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Doctoral Thesis / Dissertation, 2016
1. Chapter One: Investments and Foreign Direct Investments Attractiveness
1.1. Investments and classification of Investments.15 1.2. Concept, Theories, and Practice of Foreign Direct Investments
1.2.1. Theories of Foreign Direct Investment
1.2.2. Practice of Foreign Direct Investment Over Multiple Historical Periods
1.3. Determinants of Investments Attractiveness
2. Chapter Two: Methodology of Foreign Direct Investments Attractiveness Research
2.1. Review of Foreign Direct Investments Attractiveness Assessment Methods
2.2. Composite Measure of Foreign Direct Investments Attractiveness
2.3. Aggregate Methods in the Study of Attractiveness of Investment
2.3.1. Synthetic Vector Measure
2.3.2. Synthetic Measure Using PCA Method
2.3.3. Topsis Method
3. Chapter Three: Investment Specificity in Arab Countries
3.1. Culture and Economic Geography in Arab Countries..68 3.2. Analyses of FDI Trends for Arab Countries.83 3.2.1. FDI in Arab Countries
3.2.2. The Inter-Arab Direct Investment and Sectoral Distribution of Arabic Countries.94 3.3. Analyses of Indicators of Investments Climate in Arab Countries
4. Chapter Four: Empirical Analysis of the Investment Attractiveness Countries
4.1. Analyses of the Attractiveness of Arab Countries and Poland Using Vector Methods
4.2. Analyses of Factors Influencing Investment Attractiveness in Arab Countries (in Comparison with Poland)
4.3. Change in the Investment Attractiveness of Arab Countries and Poland in the Period 2005-2010
4.4. Propositions for Important Changes in Investment Attractiveness in Arab Countries
Conclusions and Future Research
List of Figures
List of Tables
All praises are due to Allah, the Lord of the World, and may the peace and blessing of Allah be upon his messenger Mohamed. Without the mercy and aid of Allah, this thesis could not have been started or completed.
I owe special debt of gratitude to prepare this thesis to my supervisor, dr hab. prof. Tomasz Wiśniewski, whose academic experience, patience, kindness, and encouragement was beyond the call of duty. His continuous support was a driving force behind this thesis.
I am grateful to dr hab. inż. prof. Kesra Nermend for his advice, discussions and suggestions, which were significantly important to the thesis.
I owe special gratitude to my parents, wife, children, brothers, sisters, cousins, relatives, the closest friends to my heart – Salah and haji Sajid, the best friends - Dr Essam and Dr Ali, friends Ammar, Hassan, and Ayad, and my all other Iraqi and Polish friends. All my success should be attributed to them due to their patience, support, and prayers.
I would like to express my gratitude to all the members of Faculty of Economics and Management that provided me with support and equipment I needed to produce and complete my thesis. Especially to the Dean, prof. zw. dr hab. Waldemar Tarczyński, Vice-Dean dr hab. prof. Tomasz Bernat, Vice-Dean dr hab. prof. Małgorzata Łatuszyńska, dr hab. prof. zw. Jerzy Dudziński, dr hab. prof. Sebastian Majewski and to all the staff of the Faculty.
I would like to express my gratitude to all those who gave me the possibility to complete this thesis.
Finally, I am grateful to the Iraqi government, the Iraqi Cultural Office in Warsaw and the University of Szczecin, who made my scholarship possible.
SABAH Al MIHYAWI,
Abbildung in dieser Leseprobe nicht enthalten
The flow of investments in developing countries varies greatly across countries. In this research, due to the lack of capital markets in some of Arab countries we have been focusing on foreign direct investment as one of types of foreign investment. Foreign investment comprises foreign direct investment (FDI), which inﬂows have provided the strong impetus on economic development across countries. FDI serves as an important source of supply of funds for domestic investments, promoting capital formation in the host country. Nowadays, more attention is paid to the issues of foreign direct investments at both national and international levels. According to World Investments reports, many developing countries, including the Arab countries, have attracted only small amounts of FDI inﬂows despite their efforts towards the economic openness.
