CHAPTER 11 - FOREIGN DIRECT INVESTMENT

RESEARCH NOTES
GROUP 3:
SHALLYMAR MADRIAGA
ELY ANNE ECHAVARIA
MARY JOY A. BORBANO
ROANNE TABIGNE

Foreign Direct Investment

Foreign Direct Investment (FDI) refers to the investment made by a company or an
individual in one country into a company or project in another country. Here are some research
notes about FDI:
FDI can bring many benefits to the host country, including increased employment
opportunities, technology transfer, and access to new markets.
The World Bank reports that FDI flows to developing countries have increased significantly
in recent years, with total FDI inflows reaching $759 billion in 2019.
FDI is often used as a tool for companies to expand their business internationally, diversify
their operations, and reduce their dependence on a single market.
Governments can use policies to encourage FDI, such as tax incentives, streamlined
regulations, and investment protection agreements.
FDI can also bring challenges to the host country, including the risk of a foreign company
dominating the local market, or the potential for exploitation of workers and resources.
The United States, China, and the United Kingdom are the largest sources of FDI, with
many companies from these countries investing in developing countries.
FDI can also take different forms, such as mergers and acquisitions, joint ventures, and
greenfield investments.
Research shows that FDI can have a positive impact on economic growth, but the extent of
this impact depends on various factors, such as the quality of institutions, the level of human
capital, and the economic policies of the host country.
The COVID-19 pandemic has had a significant impact on FDI flows, with many companies
delaying or canceling investments due to uncertainty and economic downturns.
 Overall, FDI is an important driver of economic development, but policymakers and
businesses need to carefully consider the benefits and risks involved to ensure that FDI
contributes to sustainable and inclusive growth.

Multinational Company
- a company that has business operations in atleast one country other than its home country.

Examples of MNC
COCA-COLA; TOYOTA; SAMSUNG; WALMART

FDI IN THE PHILIPPINES

*Reasons Why Roreign Investors Don't Invest in the Philippines?
- Bureaucratic red tape
- Infrastructure challenges
- Limited access to financing
- Political instability

Two Main Forms of Foreign Direct Investment: Greenfield and Brownfield Investment
•Greenfield investment - refers to the process of creating a new business or expanding an
existing business by constructing a new facility in a completely new location.

•Brownfield investment - is in which a company acquires an existing facility or infrastructure in

a foreign country, typically through a merger or acquisition.
Brownfield investment - involves repurposing an existing facility to meet the needs of the
acquiring company.

Three Types of FDI:

•Horizontal FDI is also known as market-seeking FDI because the company invests in a foreign
country to serve the local market. Horizontal FDI can lead to increased competition in the local
market, which can benefit consumers through lower prices and increased product choices. The
investment is made at the same stage of the production process as in the home country.

•Vertical or Forward FDI - This type of FDI occurs when a company invests in a foreign
country to either source inputs for its production processes or to sell its output. This type of
investment can also help companies to reduce the risk of supply chain disruptions and improve
their competitiveness in global markets.The investment is made at a downstream stage of the
production process.
•Backward Vertical FDI - gain control over the inputs or raw materials that are used in its
production process. The investment is made at an upstream stage of the production process.

Benefits and Costs of FDI

Benefits of FDI:
Transfer of resources: FDI can bring in new capital, technology, and managerial expertise to
the host country.
Employment generation: FDI can lead to the creation of new jobs in the host country, both
directly and indirectly.
Balance of payments: FDI can help to improve the host country's balance of payments by
increasing exports, reducing imports, and bringing in new capital inflows.
Constructive competition: FDI can stimulate competition in the host country.

Costs of FDI:
Environmental damages: FDI can have negative environmental impacts.
Human rights violations: FDI can also be associated with human rights violations.
Over-dependency: If the host country becomes too dependent on FDI, it may be vulnerable to
sudden changes in investor sentiment or external shocks.

ADVANTAGES OF FOREIGN DIRECT INVESTMENT

Economic growth
The creation of jobs is the most obvious advantage of FDI, one of the most important
reasons why a nation (especially a developing one) will look to attract foreign direct investment.
FDI boosts the manufacturing and services sector which results in the creation of jobs and helps
to reduce unemployment rates in the country. Increased employment translates to higher incomes
and equips the population with more buying powers, boosting the overall economy of a country.
Human capital development
Human capital involved the knowledge and competence of a workforce. Skills that
employees gain through training and experience can boost the education and human capital of a
specific country. Through a ripple effect, it can train human resources in other sectors and
companies.
Technology
Targeted countries and businesses receive access to the latest financing tools,
technologies, and operational practices from all across the world. The introduction of newer and
enhanced technologies results in company’s distribution into the local economy, resulting in
enhanced efficiency and effectiveness of the industry.
Increase in exports
 Many goods produced by FDI have global markets, not solely domestic consumption.
The creation of 100% export oriented units help to assist FDI investors in boosting exports from
other countries.
Exchange rate stability
The flow of FDI into a country translates into a continuous flow of foreign exchange,
helping a country’s Central Bank maintain a prosperous reserve of foreign exchange which
results in stable exchange rates.
Improved Capital Flow
Inflow of capital is particularly beneficial for countries with limited domestic resources,
as well as for nations with restricted opportunities to raise funds in global capital markets.
Creation of a Competitive Market
By facilitating the entry of foreign organizations into the domestic marketplace, FDI
helps create a competitive environment, as well as break domestic monopolies. A healthy
competitive environment pushes firms to continuously enhance their processes and product
offerings, thereby fostering innovation. Consumers also gain access to a wider range of
competitively priced products.
Climate
The United Nations has also promoted the use of FDI around the globe to help combat
climate change.

