Foreign Direct Investment and TNCs Overview

Study Notes

FDI is investing in a foreign location and engaging in economic activity there, characterized by cross-border control and the investor's involvement in managing the invested resources.
TNCs control assets in their home country and at least one other country, usually by owning a minimum stake in the capital stock.
FDI is growing and plays a significant role in external finance, with firms finding benefits in expanding production internationally. Developing countries see potential advantages in FDI over other forms of external finance.

Investment is spending money or other resources (including knowledge or time) with the expectation of a future return.
In macroeconomics, investment refers to expenditure on new capital goods (e.g., machines, equipment, factories, transportation) which increases productive capacity and contributes to economic growth.
In finance, investment involves purchasing or owning financial assets with the expectation of future returns in the form of income (e.g., dividends) or capital gains (e.g., stock value increase).

FDI is distinguished from other forms of international investment by:
- Control: The investor has control over the use of the resources invested.
- Resource Transfer: Besides capital, other assets and resources are transferred, such as technology, management skills, market access, and entrepreneurship.
Non-equity FDI: Minority ownership can be enough to exercise control, and includes forms like:
- Subcontracting: Hiring another firm to perform tasks or services.
- Management Contracts: Providing management expertise to another firm for a fee.
- Turnkey Contracts: Designing, constructing, and equipping a facility, then handing it over to the client when operational.
- Partnership Agreements: Companies providing brand names and proprietary technology.
- Franchising: Allowing a franchisee to use a brand and operational methods for fees.
- Leasing: One party allows another to use an asset for a specified period for periodic payments.
- Licensing: Contractually allowing a foreign entity to use intellectual property, technology, or trademarks for fees or royalties.

Right of Admission: The right of foreigners to enter a host country's territory and carry out business transactions, either permanently or temporarily. This right does not necessarily include the right to establish a permanent business presence.
Right of Establishment: The right of a foreign investor to establish a permanent business within a host country. This right is narrower than the right of admission.
National Treatment (NT): A principle where a host country extends to foreign investors treatment that is at least as favorable as the treatment accorded to national investors in similar circumstances.
Most-Favored- Nation Treatment (MFN): A principle where a host country extends to foreign investors treatment that is at least as favorable as the treatment it accords to other foreign investors in similar circumstances.

Post-establishment approach: This approach grants limited admission and establishment rights to foreign investors based on the principle of national treatment only after a foreign investment is established within the host country's territory.
Pre-establishment approach: This approach provides clear and transparent provisions that increase predictability and reduce risk for investors entering a new market. It aims to avoid discrimination between foreign and domestic investors and generally limits the host country's sovereign power regarding regulating the entry of foreign investors. These approaches may be subject to a "reserved list" of sectors or activities not covered by the pre-establishment rules.

FDI is a crucial driver of economic growth and development, both for investing and host countries.
Understanding the legal framework and regulatory landscape for FDI is essential for both investors and host countries.
The choice between post-establishment and pre-establishment approaches to regulating foreign investment can have significant implications for the attractiveness of a country’s investment climate.