It means many factors impede the flow of foreign capital to Arab countries. The attractiveness of investment is a set of features and factors that allow the investor to evaluate the potential of any country to be more attractive for investment than the other one. Many factors include economic factors, social factors and political factors, which lead to increase in foreign direct investment. The potential investor considers these factors when choosing a country for investments and evaluating investment attractiveness. The term of investment attractiveness refers to a set of factors that help to provide a suitable investment climate. The term of the investment climate means economic and financial conditions in a country that affect whether individuals and businesses are willing to do an investment there. This climate is usually available through improving the determinants of investment. The problem of policy makers in the Arab countries is to identify the factors that determine the investment attractiveness and to know the factors, which have the greatest influence on it. In this study, we are trying to find out the most important factors having influence on investment in Arab countries. Attracting investment is an important component of competitiveness for any country. It is worth mentioning here that competitiveness means the set of institutions, policies and factors that determine the level of productivity[*] of the country.
The importance of this research to the Arab countries is to provide a composite index that describes factors having an influence on the attractiveness of foreign direct investments. To calculate this composite index we need data that describe factors, which influence the attractiveness of investments. These data have been selected from many sources such as UNCTA and Arab Investment and Export Credit Guarantee Corporation. The index shows the rank of selected Arab countries according to their attractiveness for receiving inward FDI and then compare it with Poland as a good basis for comparison (the details are given later in Chapter 1). Also, due to the structure of the index, there is a possibility to conduct and analyse details of attractiveness for each country. Policy makers may use these analyses to draw conclusions about how to improve the country’s attractiveness for receiving inward FDI.
Arab countries tried for decades to attract foreign investments. The needs for these countries to attract more funding to meet the growing needs of infrastructure development compel them to look for external sources of funds. There is also the apparent lack of domestic investment in most Arab countries. Arab countries have made many efforts to attract foreign investments, but the volume of foreign investment is lower than they plannned and expected. Therefore, it is necessary to understand the reasons for this situation.
Arab countries share common characteristics such as language, religion, culture or location. However, these common factors do not prevent those countries to be different in other features, such as the structure and size of economy, the population, and the size of natural resources, economic progress and many others. There are different views about what factors are the most important and influential in attracting investment. The theoretical studies indicate that the motives for investment are the most important aspects that determine attractiveness of investment. There are many motives to foreign investments like the search for natural resources, efficiency, markets, low-cost supply of unskilled or semi-skilled workforce, acquisition of technological capabilities, management or marketing experience and organizational skills. In our work, we try to find out what explains the attraction of foreign investment. If the motives to foreign investment in the Arab countries vary from one country to another, the reasons for this situation are differences in the structure and size of their economies. Then, the influencing factors in attracting foreign investment in a particular country are not necessarily the same factors affecting other countries, and this is the research problem.
We are doing analyses and test of the most important influencing factors in attracting foreign investment to the Arab countries. As a result, we come up with practical proposals and recommendations to assist decision makers in improving the investment attractiveness. This is done through the knowledge of the most important factors attracting foreign investment to their countries. Also, comparison among Arab countries and Poland as a benchmark has been done.
The main goal of the research is to assess the investment attractiveness in Arab countries. This main goal could be decomposed into four detailed sub - goals. Then the most important issues in this thesis are as follows:
identification and analyses of the factors determining the investment attractiveness, construction of the measure of investment attractiveness, application of the measure for Arab countries, proposal of changes that might improve investment attractiveness of Arab countries. assessment of investment attractiveness in Arab countries and comparison with Poland as a benchmark.
The main hypothesis of the research is the following: Political factors have a major impact on investment attractiveness of Arab countries.
Our dissertation comprising of four chapters sets out the below details:
Chapter 1 describes the investment and foreign direct investment attractiveness through three sections. The chapter covers the concept of investment and classification of investments, and theories of foreign direct investment. The chapter demonstrates the history of foreign investment around the world. Determinants of foreign investment as one of the barriers to investment are referred to in this chapter.
Chapter 2 describes the methodology of FDI attractiveness assessment research through three sections. Some indices and studies on foreign direct investment attractiveness are presented in this chapter. The general steps used to build composite indicators are demonstrated. A comparison of the methods used to assess attractiveness investments is also described in this chapter.
Chapter 3 describes the investment specificity in Arab countries through three sections. The overview of selected economic and geographical data of the Arab countries and the subject of our study is presented in section one. The FDI trends in Arab countries are analysed in section two. In section three, we refer to the investment climate in Arab countries through analyses of selected of indicators.