DISADVANTAGES OF FOREIGN DIRECT INVESTMENT

Hindrance of domestic investment

Sometimes FDI can hinder domestic investment. Because of FDI, countries’ local
companies start losing interest to invest in their domestic products.
The risk from political changes
Other countries’ political movements can be changed constantly which could hamper the
investors.
Negative exchange rates
Foreign direct investments can sometimes affect exchange rates to the advantage of one
country and the detriment of another.
Higher costs
When investors invest in foreign counties, they might notice that it is more expensive
than when goods are exported. Often times, more money is invested into machinery and
intellectual property than in wages for local employees.
Poor performance
Multinationals have been criticized for poor working conditions in foreign factories.
 PRAGMATIC APPROACH TO FOREIGN DIRECT INVESTMENT (FDI)
A pragmatic approach to foreign direct investment (FDI) involves a practical, results-
oriented perspective that takes into account the specific economic and social conditions of the
countries involved. This approach recognizes that there are different approaches to FDI and that
each country has its own strengths and weaknesses.
A pragmatic approach to FDI considers several factors before investing in a foreign
country. These factors include the political stability of the country, the economic conditions, the
regulatory environment, the infrastructure, the labor force, and the cultural and social factors.
In practical terms, a pragmatic approach to FDI involves analyzing the risks and benefits
of investing in a particular country, weighing the costs of entry and operation against the
potential rewards, and making an informed decision based on the analysis.
This approach also recognizes the importance of engaging with local stakeholders and
building relationships with local businesses and communities. By doing so, foreign investors can
better understand the local market and cultural nuances, and can establish a more productive and
sustainable presence in the country.

ASEAN FDI
Governments in Southeast Asia devote much of their resources to attracting FDI in the hope
of creating jobs. Green FDI projects generate an average of three direct jobs per million USD
invested in the region (similar to the worldwide average), but the intensity of job creation varies
considerably from country to country by the level of development and economic structure.
Lower-income countries, such as Myanmar and Laos, as well as countries with abundant fossil
fuel resources, such as Brunei Darussalam, tend to attract significant FDI in natural resource
extraction and energy production, which creates relatively few direct jobs.
Emerging economies with diverse and solid industrial capacities, such as Vietnam and Thailand,
create the most jobs per dollar of investment. Countries with highly skilled workforces, advanced
industries, and relatively larger financial sectors, such as Malaysia and Singapore, attract FDI in
high-tech products and services that are knowledge-intensive and require less labor. The high
capital intensity of manufacturing FDI in Indonesia is driven by the metal and chemical
industries, while the high labor intensity of FDI in the Philippines is mainly driven by business
support services.
In addition to capital and employment, FDI has contributed significantly to sustainable
development in Southeast Asia. Many foreign firms introduce significantly newer products and
services than their domestic counterparts in most countries in ASEAN, and this greater capacity
for innovation suggests that there is potential for knowledge and technology transfer to domestic
enterprises
Country with the highest FDI in ASEAN
During the first six months of 2022, Singapore attracted more FDI than any other country in
the ‘ASEAN plus three’ group of countries, which includes the southeast Asian trade bloc along
with China, Japan and South Korea. Singapore was the leading destination for greenfield foreign
direct investment (FDI) in the first half of 2022 within the Association of Southeast Asian
Nations (ASEAN) trade bloc, as companies continued to choose the relatively small city state for
their capital-intensive expansion plans.

ASEAN Investment Report 2022

The ASEAN Investment Report is an annual report analyzing investment and related issues
in ASEAN. It is prepared under a technical cooperation arrangement between the ASEAN
Secretariat and UNCTAD, supported by the ASEAN-Australia Development Cooperation
Program Phase II.
Six Member States recorded a rise in inflows and in two, inflows remained flat. This
contrasted with the situation in 2020 when only two Member States recorded a rise.
ASEAN remained a top recipient of FDI in developing regions (second after China in 2021) and
continued to be an engine of growth. The region’s share of global FDI inflows rose from a pre-
pandemic annual average of 7 per cent in 2011–2017, to 11 per cent in 2018–2019, to 12 per cent
in 2020–2021. Strong inflows pushed up FDI stock in the region to $3.1 trillion, an increase of
72 per cent from 2015 ($1.8 trillion).