Geneva, 24 June 2009 -- Global foreign direct investment (FDI) inflows and cross-border mergers and acquisitions (M&As) - the main mode of FDI - drastically declined in the last quarter of 2008, and the fall has continued into 2009, UNCTAD data reveal. FDI inflows dropped by 54% and M&As by 77% during the first quarter of 2009 as compared to the same period last year.
Prospects for FDI will remain gloomy for the rest of the year, UNCTAD economists say (UNCTAD, 2009).
Foreign Direct Investment (FDI) is defined by the IMF as an international investment of one company with the intention of lasting relationship. This investment has to exceed 10% of equity of the target company. Also an ambition of the management for influence should be visible. This makes the difference to a
portfolio investment (IMF, 1993).
The following list summarizes major requirements:
· Transfer of capital
· Control investment
· A source of funds for foreign operations
· A balance of payments flow
Before the financial crisis hit the world economy, FDI was one of the major drivers of globalization and continuously increasing with high growth rates. FDI flows over a long period of time even increased faster than world GDP growth. But as reported from the UNCTAD World Investment Report 2009 85% of Transnational Corporations (TNC)3 worldwide are negatively affected by the
financial crisis with respective negative impacts on their investment decisions. This shortfall has also consequences to the landscape of FDI. The USA are still number one in FDI flows but a lot of emerging countries have risen in the list of top FDI inflows. This is another hint for the changes in the world. The emerging markets will more and more take over a leading position in world economics and also a stabilizing function. They will also head the recovery in FDI flow which is expected to take place in 2010.
This paper will primarily deal with the TNC and their decision for FDI. Starting with the motivations, the following process and evaluation criteria, also associated risks have to be taken into account. For a complete picture including the environment a short look at the host country and the effects of FDI will be done at
the end (the decision of the TNC is always connected with espective influences from outside). Finally, all major considerations of a TNC in combination with FDI should be described.
Inhaltsverzeichnis (Table of Contents)
- What is Foreign Direct Investment
- TNC and FDI..
- Motivation...........
- Strategies and Sequences.
- Evaluation of FDI / Capital Budgeting.
- Operational Financial Management after Initial Investment ………………………
- Risks in Connection with FDI.
- Spillover Effects on Host Country.
- Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper aims to provide a comprehensive overview of Foreign Direct Investment (FDI) from the perspective of a Transnational Corporation (TNC). It delves into the motivations behind FDI, the strategies and sequences involved, and the evaluation criteria that TNCs consider. Furthermore, the paper examines the risks associated with FDI and the potential spillover effects on the host country.
- Motivations for TNCs to pursue FDI
- Strategies and sequences for entering foreign markets
- Evaluation of FDI and capital budgeting
- Risks associated with FDI
- Impact of FDI on host countries
Zusammenfassung der Kapitel (Chapter Summaries)
- What is Foreign Direct Investment: This chapter defines FDI, highlighting its significance in global economic activity. It examines the definition of FDI according to the IMF, highlighting the key criteria that distinguish it from portfolio investment. The chapter also explores the impact of the global financial crisis on FDI flows.
- TNC and FDI:
- Motivation: This section explores the underlying reasons behind TNCs investing abroad. It delves into revenue-related motives, such as seeking new markets and exploiting competitive advantages, and cost-related motives, such as achieving economies of scale and accessing cheaper resources. The chapter emphasizes the inherent risk associated with FDI, paving the way for the subsequent discussion on strategies and sequences.
- Strategies and Sequences: This section outlines the different modes of entry for TNCs seeking to expand internationally, ranging from simple export strategies to more complex foreign production and affiliate entry. The chapter emphasizes the importance of a well-defined strategy, given the risks associated with FDI. It also examines the characteristics of each mode of entry, including greenfield investments, mergers and acquisitions, and joint ventures.
- Evaluation of FDI / Capital Budgeting: This section is expected to delve into the rigorous process of evaluating FDI projects. This could involve examining profitability, risk analysis, sensitivity analysis, and other capital budgeting techniques. The chapter may also discuss the various financial tools used for evaluating investments, such as net present value (NPV), internal rate of return (IRR), and payback period.
- Operational Financial Management after Initial Investment: This section will likely cover the ongoing financial management challenges faced by TNCs after the initial FDI investment. This could involve topics such as working capital management, foreign exchange risk management, tax optimization, and performance monitoring. The chapter may also discuss the importance of a strong financial team and effective communication between headquarters and the foreign subsidiary.
- Risks in Connection with FDI: This chapter will likely discuss the various risks inherent in FDI, ranging from political and economic risks to operational and cultural risks. It may provide insights into the tools and strategies TNCs can employ to mitigate these risks, such as comprehensive risk assessments, diversification strategies, and strong governance frameworks.
- Spillover Effects on Host Country: This chapter will likely discuss the potential impact of FDI on the host country. It may analyze the positive effects, such as economic growth, job creation, and technological transfer, and the negative effects, such as environmental degradation, social disruption, and dependence on foreign companies. The chapter will likely also delve into the importance of responsible and ethical business practices and the role of government policies in maximizing the benefits of FDI while mitigating potential risks.
Schlüsselwörter (Keywords)
This paper explores the key considerations of a Transnational Corporation (TNC) engaging in Foreign Direct Investment (FDI), analyzing motivations, strategies, risks, and impact on host countries. Key topics include greenfield investments, mergers & acquisitions, capital budgeting, operational financial management, and spillover effects.
- Arbeit zitieren
- Nicolas Breitfeld (Autor:in), 2009, Foreign Direct Investment (FDI) - Necessary Considerations of a Transnational Company, München, GRIN Verlag, https://www.grin.com/document/143713
