Advantages of Foreign Direct Investment (FDI)

FDI helps in the development of the host countries. In specific term, the major advantages are discussed as follow:

FDI as Capital Supplier: Foreign Direct Investment is expected to bring needed capital to developing countries. The developing countries need higher investment to achieve increased targets of growth in national income. Since they cannot normally have adequate savings, there is need to supplement savings of these countries from foreign savings. This can be done either through external borrowings or through permitting and encouraging Foreign, Direct Investment, Foreign Direct Investment is an effective source of this additional capital and comes with its own risks.

FDI a Remover of Balance of Payments Constraint: FDI provides inflow of foreign exchange resource and removes the constraints on balance of payment. It can be seen that a large Nurnberg of developing countries suffer from balance of payments deficit? For their demand on foreign exchange is normally far in excess of their ability to earn. FDI inflows by providing foreign exchange resources remove the constraint of developing countries seeking higher growth rates.

FDI has a distinct advantage over the external borrowings considered from the balance of payments point of view. Loans create fixed liability. The governments or corporations have to repay, the resulting international debt of the government and the corporation parts a fixed liability on balance of payments. This means that they have to repay loans along with interest over a specific period. In the context of FDI this fixed liability is not there. The foreign investor is expected to generate adequate resources to finance outflows on account of the activity generated by the FDI. The foreign investor will also bear the risk. 

FDI as a Vehicles of Technology Transfer: FDI brings along with it assets which are crucially either missing or scarce in developing countries. These assets art: technology and management and marketing skills without which development cannot take place. This is the most important advantage of FDI. This advantage is more important than bringing capital which perhaps can be had from the international capital markets and the governments. 

FDI as a Promoter of Exports of Host Developing country: Foreign direct investment pro- motes exports.' Foreign enterprises with their global network of marketing, possessing marketing information are in a unique position to exploit these strengths to promote the exports of developing countries.

FDI as a Provider of Increased Employment: Foreign enterprises by employing the nationals of developing countries provide employment. In the absence of this investment these employment opportunities would not have been available to a tot of developing countries, Further; these employment opportunities are expected to be in relatively higher skills areas. FDI not only creates direct employment opportunities but also through backward and forward linkages, it is able generate indirect employment opportunities as well.

FDI Result in Higher Wages: Foreign Direct Investment has also promoted higher wages. Relatively higher skilled jobs would receive higher wages. 

Generates Competitive Environment in Host Country: Entry of foreign enterprises in domes-tic market creates a competitive environment compelling national enterprises to compete with the foreign enterprises operating in the domestic market. This leads to higher efficiency and better products and services. The Consumer may have a wider Choice.

NATURE AND TYPES OF INTERNATIONAL INVESTMENT

The growing international production and trade require increased amount of international investment. As a result, the flow of international investment has been increasing. The country requires international investment for enhancing the production, trade and distribution capabilities. The need for international investment is more pronounced in the developing countries where the capital is in scarce. World Investment Report, 1999 has advocated the need of foreign investment. It says that the development priorities of developing countries include achieving sustained income growth for their economies by raising investment rates, strengthening technological capacities and skills, and imposing the competitiveness of their exports in world markets, distributing the benefits of growth equitably by creating more and better employment opportunities, and protecting and conserving the physical environment for future generations. The international investment plays an important role in the above effort of the developing countries. There are two major types of international investment. They are Foreign direct Investment and Portfolio Investment. Let us first learn about them.

Foreign Direct Investment 

Foreign Direct Investment occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the interest to manage the asset. The company investing in this country also transfers assets such as technology, management and marketing. Further, the investing company also seeks the power to exercise control over decision making in a foreign enterprise - the extent of which has to vary according to its equity participation. Foreign Direct Investment also includes reinvested earnings which comprise the direct investor's share of earnings not distributed as dividends by affiliates or earnings not remitted to the direct investor. Such retained profits of affiliates of foreign enterprise are reinvested.

Recent1 y there has been tremendous expansion of FDI. There are four main characteristic features of growth of foreign direct investment. These are: 

The bulk of investment flows is among the developed countries. 

The growth of investment has been substantial. 

The developing countries have increasingly become recipients of FDI. 

The flow of FDI to developing countries, however, is concentrated in approximately ten countries.

Foreign Direct Investment especially in developing countries has been a very controversial subject. Historically, FDI is associated with the domination of metropolitan powers over the colonies. It was believed that these investments were instruments of suppression of national enterprises and exploitation of these economies for the benefit of foreign investors. However over the years this historical assessment has given place to an important role to FDI. A consensus has developed since the eighties that FDI is essential for economic development.

