Global economic integration through FDI?
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Today's article introduces you to the problems and challenges that foreign direct investment (FDI) faces in the near future.
Like many things in economics and politics, the benefits of FDI are being contested.
Many question whether FDI is always a good thing for a country.
Even the richest countries of the world are starting to ask this question. Opposition to FDI is gathering steam in developed economies as well as developing and emerging economies where it has always been questioned a bit. Putting the brakes on FDI could put the brakes on world economic development though.
Developing countries stand to gain from FDI by the exposure to new technologies and new ways of doing business that transnational corporations (TNCs) often bring with them. As the author of the article points out, FDI is more important than exports now "for delivery of goods and services to foreign markets." The spread of FDI thoughout the world has occurred in parallel with the spread of western education, science, and engineering technologies. The question is, whether technology transfer via educational institutions is really enough or whether education needs to be accompanied by the reality of functioning viable foreign companies and their businesses.
The successful single country export driven growth strategies of South Korea in the 1970s and 1980s are being transformed into new strategies of mutual investment in other economies. Thailand's excellence in the hotel, restaurant, and tourism industries is acknowledged throughout the world. Thai companies in this industry are certainly a driving force behind excellence in regional markets and may well become a driving force in international markets via Thai FDI in other economies.
Originally, most TNCs originated in Japan, Europe, or the United States. Increasingly, corporations in emerging Asian economies such as South Korea, China, India, and Thailand are transforming themselves into TNCs and investing abroad. The rigors of the international market place may help transform these corporations into major international competitors.
Reading Questions
Here are some questions to guide your reading (See answers at end):
1. Which is a more important way for corporations to deliver their products to foreign markets, exports or FDI? How much more important? (Do a calculation) Can you think of a examples of this in Thailand?
2. Has trade within companies (trade between foreign subsidiaries of transnational companies) become more or less important recently?
3. In the 1970s and 1980s how did the public view the benefits versus costs of FDI? What was the result?
4. Recently which direction has public opinion been heading?
5. What are some of the reasons that countries have been resisting cross-border mergers and acquisitions?
6. Have developed countries reacted differently to takeover bids from emerging economies than they have to takeover bids from other developed countries? How? Give an example.
7. What effect will increasing offshoring of services have on public opinion about FDI?
8. Why have international arbitration cases risen in the last three years?
Bangkok Post Article - September 11, 2006
Are foreign investors still welcome?
KARL P. SAUVANTWorld flows of foreign direct investment (FDI) have soared over the past two decades, from $40 billion in the early 1980s to $900 billion last year. The cumulative stock of FDI has reached close to $10 trillion, making it the most important mechanism for delivery of goods and services to foreign markets: sales by foreign affiliates total roughly $19 trillion, compared to world exports of $11 trillion.
At the same time, the liberalisation of FDI regimes by virtually all countries has been a driving force of intra-company trade, the lifeblood of the emerging system of integrated international production and already around one-third of world trade. But are the good times coming to an end?
FDI can bring a range of benefits, but it also can have costs. During the 1970s, when the transnational corporations (TNCs) undertaking such investment caught the public eye, many governments believed that the costs of FDI outweighed its benefits, so they controlled it. Led by the developed countries, the pendulum began to swing in the 1980s. Once viewed as part of the problem, FDI became part of the solution to economic growth and development.
Nothing exemplifies this more than the changes in national FDI regimes. As the United Nations Conference on Trade and Development reports, of the 2,156 changes that took place between 1991 and 2004, 93% were in the direction of creating a more hospitable environment for TNCs. But there is a real danger that the pendulum is beginning to swing back, leading to a reversal of that liberalisation process.
FDI in developed countries (and increasingly in emerging markets) often takes the form of cross-border mergers and acquisitions (M&A). Resistance to such M&A is becoming more frequent when they involve domestic firms that are regarded by politicians as national champions or important for national security, economic development, or cultural identity. The growing involvement of private equity groups in M&A activity implies additional controversy, as such transactions are typically regarded as being purely speculative.
In the name of economic patriotism, security and other considerations, resistance to M&As is being codified in an increasing number of countries. For example, a United States Senate committee recently sought to block the planned liberalisation of foreign takeover rules for airlines, while Europe has enacted more restrictive takeover laws. Moreover, governments are applying more strictly existing regulatory provisions concerning the vetting of takeovers by foreign firms.
This response is intertwined with a defensive reaction to the growing role of TNCs from emerging markets, the new kids on the block. Established TNCs and their home countries, will need to adjust to this new constellation of forces and its implications for the world market. As we know from other contexts, adjustment to newcomers is not easy. Compare, for example, the reaction to the tie-up between France's Alcatel and America's Lucent to the bids by the China National Offshore Oil Corporation for Chevron or Mittal for Arcelor.
Another type of defensive reaction this time to outward FDI may well arise once the offshoring of services gathers more speed. All indications are that offshoring has reached the tipping point, and more of it will take place through FDI. If countries do not put in place the adjustment mechanisms to deal with the unfolding revolution in making service industry jobs tradeable, a backlash against such outward FDI will become inevitable.
The growing unease with FDI is so far largely confined to developed countries. But there are signs it is spreading to emerging markets. In the case of large projects, some host countries are raising questions about contracts that define their relationship with TNCs, and governments are reviewing such deals because they believe (rightly or wrongly) that they did not get a fair deal. Of the 219 known international arbitration cases concerning investment projects, two-thirds were initiated during the past three years.
