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.
Table of Contents
1 What is Foreign Direct Investment
2 TNC and FDI
2.1 Motivation
2.2 Strategies and Sequences
2.3 Evaluation of FDI / Capital Budgeting
2.4 Operational Financial Management after Initial Investment
3 Risks in Connection with FDI
4 Spillover Effects on Host Country
5 Conclusion
Objectives and Core Themes
This paper examines the strategic decision-making processes of Transnational Corporations (TNCs) regarding Foreign Direct Investment (FDI). It explores the motivations behind international expansion, the evaluation criteria for such investments, the inherent risks, and the socio-economic impacts on host countries, aiming to provide a comprehensive framework for understanding the complexities of global investment decisions.
- Motivations and strategic entry modes for international expansion.
- Capital budgeting and financial management challenges in FDI.
- Categorization and mitigation of risks associated with international business.
- Analysis of spillover effects and their impact on host country development.
- Integration of Corporate Social Responsibility in the investment landscape.
Excerpt from the Book
2.2 Strategies and Sequences
After having achieved the awareness of a profitable investment abroad, the concrete mode of entry has to be planned. Typically four types are distinguished: 1. Export, 2. Licensing, 3. Affiliate entry, 4. Foreign production. In this list the order also represents the impact of risks and financial burden. Therefore only point three and four represent real FDI as it is defined by the UN.
Export to another country typically does not involve high investments. The corporation willing to export needs to find a company willing to import the goods and further distribute them in the host country. Sometimes the exporter builds up a local office to improve the contacts with the importer/distributor and/or to support the local distribution with sales expertise (e.g. building up an own sales force organization).
Licensing also does not involve heavy investments. This is the case when for example technology is granted for royalties.
Real FDI then comes up when a corporation invests in an affiliate or even establishes a foreign production. The typical approaches to this are Greenfield investments, Mergers & Acquisitions, and Joint Ventures.
Greenfield investments take a lot of time and heavy investments are necessary before the needed facilities are set up. But there are also many opportunities. This begins with independency from any partners, or when the corporation has a well-known brand-name which will make the market entry much easier. The new factory of Volkswagen in Russia is an example for a problematic Greenfield investment. It has taken much more time to set up the factory and reach the production rates as originally planned. One main factor was the human capital. It was not as easy to find enough necessary skilled workers, so that many more expatriates had to be sent there, which is also a costly alternative.
Summary of Chapters
1 What is Foreign Direct Investment: Defines FDI according to the IMF and explores the impact of the global financial crisis on FDI flows and the rise of emerging markets.
2 TNC and FDI: Discusses the motives, entry strategies, capital budgeting procedures, and operational financial management challenges faced by transnational corporations.
3 Risks in Connection with FDI: Provides a classification of risks—including political, economic, financial, structural, and cultural—and outlines methods for assessing and mitigating these risks.
4 Spillover Effects on Host Country: Analyzes the positive and negative impacts of FDI on host nations, focusing on technology, labor markets, and the role of Corporate Social Responsibility.
5 Conclusion: Summarizes the complexity of the FDI process, emphasizing that successful international investment requires a holistic analysis beyond simple net present value calculations.
Keywords
Foreign Direct Investment, Transnational Corporations, Capital Budgeting, Market Entry Strategies, Political Risk, Economic Development, Spillover Effects, Globalization, Greenfield Investment, Mergers and Acquisitions, Working Capital Management, Corporate Social Responsibility, Exchange Rate Risk, Risk Mitigation, International Business.
Frequently Asked Questions
What is the primary focus of this publication?
The publication provides an overview of the strategic and financial considerations necessary for Transnational Corporations (TNCs) when engaging in Foreign Direct Investment (FDI).
What are the central themes discussed in the work?
Key themes include motivations for international expansion, entry modes like Greenfield investments and M&A, risk management, and the spillover effects of FDI on host economies.
What is the core objective of the research?
The goal is to raise awareness of the multifaceted factors—ranging from financial calculations to cultural integration—that influence successful FDI decisions.
Which methodologies are mentioned for evaluating FDI?
The text focuses on capital budgeting, specifically the calculation of Net Present Value (NPV), while emphasizing the need for adjusted present value approaches to account for international risks.
What aspects are covered in the main body of the text?
The main body covers investment planning, the classification of entry modes, operational financial management, the identification of country-specific risks, and the analysis of social and economic spillovers.
Which keywords best characterize this work?
Keywords include Foreign Direct Investment, TNCs, Risk Management, Capital Budgeting, Spillover Effects, and Corporate Social Responsibility.
Why are Greenfield investments considered complex according to the text?
They require significant time and capital investment, and as shown by the Volkswagen example in Russia, challenges in local human capital can significantly impact project success.
How does the author define the relationship between cultural differences and M&A failure?
The author argues that cultural clashes often lead to failure because of misaligned internal processes, overvaluation of resources, or a lack of understanding of the local market, such as consumer behavior.
What role does Corporate Social Responsibility (CSR) play in modern FDI?
CSR is increasingly influencing TNCs to establish standard ethical conditions across their global operations, which can positively impact host countries by reducing issues like child labor.
- Quote paper
- Nicolas Breitfeld (Author), 2009, Foreign Direct Investment (FDI) - Necessary Considerations of a Transnational Company, Munich, GRIN Verlag, https://www.grin.com/document/143713