Portfolio Investment 

Portfolio capital normally moves to investment in financial stocks, bonds and other financial instruments. Further, the portfolio capital moves to the recipient country which has revealed its profitability and has a comparative advantage over the counterparts in investing country. Portfolio capital unlike FDI is affected largely by individuals and institutions through the mechanism of capital market. Portfolio investment to a large extent is expected to be speculative and footloose in its character. Very often depending on the confidence of the investor, the investment is made. In the event this confidence is shaken, the capital has a tendency to shift from one country to another very fast occasionally creating a crisis for the host country.

Equity capital is the value of the Multinational Corporations (MNCs) investment in shares of an enterprise in a foreign country. An equity capital stakes of 10 per cent or more of the ordinary shares or voting power in an incorporated enterprise is normally considered threshold for the control of assets. This category includes both mergers and acquisitions and green field investments (the creation of new facilities). Mergers and acquisitions are important sources of investment in developed countries. .

Mergers and acquisitions are a popular mode of investment for firms wishing to project, consolidate and advance their global competitive positions by selling off divisions that fall outside the scope of their core competence and acquiring strategic assets that enhance their competitiveness. For these firms, the "ownership” assets acquired from another firm, such as technical competence, established brand names and existing supply networks and distribution systems can put to immediate use towards serving global customers, enhancing projects, expanding market share and increasing corporate competitiveness by employing international production network more efficiently.

GLOCALIZATION

The alternative to the Globalization strategy is dubbed as 'Glocalizatjon'. The objective of glocalization is to establish a geographically concentrated inter-firm division of labour in the three major bonding blocks. Manufacturers strive to build their competitive advantage in a combination of vertical de-integration of production to local supplies and sub-contractors. And structural control over local suppliers, dealers, workers, and governments. As Glocalizatjon aims to establish production within the major markets international trade may decline. Glocalizatjon pertains to a company's attempt to become accepted as a local citizen in a different trade bloc. 

Glocalization also leads to the concept of global firms meaning that large firms cease to be national firms. Therefore, they can be treated as stateless Corporations. It is argued that time has not yet arrived to think of global firms. This is for a number of reasons. 

(a) Even the large multinational corporations are still tied to apparent country 

(b) The ownership and control of the firm is still retained by the parent firm. Me subsidiaries profit accrue to the parents 

(c) There are very few non-nationals on the boards of parent company 

(d) The legal nationality of the parent firm is still the nation state where it is registered 

(e) In most cases technological activities are concentrated in the parent company.

CROSS BORDER MERGERS AND ACQUISITIONS

The process of globalization of the economy has been strengthened at the global economy and firm’s level as the phenomenon of cross border mergers and acquisition. These affect the foreign direct investment flows, the World economy and competition.

Merger and acquisitions are a popular mode of investment for firms wishing to project, consolidate and advance their global competition position by selling off divisions that fall outside the scope of their core competence and acquiring strategic assets that enhance their competitions. For these firms, the ‘ownership’ assets acquired from another firm, such as technical competence, established brand names and existing supplier networks and distribution systems can be put to invertible use towards better serving global customers, enhancing projects, expanding market share and increasing corporate competitiveness by employing international production networks more efficiently.

For the past several years, cross border merger and acquisitions worldwide have increased significantly. The absolute value of all crosses border M & A sales and purchases amounted to $544 billion in the year 1998 representing an increase of about 60% over the year 1997. The amount was $342 billion in the year 1997. Cross-border M & A are primarily concentrated in developed countries, but there is also a trend towards an increase in such deals in some developing countries. In the year 1998, there were 89 mega cross-border M & A deals, each with more than $1 billion value. These mega deals accounted for nearly three-fifths of the total all cross-border M & A in the year 1998. Recent cross-border M & A have been concentrated in industries that are losing comparative advantages. In the year 1998, the industry that recorded the largest cross-border M &as include: oil industry, automobile industry, banking and telecommunication industry and non-petroleum mining and refining industries.

GLOBALIZATION AT THE FIRM/CORPORATE LEVEL

From the point of view of international business globalization of the firm is very important. There have been a number of approaches to globalization of the firm. A few important approaches are discussed below: 

1. The term globalization was first used by Professor Theodore Levitt of Harvard Busine.ss School. Globalization according to him was referred to as an alleged consequence of markets in the world. 

Globalization in Levitt's view is the emergence of global markets for standardized consumer products enabling a firm to benefit from enormous economics of scale in production, distribution, marketing and management. The impact of technology would be toward further standardization. According to Levitt a successful globalized corporation does not abjure customerization or differentiation and for the requirements of markets that differ in product preferences, spending patterns and shopping preferences. Global Corporations accept these differences only reluctantly. For instance, Ford. The US car maker has at several points in history tried to launch a world car.