Approaches to FDI have changed in the past, and they can change again in the future, depending on how governments view the balance of costs and benefits. This balance involves not only economic factors, but also security and the desire to control one's own economic development.
The concept of 21st century nationalisation, introduced by Peruvian presidential candidate Ollanta Humala, mirrors in this respect the economic patriotism of French Prime Minister Dominique de Villepin.
Reservations against FDI (as against anything foreign) can be found in all groups of countries and politicians can bring them to the surface, resulting in protectionism. It would be ironic, though, if developed countries, which led the FDI liberalisation wave of the past two decades, now led a backlash against FDI.
Let us hope that the de-liberalisation seen in developed countries can be checked before it spreads to other parts of the world and ultimately brings undesirable consequences for all.
Karl P. Sauvant is the executive director of the Program on International Investment at Columbia University (www.cpii.columbia.edu). He is a co-author of 'World Investment Prospects to 2010: Boom or Backlash?', a report on foreign direct investment in 82 countries, to be issued tomorrow by Columbia University and the Economist Intelligence Unit. Project Syndicate, 2006, www.project-syndicate.org
Vocabulary (in discussion above)
foreign direct investment (FDI) - when a foreign company has control over another company or assets in a country (See Wikipedia)
a regime - a system
liberalisation - when laws or attitudes become less strict and people are allowed more freedom of action (See Wikipedia on Liberalisation)
liberalisation of FDI regimes - making FDI easier by making laws less strict
the lifeblood of - the most important thing needed for continued existence (humans need blood to live)
transnational corporations (TNCs) - a corporation that runs businesses in more than one country (See Wikipedia on multinational corporations)
caught the public eye - many people became interested in it (andit became an issue, in the media for instance)
the pendulum began to swing - change began
emerging markets - an economy between developing and fully developed, such as Thailand (See Wikipedia on emerging markets)
mergers and acquisitions (M&A) - "The phrase mergers and acquisitions or M&A refers to the aspect of corporate finance strategy and management dealing with the merging and acquiring of different companies as well as assets. Usually mergers occur in a friendly setting where executives from the respective companies participate in a due diligence process to ensure a successful combination of all parts. Historically, though, mergers have often failed to add significantly to shareholder value." (See Wikipedia)
merger - "a merger is a combination of two companies into one larger company. Such actions are commonly voluntary and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal" (Source Wikipedia)
cross-border mergers and acquisitions - foreign ownership of parts of companies
private equity groups -
vetting - checking thoroughly to make sure things are unacceptable, those unacceptable are rejected (for example the job candidates were thoroughly vetted before the final interview)
intertwined with - mixed with
a constellation - a pattern (originally a group of stars in the sky that form a pattern and have a name like the Big Dipper)
a constellation of forces - a pattern of forces
offshoring of services - outsourcing of services such as call centers, data entry, transcription, insurance claim processing
a backlash against - a negative reaction to
arbitration - resolving legal disputes outside courts (used as a low cost way to resolve commercial disputes, particularly international commercial transactions. Also commonly used in labour, consumer, and family disputes)
nationalisation - when the government takes over (or seizes) a private company or assets and becomes the owner (See Wikipedia on nationalisation)
protectionism - Protectionism is the economic policy of promoting favored domestic industries through the use of high tariffs and other regulations to discourage imports.(See Wikipedia on protectionism)
Answer Key:
1. Which is a more important way for corporations to deliver their products to foreign markets, exports or FDI? How much more important? (Do a calculation) Can you think of a examples of this in Thailand?
FDI is roughly 1.7 times more important than exports ($19 trillion in FDI / $11 trillion in exports).
Automobiles in Thailand are a good example. Many more automobiles are assembled in Thailand than imported completely assembled. The companies that produce these automobiles are all large transnational corporations.
2. Has trade within companies (trade between foreign subsidiaries of transnational companies) become more or less important recently?
More important, intra-company trade (within one company) already accounts for around one-third of world trade.
3. In the 1970s and 1980s how did the public view the benefits versus costs of FDI? What was the result?
In the 1970s the public believed that costs were greater than benefits, so there was a lot of control and regulation. In the 1980s the public believed that benefits were greater than costs, so FDI was liberalised and became easier.
4. Recently which direction has public opinion been heading?
Public opinion has been heading towards a reversal of liberalisation.
5. What are some of the reasons that countries have been resisting cross-border mergers and acquisitions?
There is resistance when the company targeted for merger or acquisition is "important for national security, economic development, or cultural identity." When a company is a source of national pride (a "national champion") economic patriotism may also be a factor.
Most countries are concerned about attracting long-term investment to develop their economies and not speculative investments that might leave the country suddenly in a panic and leave the country in a foreign exchange crisis. Since private equity groups are associated with speculation, most countries are suspicious of this kind of investment.
6. Have developed countries reacted differently to takeover bids from emerging economies than they have to takeover bids from other developed countries? How? Give an example.
Yes, developed countries often have a more defensive reaction to takeover bids from emerging economies. For example, the American reaction to China's bid for Chevron or Mittal for Arcelor was quite different to the merger of France's Alcatel and America's Lucent (See news article).
7. What effect will increasing offshoring of services have on public opinion about FDI?
There is likely to be a backlash in developed countries when more offshoring takes place through FDI and jobs in developed countries are lost to developing countries.
8. Why have international arbitration cases risen in the last three years?
The governments of many emerging market countries are questioning whether they got a good deal on the deals they made with TNCs for large projects in their country in the past.
