Theories of Foreign Direct Investment

Topics: Investment, Macroeconomics, Foreign direct investment Pages: 10 (3144 words) Published: March 24, 2013
Theories of Foreign Direct Investment
Foreign Direct Investment, or FDI, is a type of investment that involves the injection of foreign funds into an enterprise that operates in a different country of origin from the investor. Foreign direct investment has many forms. Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intracompany loans”. Foreign direct investment incentives may take the following forms:

• low corporate tax and individual income tax rates
• tax holidays
• other types of tax concessions
• preferential tariffs
• special economic zones
• EPZ – Export Processing Zones
• Bonded Warehouses
• Maquiladoras
• investment financial subsidies
• soft loan or loan guarantees
• free land or land subsidies
• relocation & expatriation
• infrastructure subsidies
• R&D support
• derogation from regulations
Once firms have decided to enter a foreign market, they have to choose the best mode of entry. Firms can use six different modes to enter foreign markets: 1. Exporting, being a temporary strategy is like a stepping stone in the international expansion process for most firms. In the past, Seagate was a well know example which concentrated its manufacturing operations in one location enables it to move down the experience curve and achieve location economies. 2. Turnkey projects, are popular because firms can continue with normal business operations while the contractor handle the time consuming and resource intensive projects for a foreign client. Singapore shipyard is reputable for handling sophisticated turnkey projects regardless of is complex requirements and other considerations. This industry is well known in the economic development for the last 40 years and will continue to play the critical role in our economy in order to achieve the goal for Singapore to become a leading international maritime link. Another example would be Sitra Holdings (International) Limited, the international producer of integrated wood based products and turnkey services, secured several turnkey design and build contracts in November 2009. Amongst these contracts, the single largest contract is worth S$3.24 million at the Marina Bay precinct. 3. Licensing, enables a firm to gain access into new markets otherwise inaccessible, hence to facilitate the growth of licensing activities in Singapore with additional focus on brand licensing, character licensing and know-how licensing, the Franchising and Licensing Association (FLA) aims to encourage the adoption of licensing as a growth strategy by producing a report to raise the awareness of how licensing can translate to income stream for companies. 4. Franchising, in Singapore has grown tremendously and is a preferred strategy for SMEs, as it involves minimal investment and staff, thus reducing costs. Local entrepreneurs have successfully made their mark internationally through franchising like BreadTalk, Charles & Keith, and OSIM. Larger companies can also make use of the networks of their established franchise partners to grow globally. 5. Joint ventures enable firms to share the benefit of the work process from a local subsidiary's knowledge of the host country such as the competitors, culture, political and business systems and access to greater resources including staff specialized in technology, finance, and so on. In November 2009, QATARQatar Petroleum International (QPI) and Shell Eastern Petroleum Pte Ltd have sealed agreements in which QPI takes stakes in two Shell Chemicals joint ventures in Singapore. The deal, to be completed in December, Shell will sell its existing shareholdings in two companies to a new joint venture called QPI and Shell Petrochemicals (Singapore) Pte Ltd. 6. Establishing new wholly owned subsidiaries would be best adopted by firms pursuing the global and transnational strategies, for instance, Temasek Holdings...

References: Ijaz Nabi and Manjula Luthria. (2002) Building competitive firms, incentives and capabilities, Washington, DC, The World Bank.
Wendy Dobson & Chia Siow Yue (1997) Multinationals and east Asian integration, Canada & Singapore, International Development Research Centre.
David M, Marchick & Matthew J. Slaughter (2008) Global FDI Policy, correcting a protectionist drift, USA, Council on foreign relations.
Temasek Holdings Limited (2006) announces investments in Fraser & Neave Limited URL:
Charles Oman (2000) Development centre studies, Policy competition for foreign direct investment, A study of competition among governments to attract FDI, USA, OECD.
Abraham A. Azubuike.(2006) Accessibility of Government Information as a Determinant of Inward Foreign Direct Investment in Africa, ECA Library, United Nations Economic Commission for Africa Addis Ababa, Ethiopia URL:
SPRING, franchising and licensing association (Singapore). URL:
WINDS, Multilateral Agreement on Investment, URL:
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