Determinants of Direct Foreign Investment (DFI)

Study Notes

Factors Affecting Direct Foreign Investment (DFI)

Countries with greater potential for economic growth are more likely to attract DFI.
Countries that impose relatively low tax rates on corporate earnings are more likely to attract DFI.
Firms typically prefer to pursue DFI in countries where the local currency is expected to strengthen against their own.

Factors Affecting International Portfolio Investment

Investors normally prefer to invest in a country where taxes are relatively low.
Money tends to flow to countries with high interest rates, as long as the local currencies are not expected to weaken.
Investors are attracted to a currency that is expected to strengthen.

Impact of International Capital Flows

The United States relies heavily on foreign investment in U.S. manufacturing plants, offices, and other buildings, debt securities issued by U.S. firms, and U.S. Treasury debt securities.
Foreign investors are especially attracted to the U.S. financial markets when the interest rate in their home country is substantially lower than that in the United States.

Current Account

The current account summarizes payments for merchandise and services, factor income payments, and transfer payments between one specified country and all other countries over a specified period of time.
Merchandise exports and imports represent tangible products that are transported between countries.
Service exports and imports represent tourism and other services.
The difference between total exports and imports is referred to as the balance of trade.
Factor income payments represent income (interest and dividend payments) received by investors on foreign investments in financial assets (securities).
Transfer payments represent aid, grants, and gifts from one country to another.

Trade Volume Among Countries

The annual international trade volume of the United States is between 10 and 20 percent of its annual GDP.
About 20 percent of all U.S. exports are to Canada, while 13 percent are to Mexico.
Canada, China, Mexico, and Japan are the key exporters to the United States. Together, they are responsible for more than half of the value of all U.S. imports.

Trend in U.S. Balance of Trade

The U.S. balance of trade deficit increased substantially from 1997 until 2008.
In the 2008–2009 period, U.S. economic conditions weakened and the U.S. trade deficit decreased.

Friction Regarding Exchange Rates

All governments cannot weaken their home currencies simultaneously.
Actions by one government to weaken its currency causes another country’s currency to strengthen.
Government attempts to influence exchange rates can lead to international disputes.

Agencies that Facilitate International Flows

International Monetary Fund (IMF):
- Promotes cooperation among countries on international monetary issues.
- Promotes stability in exchange rates.
- Provides temporary funds to member countries attempting to correct imbalances of international payments.
- Promotes free mobility of capital funds across countries.
- Promotes free trade.
World Bank (International Bank for Reconstruction and Development):
- Makes loans to countries to enhance economic development.

Description

Explore the factors that influence a country's attractiveness to foreign investors, including economic growth, tax rates, and exchange rates. Learn how these determinants impact Direct Foreign Investment (DFI) decisions.