Foreign Direct Investment: Theory, Evidence And...
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The flow of foreign direct investment (FDI) into a country can benefit both the investing entity and host government. This study employed panel analysis to examine the factors that determine the direction of FDI to the fast-growing BRICS (Brazil, Russia, India, China, and South Africa) and MINT (Mexico, Indonesia, Nigeria, and Turkey) countries. First, we used a pooled time-series cross sectional analysis of data from 2001 to 2011 to estimate and model the determinants of FDI for three samples: BRICS only, MINT only, and BRICS and MINT combined. Then, a fixed effects approach was employed to provide the model for BRICS and MINT combined. The results demonstrate that market size, infrastructure availability, and trade openness play the most significant roles in attracting FDI to BRICS and MINT, while the roles of availability of natural resources and institutional quality are insignificant. To sustain and promote FDI inflow, the governments of BRICS and MINT must ensure that their countries remain attractive for investment by offering a level playing field for investors and political stability. BRICS and MINT governments also need to invest more in their human capital to ensure that their economies can absorb substantial skills and technology spillovers from FDI and promote sustainable long-term economic growth. This study is significant because it contributes to the literature on determinants of FDI by extending the scope of previous studies that often focused on BRICS only.
A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business, in real estate or in productive assets such as factories in one country by an entity based in another country.[1] It is thus distinguished from a foreign portfolio investment or foreign indirect investment by a notion of direct control.
Broadly, foreign direct investment includes \"mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans\". In a narrow sense, foreign direct investment refers just to building new facility, and a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.[2] FDI is the sum of equity capital, long-term capital, and short-term capital as shown in the balance of payments. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. Stock of FDI is the net (i.e., outward FDI minus inward FDI) cumulative FDI for any given period. Direct investment excludes investment through purchase of shares (if that purchase results in an investor controlling less than 10% of the shares of the company).[3]
FDI, a subset of international factor movements, is characterized by controlling ownership of a business enterprise in one country by an entity based in another country. Foreign direct investment is distinguished from foreign portfolio investment, a passive investment in the securities of another country such as public stocks and bonds, by the element of \"control\".[1] According to the Financial Times, \"Standard definitions of control use the internationally agreed 10 percent threshold of voting shares, but this is a grey area as often a smaller block of shares will give control in widely held companies. Moreover, control of technology, management, even crucial inputs can confer de facto control.\"[1]
Intrigued by the motivations behind large foreign investments made by corporations from the United States of America, Hymer developed a framework that went beyond the existing theories, explaining why this phenomenon occurred, since he considered that the previously mentioned theories could not explain foreign investment and its motivations.[citation needed] Facing the challenges of his predecessors, Hymer focused his theory on filling the gaps regarding international investment. The theory proposed by the author approaches international investment from a different and more firm-specific point of view. As opposed to traditional macroeconomics-based theories of investment, Hymer states that there is a difference between mere capital investment, otherwise known as portfolio investment, and direct investment. The difference between the two, which will become the cornerstone of his whole theoretical framework, is the issue of control, meaning that with direct investment firms are able to obtain a greater level of control than with portfolio investment. Furthermore, Hymer proceeds to criticize the neoclassical theories, stating that the theory of capital movements cannot explain international production. Moreover, he clarifies that FDI is not necessarily a movement of funds from a home country to a host country, and that it is concentrated on particular industries within many countries. In contrast, if interest rates were the main motive for international investment, FDI would include many industries within fewer countries.
Another observation made by Hymer went against what was maintained by the neoclassical theories: foreign direct investment is not limited to investment of excess profits abroad. In fact, foreign direct investment can be financed through loans obtained in the host country, payments in exchange for equity (patents, technology, machinery etc.), and other methods.