Chapter 4 describes the assessment of investment attractiveness of Arab countries through four sections. In the first section, the analyses of the attractiveness of Arab countries and Poland using vector methods are discussed. We refer to the steps taken to build the composite index by synthetic vector measure and compare our results with other indices. In section two, we analyse the factors that are influencing investment attractiveness in Arab countries, compared to Poland. We discuss the changes in investment attractiveness of Arab countries and Poland in section three. In the last section, we show proposals that may help to increase the flow of FDI into each Arab country separately.
We were limited to data from “only” 13 Arab countries because there were no enough data about the others. For example there were no data on FDI for Sudan, no data about inflation were available for the State of Palestine, there were no data for GDP for Comoros. During the research period, there was a war and unstable political and economic situation in Somalia. In some Arab countries, data were available but unreliable. This study is the first one that compares the investment attractiveness of the Arab countries in the Middle East and North Africa with Poland over the period 2005-2010. We did an investigation both in database of the Iraqi Ministry of Higher Education and Scientific Research and in different databases available on the Internet and there was no study available on the same subject. We selected Poland as a base for comparison and the reasons of that were as follows:
For comparison, we wanted a country, which was a good benchmarko for investments attractiveness. We concentrated on Europe because of the change froma centrally planned economy toa market economy,as and this is what happened in some of the Arab countries, which were transformed from a centralis z ed systemin to a market system, such as Iraq. Polandha i sbecome the most attractive country for foreign investment in Central Europesince after i ts he transformation from communismfor more than 20 yearsago . There is some instruction of inflows of capital to the country in some Arab countries same like in Poland on communism. Poland has the largest economy in Central Europe andwa i s the only European Union country that recorded economic growth when the other economies declined duringof the financial crisis in 2009. Polandha i s one of the strongest stock exchanges, while as the financial markets in some Arab countriesare characteris z ed by weakor , and non-existent stock exchanges t in others . T and t hus, Poland is a good model forthese countriesseeking to developthe financial markets. Poland is the largest sources of natural resources in Europe, and as well some Arab countries (such as Saudi Arabia, Iraq, Qatar and others) have s a huge great potentialof natural resources, such as oil and gas and other minerals (seeC c hapter 3). Poland maybe nowbe is at a historical crossroads , in effect, becoming one of the leading European countriesand to be a model for Arab economies.
In some aspect dimension s, Arab countries are comparable to Poland. Poland is a religious societyin a which is similarway to Arab countries.To s S election of an other countries y for comparison- such as China, India, … etc.- wouldhave been misleading inexact, because of the large differencebetwee i n the size of their economies y andthe populations and those of between these countries and each separate Arab country, and therefore itwas would have been sensible better to choose Poland.Also, Poland has its ave own independent currency, as is the case with Arab countries like in Arab countries .
Our plan was to choose a long period, and it would have been the best if we could choose a long time for a comparison. However, considering the Arab countries, it is difficult to choose any stability period. Many Arab countries are instable because of wars, international sanctions, political unrest and economic crisis. There is also lack of data. Some Arab countries still refrain from publishing economic data for many reasons. Thus we selected the period 2005-2010 because:
in the years before 2005, the region experienced a long period of instability. That was because of the wars in Iraq, and imposing economic sanctions on Iraq. Therefore, the Arab region has suffered from a state of political and economic instability. As well as the FDI inflows, percentage of world total FDI inflows before 2005 was insignificant and did not exceed 3.4 percent. While this percentage increased to 4.8 percent in 2005 and reached a maximum of 7 percent in 2009.
since the beginning of 2011, the Arab world has witnessed a lack of political and economic stability, which lasted until now. It was caused by the Arab Spring or the Arab revolutions. There were not enough or reliable data for many of the Arab countries for the period that followed the events of the Arab Spring.
Many factors influence FDI attractiveness, and in our work for the methods; we decided to use the factors recognized in three groups: economic factors, social factors and political factors. These three groups can give a clear view about the impact of factors on attracting investments. In our study we selected 16 possible factors and 13 Arab countries, according to a literature review that we refer to in details in Table 1-9.
We used these factors as input data in synthetic vector measure in two ways. The first approach called vector measure method we have used all the data, and we get 16 input factors. In the second approach called composite vector measure, we used the data in three groups (economic factors; social factors; and political factors). After the colocation of each group we have only three input factors to make the comparison much easier. These comparisons make easy to improve the country in FDI influence. The quality of index was measured using the correlation between actual inflows of FDI and proposal FDI attractiveness index.