2. In the Japanese view as presented by Ohame Kenichi Globalization is understood as a 'business chain'. A business chain comprises a firm’s main activities such as. Research and Development, engineering, manufacturing, marketing and sales and services. He distinguishes five steps in globalization of a firm. Each of these steps involves the transfer of activities in the business chain to a foreign location. It is in reference to development in the 1980s. Since 1980s had been dominated by unprecedented flows of foreign direct investment as has been seen, mergers and acquisitions and strategic alliances as well as by ever-fiercer competition from Japanese and South East Asian firm.; Ohame argued that these developments would constitute a new era in international business. Companies and customers horizons would stretch, ‘beyond national borders’, they would become global citizens.

1. Export: The entire range of activities is performed at home. Exports are often handled by an exclusive local distributor. 
2. Direct Sales and & Marketing: If the product is accepted in the overseas market, it will lead to establishment of an overseas sales campaign to provide better marketing, sales and service & functions to the customers. 
3. Direct Production: This step involves the establishment of local production activities. 
4. Full Autonomy: All activities of the business chain as mentioned above are transformed to the key national markets. 
5. Global Integration: In the ultimate stage of globalization. According to Ohame, companies conduct their R & D and finance their cash requirements on a worldwide scale and recruit their personnel from all over the world.

3. Globalization is also presented in management centered concepts especially of Japanese firms (i) Management Centered around the head office; (ii) Management delegated to overseas operating units (iii) Management centering overseas operating units with regional coordination; and (iv) Management with a global perspective and conscious integration of total system and sub-system.

4. The fourth globalization strategy that of global supplies is one of export centered global expansion. All systems such as R & D, procurement, sales, marketing. Distribution and the organizational structure are designed so as to enhance export of products manufactured in the home country in such an operation. 

This process consists of four stages: (i) creation of a global vision, (ii) integration of overseas organization and establishment of multiple corporate headquarters; (iii) promotion of a global hybridization process; and (iv) globalization of personnel administration and the cultivation of entrepreneurial middle management.

5. Porter’s View of Globalization: An industry can be defined as global if there is some competitive advantage to integrating activities on a worldwide basis. To diagnose the sources of competitive advantage in any context, domestic or global, it is necessary to adopt a disaggregated view of the firm which Porter calls ‘Value Chain’. "Every firm is a collection of discrete activities performed to do business in its industry", which he calls ‘value activities'. The activities performed by a firm include such things as sales people selling the product, service technicians performing repairs, scientists in the laboratory designing products, processes or accountants keeping books. These functions are technical and physically distinct. The firm's value chain resides in a larger stream of activities termed as value system. Suppliers have value chains that provide the purchased inputs to the firm's chain, buyer's have value chains in which the firm's product or service is employed, channels have value chains through which the firms’ product or service passes. The connections among these activities become essential to competitive advantage. Value chain concept needs the notion of competitive scope. Competitive scope is the breadth of activities the firm performs in competing in an industry. There are four basic dimensions of competitive scope. They include: Segment scope, industry scope, vertical scope and geographic scope. Segment scope refers to the range of scope the firm serves, for example product varieties, customers’ types, etc. Industry scope refers to the range of related industries the firm competes in with a coordinated strategy. Vertical scope refers to the activities that are performed by the firm versus suppliers and channels. The geographic scope refers to the geographic regions in which the firm operates with coordinated strategy. Competitive scope is vital for competitive advantage. It shapes the configuration of the value chain how activities are performed and whether activities are shared among units. International strategy is an issue of geographic scope. A firm that competes internationally must decide how to spread the activities in the value chain among countries. The distinctive issues in international, as contrasted to domestic, strategy can be summarized in two key dimensions of how a firm competes internationally. Porter calls the first the configuration of n firms* activities worldwide, or the location in the world where each activity in the value chain is performed including how many places. The second dimension is called by Porter 'coordination' which refers to how liked activities performed in different countries are coordinated with each other.

Industries globalize when the benefits of configuration and/or coordination globally exceed the costs of doing so. The way in which an industry globalizes reflects the specific benefits and costs of global configuration and/or coordination of each value activity. Further, in global competition, a country must be viewed as a platform and not as the place where all activities of a firm are performed.

6. Michael Taylor and Nigel Thrift considered that the emerging global corporation was the result of the complex process of interlocking between the relatively autonomous development sequences of subsidiaries, branches and affiliates. These firms grow into complex international economic network. 

7. Globalization: A Macro-Fordist view: This approach has been developed by Wisse Dekker, former president of Philips who calls it "transationalization of business". Dekker defines. Globalization as a relatively early stage in the internationalization of the firm. According to him transnationalization takes place in the following steps.

• The local enterprise produces and sells in one and the same country. 
• The international enterprise still produces entirely or predominantly in the parent country but establishes sales in foreign markets. International firms are characterized by a strong central organization. 
• The global enterprise is transcending part of its production process abroad - often limited to assembling - to circumvent input barriers or because of transportation costs; 
• Multinational enterprise bas complete production facilities, sometimes even R & D in a host of countries. The MNC often has a federal structure, a network organization in which synergy plays an important role. Production in many cases is no longer local for local.