FDI: Inflows & Outflows Overview

Study Notes

FDI Outflow: Capital provided by investors based in one country to their foreign affiliates, either directly or through related enterprises.
FDI Inflow: Capital received by foreign affiliates from their parent firms, either directly or indirectly through related enterprises.
FDI Components:
- Equity Capital: Direct investor's purchase of shares in a foreign enterprise.
- Reinvested Earnings: Direct investor’s share of undistributed earnings by their foreign affiliates.
- Intra-company Loans: Short or long-term borrowing and lending between direct investors and their foreign affiliates.
Balance of Payments:
- Net Decreases in Assets (Outward FDI): Recorded as credits with a positive sign.
- Net Increases in Liabilities (Inward FDI): Also recorded as credits with a positive sign.
- Net Increases in Assets: Represented as debits with a negative sign.
- Net Decreases in Liabilities: Also recorded as debits with a negative sign.
FDI Stock:
- Outward FDI Stock: Sum of FDI stocks of parent enterprises based in a country.
- Inward FDI Stock: Sum of FDI stocks held by foreign affiliates located in a country.

Global FDI Decline: Financial crisis of 2008 led to a 14% drop in global FDI flows, with continued declines in 2009.
Developed Countries: Experienced sharp declines in FDI inflows and outflows, particularly after the collapse of Lehman Brothers.
Developing and Transition Economies: Initially saw record FDI levels in 2008, but inflows declined as the crisis deepened.
Equity Investments: Significant drop in equity investments indicated a longer recovery period for FDI.

M&As Driving FDI: Cross-border M&As are major drivers of FDI, with their share rising from 52% in 1987 to 83% in 1999.
M&A Motivations: Quick market entry, access to valuable assets, potential financial gains, and personal objectives of managers.
M&A Locations: Most M&As occur between developed countries, historically led by US TNCs, with increasing participation from EU firms.
Developing Countries' M&A Growth: Their share of global M&As grew from 2% in 1987 to 15% in 2006, influenced by privatization and financial crises.
M&A Concerns:
- May shift ownership without adding capacity, leading to layoffs and market dominance by foreign firms.
- May threaten national culture and sovereignty.

Non-equity Relationships: Crucial for global firm expansion, providing access to TNC technologies without traditional FDI.
Types of Non-equity Relationships:
- Franchising Agreements: International restaurant networks, car rentals, and retail trading networks.
- Management Contracts: The hotel industry (often alongside equity forms).
- Partnerships: Business services like accounting, business consultancy, engineering, or legal services.

Impact of FDI on Export Competitiveness:
- Exploiting Static Comparative Advantages: FDI helps developing countries use their resources and labor for exports, but requires investment in education and skills for long-term growth.
- Creating Dynamic Comparative Advantages: TNCs can introduce new skills and technologies in host countries with strong education systems.
- Providing Access to International Markets: FDI aids with established brands but may limit market choices for foreign affiliates.
- Increasing Local Firms' Links to International Markets: FDI links local suppliers to global markets, enhancing exports in developing countries.

Quality Employment and Skills: Drive development by boosting output and wages, especially in high-value sectors.
FDI and Job Creation: FDI aids job creation and capacity building, influenced by FDI type and local policies.
Policies to Maximize FDI Benefits:
- Mandatory Measures: Prescribe what foreign affiliates must do regarding specific aspects of their performance related to host country development objectives (e.g., increasing exports, hiring and training local workers, transferring technology).
- Incentives: Measures to increase the rate of return for FDI or reduce its costs and risks (e.g., tax deductions, infrastructural provision, input subsidies, preferential loans).

Potential Conflict of Interest: Balancing host country development objectives with national treatment and FDI policies.
National Treatment Exceptions: Provide flexibility for developing countries to pursue their development goals through national FDI policies.