in foreign markets because of the various advantages in foreign countries over their home country. In this essay, I will be focusing on the determinants, characteristics, cost and benefits for host and investing countries for FDI and MNC.
Determinants & Characteristics
There are various reasons for FDI to arise but one major reason is that investors foresee promising returns of profits of their investments in foreign nations before they invest. Every investor wants to maximize their returns as much as they can. The determinants of FDI have been first studied by Adam Smith, Torrens and Stuart Mill but Ohlin soon addressed the issue after it. Then what was explained by Ohlin was that FDI was mainly stimulated by the possibility of high profitability in growing foreign markets adding up to the chances of a low tax rate and interest in the host country. (Nonnemberg & Mendonca, 2000). Question why doesn’t people of the host country that is so familiar with local rules and culture borrow capital from foreign countries and instead invest in their own home country rather than letting foreign firms coming in to invest. It’s because MNC has the technology capital, technology, knowledge and power for it. MNC also have a more stable return of profit and changes little in the returns they make. Then for a firm to succeed in a foreign market, it must first possess a handful of ownership-specific assets in organization, technology, management, marketing skills and knowledge. Most MNC are blessed with a huge amount of assets to claim the profits that they will yield in foreign markets (Blomstrom & Kokko, 2003). Corporations want to have total direct control of their own management and production. Acquisition of a similar firm doesn’t guarantee direct control for the MNC and would expose their trade secrets to the producing companies abroad. For example BMW, one of the world’s great automobile manufacturers wants to invest in foreign countries through horizontal integration, may agree if it takes over a similar firm abroad but when it comes to negotiating licensing agreements, a large MNC such as BMW would always play it safe in fear of giving out to other firms their technology secret. Licensing to foreign producers may also cause deterioration and inconsistency in manufacturing quality; if that happens, BMW’s reputation would go down the drain and lose money instead. That is why most MNC such as Honda, Toyota and Sony may also face this kind of situation and would always prefer to have full direct...