Since we aim to work dynamic analyses (during consideration of the year 2005 as a reference to the other years), we had to use synthetic vector measure instead of other approaches’. In the other approaches,’ the possibility to conduct such a dynamic analyses is not available.
Our input data are chosen from various sources such as World Bank, United Nations Conference on Trade and Development, World Bank, Arab Monetary Fund, Arab Central Banks, Arab Trade Financing Program, Arab League, Arab Industrial Development and Mining Organization, Union of Arab Banks, Council of Arab Economic Unity, as well some other sources.
The foreign direct investment (FDI) importance has increased in the past decade. There is a discussion about the negative and positive effects of FDI inflows around the world. FDI can help in development and in creating a better economic environment. Foreign direct investment can support the growth of per capita income in the host country.It works to expand the methods of use of modern management and local raw materials. Moreover, this, it can help in developing and training of human resources(Hassan, 2003, p. 4). However, it does not preclude the existence of a negative impact of foreign direct investment on the balance of payments and competition in local markets. Foreign direct investments (FDI) around the world have grown significantly in recent years. Between 2005 and 2010, FDI inflows around the world increased by 42 percent. However, most of the FDI transactions were among the developed countries. There are difficulties in attracting foreign direct investment in developing countries; there are also variations in distributing foreign direct investment. FDI inflows have provided a strong impetus for economic development in various countries(Yan, 2008) and issues relating to foreign direct investment were subject of research in many studies. FDI is increasingly important to developing countries, as the attractive investments can help countries to attract capital, knowledge, and competitiveness(Ballotta, 2004). Despite this fact over the past few years, the share of the developing countries in global FDI inflows has been declining.
Foreign direct investment is based on many factors such as the openness of the economy, the quality of the workforce, the national economy growth potential, financial and technological, quality of physical infrastructure, natural resources, and the size of the economy. Each year more FDI is flowing from not only developed economies into developing economies but also between developing and transition economies.
Economies of both developed and developing countries are affected by the investment, as one of the important economic variables. There is an important role, which it plays in creating production capacities, as well as expands and supports the production potential. First, we must distinguish between different definitions of investment. In finance, investment means the purchase of a financial product or another asset with the expectation of the future positive returns. Also, in general terms, investment means the use of funds or other resources in expecting of making future benefits (Bodie, Kane, & Marcu, 2008). According to UNCTAD, the investment means every kind of asset invested directly or indirectly by investors in the territory(UNCTAD, 2008a). The concept of investment has changed over time as the nature of international economic relations has changed. Thus many types of investment appeared.
The types of investment distinguish by contrast and differences in the relative importance and characteristics of each form. They also differ by forms and preferences of each of the host countries, likewise the multinational corporations* in adoption a form or forms of investment. For example various levels of economic progress in the host countries pay to follow the forms of foreign investments in them. The size and shape of the investments (Multinational Corporations) affect the choice of form of investments. If investors who expect to increase their profits, costs, or technical factors, they have to execute the foreign direct investments in different forms. Therefore, it could be said there is no common definition of the foreign investment(OECD, 2008, p. 9). However, US - Rwanda bilateral investment treaties (BITS) in 2008, showed that the"investment" means all the indirect or direct assets owned by the investor, such as a capital, profits, or other resources(Malik, 2008, pp. 3-4).
We may perceive investments from different points of view:
investments from the viewpoint of the exporting countries, investments related to the property, foreign portfolio investment.
Investments from the viewpoint of the exporting countries. This group includes horizontal investments, which refers to all foreign products and services manufactured almost similar to those the company produces in its domestic market. It duplicates the same activities in various countries. Horizontal FDI arises because it is too expensive to serve foreign markets through export due to transport costs or trade barriers(Protsenko, 2003).
Second group are vertical investments, which comprise investments where the fragmentation of the production process is done vertically across the border. The companies are located in one country and the other ones - producing parts in another country. It means the production of intermediate goods is abroad and companies introduce them to the home country to use them in the final product(Alfaro & Charlton, 2007).
