Notesale: Turn your study into money

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ASEAN Free Trade Area (AFTA)
Asia-Pacific Trade Agreement (APTA)
Central American Integration System (SICA)
Central European Free Trade Agreement (CEFTA)[1]
Common Market for Eastern and Southern Africa (COMESA)
G-3 Free Trade Agreement (G-3)
Greater Arab Free Trade Area (GAFTA) - June 1957[2]
Dominican Republic–Central America Free Trade Agreement (DR-CAFTA)
Gulf Cooperation Council (GCC)
North American Free Trade Agreement (NAFTA)[3]
Pacific Alliance[4]
South Asia Free Trade Agreement (SAFTA)[5]
Southern African Development Community (SADC)
Southern Common Market (MERCOSUR)
Trans-Pacific Strategic Economic Partnership (TPP)[6]

Foreign Direct Investment In The World Economy
 The flow of FDI refers to the amount of FDI undertaken over a given time period
 The stock of FDI refers to the total accumulated value of foreign-owned assets at a given
time
 Outflows of FDI are the flows of FDI out of a country
 Inflows of FDI are the flows of FDI into a country
The Direction Of FDI
 Gross fixed capital formation summarizes the total amount of capital invested in factories,
stores, office buildings, and the like
 All else being equal, the greater the capital investment in an economy, the more favorable
its future prospects are likely to be
The Source Of FDI
 The U
...
has been the largest source country for FDI
 The United Kingdom, the Netherlands, France, Germany, and Japan are other important
source countries

Why Foreign Direct Investment?
Why do firms choose FDI instead of:
 exporting - producing goods at home and then shipping them to the receiving country for
sale
or
 licensing - granting a foreign entity the right to produce and sell the firm’s product in return
for a royalty fee on every unit that the foreign entity sells
The Pattern Of Foreign Direct Investment
According to the eclectic paradigm, in addition to the various factors discussed earlier, it is important
to consider:


location-specific advantages - that arise from using resource endowments or assets that are
tied to a particular location and that a firm finds valuable to combine with its own unique
assets



externalities - knowledge spillovers that occur when companies in the same industry locate
in the same area

and

The Radical View
o
o

The radical view traces its roots to Marxist political and economic theory
It argues that the MNE is an instrument of imperialist domination and a tool for exploiting
host countries to the exclusive benefit of their capitalist-imperialist home countries

The Free Market View
o
o

According to the free market view, international production should be distributed among
countries according to the theory of comparative advantage
The free market view has been embraced by a number of advanced and developing nations,
including the United States, Britain, Chile, and Hong Kong

Pragmatic Nationalism




Pragmatic nationalism suggests that FDI has both benefits, such as inflows of capital,
technology, skills and jobs, and costs, such as repatriation of profits to the home country and
a negative balance of payments effect
According to this view, FDI should be allowed only if the benefits outweigh the costs

Host-Country Benefits
There are four main benefits of inward FDI for a host country:
1
...
employment effects - FDI can bring jobs to a host country that would otherwise not be
created there
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the possible adverse effects of FDI on competition within the host nation


subsidiaries of foreign MNEs may have greater economic power than indigenous
competitors because they may be part of a larger international organization

2
...
the perceived loss of national sovereignty and autonomy


key decisions that can affect the host country’s economy will be made by a foreign parent
that has no real commitment to the host country, and over which the host country’s
government has no real control

Home-Country Benefits
The benefits of FDI for the home country include:




the effect on the capital account of the home country’s balance of payments from the
inward flow of foreign earnings
the employment effects that arise from outward FDI
the gains from learning valuable skills from foreign markets that can subsequently be
transferred back to the home country

Home-Country Costs
The home country’s balance of payments can suffer:





from the initial capital outflow required to finance the FDI
if the purpose of the FDI is to serve the home market from a low cost labor location
if the FDI is a substitute for direct exports
Employment may also be negatively affected if the FDI is a substitute for domestic
production



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