Hymer's importance in the field of international business and foreign direct investment stems from him being the first to theorize about the existence of multinational enterprises (MNE) and the reasons behind FDI beyond macroeconomic principles, his influence on later scholars and theories in international business, such as the OLI (ownership, location and internationalization) theory by John Dunning and Christos Pitelis which focuses more on transaction costs. Moreover, \"the efficiency-value creation component of FDI and MNE activity was further strengthened by two other major scholarly developments in the 1990s: the resource-based (RBV) and evolutionary theories\"[7] In addition, some of his predictions later materialized, for example the power of supranational bodies such as IMF or the World Bank that increases inequalities (Dunning & Piletis, 2008). A phenomenon the United Nations Sustainable Development Goal 10 aims to address.[8]
A 2010 meta-analysis of the effects of foreign direct investment (FDI) on local firms in developing and transition countries suggests that foreign investment robustly increases local productivity growth.[12]
According to a study conducted by EY, France was in 2020 the largest foreign direct investment recipient in Europe, ahead of the UK and Germany.[13] EY attributed this as a \"direct result of President Macron's reforms of labor laws and corporate taxation, which were well received by domestic and international investors alike.\"[13] Moreover, 24 countries of the EU made an investment into Armenian economy since the year of Armenian Independence.[14]
FDI in China, also known as RFDI (renminbi foreign direct investment), has increased considerably in the last decade, reaching $19.1 billion in the first six months of 2012, making China the largest recipient of foreign direct investment at that point of time and topping the United States which had $17.4 billion of FDI.[15] In 2013 the FDI flow into China was $24.1 billion, resulting in a 34.7% market share of FDI into the Asia-Pacific region. By contrast, FDI out of China in 2013 was $8.97 billion, 10.7% of the Asia-Pacific share.[16] During the global financial crisis FDI fell by over one-third in 2009 but rebounded in 2010.[17] China implemented the Foreign Investment Law[18] in 2020.
White House data reported in 2011 found that a total of 5.7 million workers were employed at facilities highly dependent on foreign direct investors. Thus, about 13% of the American manufacturing workforce depended on such investments. The average pay of said jobs was found as around $70,000 per worker, over 30% higher than the average pay across the entire U.S. workforce.[27]
In September 2013, the United States House of Representatives voted to pass the Global Investment in American Jobs Act of 2013 (H.R. 2052; 113th Congress), a bill which would direct the United States Department of Commerce to \"conduct a review of the global competitiveness of the United States in attracting foreign direct investment\".[32] Supporters of the bill argued that increased foreign direct investment would help job creation in the United States.[33]
EconPapers FAQ Archive maintainers FAQ Cookies at EconPapers Format for printing The RePEc blog The RePEc plagiarism page Foreign direct investment and search unemployment: Theory and evidenceHans-Joerg Schmerer (Obfuscate( 'gmail.com', 'hj.schmerer' ))International Review of Economics & Finance, 2014, vol. 30, issue C, 41-56Abstract:This paper proposes a simple multi-industry trade model with search frictions in the labor market. Unimpeded access to global financial markets enables capital owners to invest abroad, thereby fostering unemployment at the extensive industry margin. Whether a country benefits from foreign direct investments (FDI) in terms of unemployment depends on the respective country's net-FDI, measured as the difference between in- and outward FDI. The link between FDI and unemployment derived in the model is tested using macroeconomic data for 19 OECD countries on unemployment, FDI, and labor market institutions. Results support the model in that net-FDI is robustly associated with lower rates of aggregate unemployment.Keywords: Trade; Foreign direct investment; Search unemployment; Labor market frictions (search for similar items in EconPapers)JEL-codes: E24 F16 F21 J6 (search for similar items in EconPapers)Date: 2014References: View references in EconPapers View complete reference list from CitEc Citations: View citations in EconPapers (7) Track citations by RSS feedDownloads: (external link) Full text for ScienceDirect subscribers onlyRelated works:Working Paper: Foreign direct investment and search unemployment: Theory and evidence (2012) This item may be available elsewhere in EconPapers: Search for items with the same title.Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/TextPersistent link: :eee:reveco:v:30:y:2014:i:c:p:41-56DOI: 10.1016/j.iref.2013.11.002Access Statistics for this articleInternational Review of Economics & Finance is currently edited by H. Beladi and C. ChenMore articles in International Review of Economics & Finance from ElsevierBibliographic data for series maintained by Catherine Liu (Obfuscate( 'elsevier.com', 'repec' )). var addthis_config = {\"data_track_clickback\":true}; var addthis_share = { url:\" :eee:reveco:v:30:y:2014:i:c:p:41-56\"}Share This site is part of RePEc and all the data displayed here is part of the RePEc data set. Is your work missing from RePEc Here is how to contribute. Questions or problems Check the EconPapers FAQ or send mail to Obfuscate( 'oru.se', 'econpapers' ). EconPapers is hosted by the Örebro University School of Business. 59ce067264
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