The investments related to property, include:
Bilateral foreign direct investments. There are two major types of international investment agreement (IIAs): first are the bilateral investment treaties (BITs, known as investment protection and promotion agreements or IPPAs). Bilateral agreements between the countries aim at protecting and promoting the interests of investors of one country in the country where the investment is made (Fulton & Richard, 2011). Second are the preferential trade and investment agreements (PTIAs). PTIAs include provisions to invest in bilateral and multilateral agreements on economic integration (EIAs), such as regional trade agreements (RTAs), free trade agreements (FTAs), and closer economic partnership (CEP) agreements. Increasing the drafting of the investment as part of the agreements, those are covering a wide range of issues, including trade in goods and services. That has led to increased variety of international investment treaty law and a new set of issues, especially concerning the relationship between investment and services in PTIAs. While BITs are still by far, the most number of PTIAs and the latter occupies a more important place in the international investment regime than it was a decade ago. Some countries more and more prefer to address traditional investment protection and liberalization, and the latest issues in the context of these broader agreements, where the investments are only part of a broader economic integration framework(UNCTAD, 2008a).
The first ratification of the bilateral direct foreign investments between Germany and Pakistan took place in 1959 (Yackee, 2010). The bilateral investment treaties grew up during the eighties of the last century. In 1990, there were 470 treaties, which increased to 1513 in 1997, involving 169 countries and territories(Walter, 2000). By the year 2000 of the last century there were about 2000 bilateral investment treaties (BITS). At the beginnings of the early years of this decade, the overall international investment agreements (IIAs) comprised 3164 agreements, which included 331 other IIAs and 2833 BITs. The purpose of developing countries to sign bilateral investment treaties is to attract more foreign direct investments. These agreements offer to all foreign investors in the host country ways to protect their investments and give them advantages over local investors. There are many rights guaranteed by the BIT agreements. Some of them guarantee investors to protect private property rights. Also, bilateral investments treaties give the investor the right to sue the host government if the government would take over the company(Yannaca-Small, 2008, p. 8). That is through the ICSID Convention, which is the main tool for the settlement of disputes of the investor countries, limits the jurisdiction of its centre to disputes between investors from different countries(Mann, 2008, p. 4). Investments treaties have been developed by capital-exporting countries to promote investments and protect their investors in capital-importing countries. With capital flowing from more developed countries to less developed ones, the bulk of these investments treaties traditionally were concluded between developed and developing countries.
Wholly owned direct foreign investments are when a single investor, either a legal or natural person acquires a productive asset in a foreign country and controls and operates that asset to make a profit. To buy that asset, the investor must make a series of contracts with other persons and may have to contract with a host country for permission to operate the investment or to obtain desired incentives, such as tax exemptions(Salacuse, 2013). The investor keeps the right to ownership of the investment project. Besides that, investors can manage and control all the operations, and through investment establish branches of the company in the host country. The multinational corporations (MNC)* are one of the common and popular kinds that have increased their investments in developing countries. These investments can make links to the developing economies from developed countries. One of the advantages of these investments is that the increase in amount of foreign investments inflows to the host countries leads to increase in the goods and services inflows to the domestic market. Moreover, reduced import and the surplus of export is observed, which, leads to improve the Balance of Payments (BOP). The large size of these projects leads to a transfer of technology. While, the cons of this type of investment is that the host countries are afraid of the danger of monopoly(Hallward Driemeier, 2003).
Investments in the free zone. Free zone is a region of a country where the customs and taxes are exempt or lower than in the rest area of a country. These exemptions allow the freedom of trade and therefore, may contribute to attracting investment(ḫṣawna, 2010, p. 13). Free trade zones (FTZ) are usually located near international airports and ports. It is one of the economic tools that contribute to economic development through attracting modern technology; establishment of export-oriented industries; providing jobs, and maximizes foreign currency. There were over 1735 free zones in 133 countries in 2010(Bost, 2011, p. 3).
The Foreign Portfolio Investment (FPI) and foreign direct investment (FDI) are considered as long as distinct and separate forms of international capital inflows exist. However, in today's world there are reasons for treating them as if they were interconnected phenomena (Humanicki, Kelm, & Olszewski, 2013). FPI means foreign investment and direct ownership of some securities from stocks and bonds of national institutions by non-resident individuals and institution without any control or participation from the person in the organization and management of the project. This is called a short-term investment, hot money. The parent company provides management branch and foreign ownership requirements, and this distinguishes FDI from the indirect foreign investment. This investment sometimes is called the portfolios of investment securities. Another issue are forms of foreign investment overlapping between direct or indirect investments. This can be treated as a form of foreign direct investment because of its process of transforming technological resources, material, and human resources, and such forms can refer to the following(UNCTAD, 1998, p. 351; Ming, 2010; Salacuse, 2013):
Licensing Contract: it is an agreement or a contract between a multinational company and a domestic investor, sometimes referred to as a “concession agreement”(UNCTAD, 2004a). Through this agreement, the foreign investor gives the right to the investor to use the national technology or brand. That helps a foreign investor in transferring production methods and products to new markets.
