Foreign Direct Investments
Foreign direct investment (FDI) is defined as a company from one country making a physical investment in another country. Foreign direct investment plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country which receives the investment, it can be provided with a source of new technologies, capital, processes, products, organizational and management skills, and as such, can provide a strong impetus to economic development. All of these are very important for the economic development of developing countries such as Caribbean countries.
Foreign direct investments (FDI), especially those of multinational corporations (MNC), take shape through the transfer of modern technology including machinery, technical and managerial assistance. All this make the direct foreign investments an advantage for both the investing countries and host countries. The most effective method of foreign direct investments is through MNCs.
A multinational corporation (MNC) is a company that has an established presence in a country other than its home country. They generally have a headquarters in their home country that centralizes the management of their global facilities.
Different Methods to Becoming a Multinational Corporation
Multinational corporations employ multiple approaches as they venture into the international marketplace.
Exporting – through exporting, multinational corporations penetrate foreign markets by selling their products to foreign brokers or agents. Once the products are sold, the corporation loses control over the way the product is marketed. Although this approach is considered low risk on account of its low investment costs, the way that the product is handled can hurt a MNC's image and potential for further business in foreign regions.
License agreements – through licensing agreements, a multinational corporation allows foreign companies to manufacture and sell its products. Additionally, the agreement allows for the use of brand names and symbols which allow the corporation more control over the product and its manufacturing process. By committing to a multinational approach, a corporation can establish joint ventures to exercise full control over the manufacturing process and exchange access to local markets with its business partners.
Acquisition – when a multinational corporation vertically integrates a subsidiary it fully owns (an acquisition), it gains complete control over the manufacturing, distribution and retail elements. This requires a significant investment and entails high levels of risk, but it creates an opportunity to deliver a global product and establish global market domination.
Advantages of MNC's for the Home country
MNC's home country has the following advantages.
1. MNC's create opportunities for marketing the products produced in the home country throughout the world.
2. They create employment opportunities to the people of home country both at home and abroad.
3. It gives a boost to the industrial activities of home country.
4. MNC's help to maintain favourable balance of payment of the home country in the long run.
Advantages of MNC's for the Host country
MNC's can also contribute to the well-being of the host country. The advantages of MNCs to the host country are as follows:
Economic: the investment level, employment level, and income level of the host country increase due to the operation of MNC's. This contributes positively to the economic development of the host country.
Technology: the industries of host country get latest technology from foreign countries through MNC's. In many instances, the host country is in the less developed part of the world such as in the Caribbean which lack modern technology. The presence of these MNCs can in fact allow these host countries access to modern technologies.
Management Expertise: the host country also has an opportunity to benefit from the management expertise of the MNCs. In many of these host countries, there is the problem with brain drain where some of the highly equipped employees migrate to the developed countries. The presence of MNCs in the host country can be a solution to the brain drain problem.
Improvement in Balance Position: the host country can reduce imports and increase exports due to goods produced by MNC's in the host country. Therefore, MNCs contribute to increasing the exports of the host country which translates into an improvement in the host country’s balance of payments position.
The Roles of the World Bank and the International Monetary Fund
Known collectively as the Bretton Woods Institutions after the remote village in New Hampshire, U.S.A., where they were founded by the delegates of 44 nations in July 1944, the World Bank and the International Monetary Fund (IMF) are twin intergovernmental pillars supporting the structure of the world's economic and financial order.
At Bretton Woods the international community assigned to the World Bank the objective of financing economic development. The international community assigned to the IMF a different purpose which is to oversee members' monetary and exchange rate policies.
Source of Funding
The World Bank is an investment bank, intermediating between investors and recipients, borrowing from the one and lending to the other. Its owners are the governments of its member nations with equity shares in the Bank. It obtains most of the funds it lends to finance development by market borrowing through the issue of bonds. The IMF gets its funding from quota subscriptions, or membership fees paid in by the IMF's member countries. Each member contributes to this pool of resources a certain amount of money proportionate to its economic size and strength; richer countries pay more while poorer countries pay less.
Recipients of Funding
Neither wealthy countries nor private individuals borrow from the World Bank, which lends only to creditworthy governments of developing nations. The poorer the country, the more favorable the conditions under which it can borrow from the World Bank. In contrast, all member nations, both wealthy and poor, have the right to financial assistance from the IMF. In order for countries to obtain funding from the IMF, they are usually required to do some sort of structural adjustments. Structural Adjustment refers to a set of economic policies often recommended as a requirement for obtaining a loan from the IMF. Structural adjustment policies usually involve a combination of free market policies such as privatization, fiscal austerity, free trade and deregulation. Some of the typical structural adjustments policies include:
- Reduction in government spending in order to reduce its budget deficit,
- Privatization of state owned industries,
- De-regulation and liberalization of markets,
- Devaluation of currencies to restore competitiveness and reduce current account deficit.