Product-In-Hand Project; it is an agreement between the foreign investor and the domestic investor. It is provided that the local investor must pay the value of the project to the foreign investor. The foreign investor submits a design of the project and methods of operation, maintenance, and administration (especially in the start phase). The host country will pay the cost of obtaining machinery, plus transport costs(Robinson, 1967, p. 166).
Managerial Contract; It is an agreement between the foreign investor and the host country. Under this agreement, foreign investor is running a part of the operations of a specific project in the host country to participate in profits(L.S.Walsh, 1983, p. 77).
Contract for the Agency; the model that appears in the field of trade, it is an agreement between a foreign investor and the host country. Under the contract, one of the parties employs another party called the agent to facilitate the sale of goods and products of the foreign investor to the final consumer(L.S.Walsh, 1983, p. 64).
Subcontracting Business Arrangement; The purpose of this type of contract is to hold an agreement between one company (the contractor or "principal"), and another company (the "subcontractor") to export, supply or produce basic components of goods. The second party (subcontractor) uses a brand obtained from the first party in the production of final products(EIM Business & Policy Research, 2009, p. 12).
Construction Joint Venture (CJV: exists when two or more enterprises (design units, equipment suppliers, construction contractors) sign a consortium contract to form a joint bidding consortium to undertake a project through various forms (financial, human resources, etc.)(Ming, 2010). This investment (CJV) can be in one of three forms: legal shapes, partnership consortium/contractual, or corporation(Šryf, 2003).
There are other types of investments, which are called foreign direct investment in land by a foreign company or a country(Kamal). These investments give rights to land-use or land ownership; these rights can be valid for a limited period and can extend(Görgen, Rudloff, Simons, Üllenberg, Väth, & Wimmer, 2009).
In this research, the focus will be on the foreign direct investment due to the lack of another kind of investments in the Arab countries.
There is a belief about the benefits of foreign direct investments (FDI) to economies of both the host and investor’s countries. Therefore, foreign direct investments have more attention, at each of the international and national level.
It is believed that FDI originated within American companies, and some of its forms, as we know today were developed mainly in American companies. However, Lipsey said that the East India Company, which chartered in London in 1600, established branches abroad. According to Lipsey the first foreign direct investment in Virginia State took place through the company that was chartered by King James I in 1606 with the purpose to establish the first permanent English settlement in Jamestown (Lipsey, 2001). Before the mid-nineteenth century, the capital inflows across borders were mainly in the form of lending by European investors to borrowers in other European countries(Kindleberger, 2006). For the first time the concept of foreign direct investments emerged in the writings of Herbert before the First World War. At this period, the people of Western Europe used a large part of their savings and income to finance foreign governments and enterprises in other regions of the world(Kamga Wafo, 1998). By the mid-twentieth century, the largest share of FDI was in the natural resources. Therefore, the concession agreements for natural resource extraction became an issue of importance in international law(UNCTAD, 2005a). At the end of the last century, after the spread of technological innovations in all parts of the world forms of foreign investment have become more diverse.
The definition of foreign direct investment is the transmission of foreign capital to invest abroad directly in working in industrial units, financing constructions, agriculture, or service. The motive of this foreign direct investment is the profit(Alasrag, 2005). FDI means that investor exercises a powerful influence on the management institution established in the host country(Kehal, 2004, p. 14). The parent company is allowed to control foreign assets of much larger, including those funded through retained earnings and by borrowing from domestic or foreign creditors (Feldstein, 1995, p. 46). According to the United Nations Conference on Trade and Development (UNCTAD) a growing group of owned assets is owned by foreigners with economic value, and can, therefore, be a foreign direct investment(UNCTAD, 2011a).
FDI is the total funds held outside the local economic system by the investor(Alzhrany, 2004, p. 26). Foreign direct investment is also the goal of making a permanent interest that the company is seeking to achieve in the foreign economy (Duce, 2004). Foreign direct investment is the flow of investment capital into the host countries to achieve the benefits and maximize profits. It can also be shared with local capital in those countries(Msaadawi, 2008, pp. 163-164). The foreign direct investment has three components, which are equity investment, reinvested earnings, and intra-company loans(UNCTAD, 2004b, p. 345; ʿbd Alǧfar, 2002, p. 15). The measurements and definitions of FDI still differ among countries, despite efforts of international agencies to push for the agreement.
Various FDI theories provide the motivations and determinants of FDI. The theories try to answer the questions why the firms prefer to invest abroad and how they enter into the foreign countries, etc. All the new marks in the new theories are to add some new elements and criticism to the earlier ones. Economists classified the FDI theories into micro-level and macro-level FDI theories. The micro-level theories (such as the theory of monopolistic advantage, the theory of internalization, and eclectic FDI theory) discuss the motivation of FDI associated with the firm level. The macro-level FDI theories (such as capital market theory, FDI theories based on exchange rates, and FDI theories based on economic geography) give the macroeconomic factors that determine the FDI. Besides these two categories, the development theories of FDI (which combine both the micro level and macro level FDI theories (such as Life-cycle theory) also discussed the motivation of FDI inflows(Denisia, 2010, p. 53).
We list the most important theories of FDI in below theories (ʿbd Alǧfar, 2002; Denisia, 2010)
the theory of monopolistic advantage, the theory of internalization, the eclectic theory, product life-cycle model, the theory of exchange rates in imperfect capital markets, theory based on economic geography.
Stephen Hymer (1976) developed the theory of monopolistic advantage. According to this theory, firms invest abroad because of certain firm-specific advantages such as access to raw materials, economies of scale, trade names, patents, low transaction costs, etc. Also, these features are limited to the company enabling it to get the monopoly profit. Hymer stated that local firms will always be better informed about the local economic environment, and to have FDI taken place there must be certain conditions. The theory assumes investments to be viable, and the markets of these benefits must be imperfect(ʿbd Alǧfar, 2002).
Casson and Buckley developed the theory of internalization in 1976 (Rugman & Verbeke, 2007, p. 156). According to this theory and due to imperfect market* firms try to make use of their monopolistic advantage themselves. Buckley and Casson (1976) suggest incorporation a vertical union in bringing new operations and activities under the governance of the firm. Earlier the intermediate firms carried out these activities. In the same year Hymer added two major determinants of FDI to this theory; first is advantages that some firms possess in a special activity and the second is the removal of competition(Denisia, 2010).
The eclectic theory; in 1980, John H. Dunning developed a comprehensive theory of foreign direct investment. Dunning believes there are three factors or three advantages called Ownership Location Internalization (OLI) paradigm(Zhu, 2008, p. 16), which must be existing to make decision of foreign direct investments(Dunning, 2001):
Ownership (O) - Ownership advantages refer to the assets (such as natural resources, patents, trademarks, etc.) which are possessed by the firm and may be transferred within MNCs at lower costs, and lead to reduction of costs or increase of incomes. The ownership advantage helps the company to compete with local companies in the foreign economy (Johnson, 2005, p. 19).
Location (L) - when the first condition is achieved, then location advantages decide who will become the host country for the activities of MNCs. Choose of the host country will accord to specific location advantages. Such as distance from the home country, lower costs of transportation, natural resources availability, telecommunications, government policies, market size, taxes, tariffs or lower labour cost , etc. (Root, 1998; Brouthers, Brouthers, & Werner, 1996).
Internalization (I) - advantages, will be achieved when the first two conditions are achieved, it must be useful for the firm to use these advantages in collaboration of some factors outside the home country.
According to Liu Wenke and others, these advantages are complementary and not substitute for each other in explaining the activities of FDI(Wenke & Jingfeng, 2005, p. 14).
The theory of exchange rates in imperfect capital markets; In 1985,"Cushman pointed to some cases of uncertainty, which could theoretically contribute to the increase of foreign direct investment"(Cushman, 1988). He believes that the stability of the currency and the economic stability are a motivation for foreign direct investment. Cushman concludes that rise in the value of dollar has led to decrease in the value of foreign direct investment in the United States by 25 percent. However, this theory cannot explain simultaneous foreign direct investment between countries with different currencies(Denisia, 2010, p. 56).
Theory based on economic geography. One of the macroeconomic FDI theories is based on economic geography. It focuses on countries and explains why internationally successful industries develop in particular countries. These explanations were based on the differences among countries regarding the availability of natural resources, nature of labour and local demand, infrastructure, etc. The FDI theories based on economic geography present also how governments can affect the resources within the control by different policy actions(Krugman, 1998).
Raymond Vernon proposed the product life cycle theory in the mid 1960 s(Hill, 1997, p. 136). The theory analyses the relationship between product lifecycle and possible FDI inflows. The concept includes four consecutive stages: product introduction, product growth, product maturity, and product decline. The life cycle starts when a company introduces a product that is wholly or partly differentiated from old products. At the first stage, the product is a specialty and, nowadays the manufacturer has a monopoly.
The theory mentions a cycle where a domestic company produces a product, and then to capture the world market, the firm’s foreign assistant produces the product and finally the product is produced in any parts of the world where the cost of production of the product is the lowest. However, as more companies enter the market the different brands become more and more alike to each other in the consumers’ viewpoint. The product may slip into the third stage as a mature product. Brand competition now gives way to price competition(Franklin R, 1990, pp. 125-126). The last stage demand for the product will go down, and it will become obsolete.
From the FDI theories discussed above, we found some determinants of FDI, such as exchange rate, interest rate, labour force, taxes, tariffs, political stability,economies of scale, natural resources, good infrastructure, labour costs, government policies, etc.
Since the inception of foreign direct investment it has passed through different stages of time, as presented below:
before the First World War (1800-1913), between the two Worlds Wars (1919-1945), a recovery period of foreign investments after the Second World War (1946-1969), modern trends of foreign investments (1970-2010).
During the period before the First World War (1800-1913), the great depression had a negative impact on the global economy, through a relatively simple direct investments and international movements of capital and their effects on trade of goods and services across the borders (Winder, 2006, p. 789). In this period, the international business developed from intermediate forms, such as the foreign agencies and licensing arrangements, to multinational corporations(Harvey & Jon, 1990). Before the first war and between 1897 and 1908 the value and number of investments in European manufacturing were about three times higher compared to the years 1881-1897(Bova, 1995). In the literature before this period, it was considered that the majority of international investments were indirect investments. This belief was based on a study published in 1938 by Chon Lewis, and accepted as fact for over 40 years. In reality, the majority of international investment is a direct investment(Trends, p. 24).
From the mid-seventies, some economists checked the accounts of the United Kingdom, as the largest international investor at that time. The conclusion was that the investments were almost direct investments. Before the First World War, the United States was the largest importer of foreign capital in the world(Chang, 2004). Table 1-1 shows the share of direct investment in foreign private investment in the United States and US private investment abroad for the years
1897-1914. In this period most the foreign investments in the United States were portfolio investments. About 80 percent of the stock of long-term investments in the United States was portfolio investments (Lipsey, C, H, & N, 1999). Also over 50 percent of the world investments were in the primary sector (agriculture and raw materials) 20 percent were in railroads, 15 percent in manufacturing, and 10 percent in services(Akrami, 2008, p. 137).
Table 1- 1. Share of Direct Investment in Foreign Private Investment in the United States and US Private Investment Abroad: Selected Years, 1897 to 1919(Percent)
Abbildung in dieser Leseprobe nicht enthalten
Source: Author’s elaboration according to (Lipsey, 1993).
In the period between the two Worlds Wars (1919-1945), there were a few different estimates of total foreign investment. A significant reduction in foreign direct investments (FDI) inflows on the list of biggest investors changed the positions of countries. The United States had emerged creditor from the war. Also, the European investment in the United States, Latin America, and Britain liquidated about US $ 4 billion from their investments abroad.
Robert E. Lipsey and others argue that the period after the First World War witnessed the first U.S. portfolio investment abroad, including the large loans to foreign governments. By the end of 1919, direct investments reduced to slightly more than half of private investments in the United States abroad. However, this represented less than a quarter of the total foreign investments including government loans(Lipsey, C, H, & N, 1999, pp. 313-314).
The 1920s are characterized by rapid growth in both direct and portfolio private investments abroad. The direct investments amounted to more than twice the value of the past decade. By 1929, the value of U.S. private portfolio investments exceeded that of direct investments for the first time. The international investments in the twenties took the form of foreign direct investments. There has been a regular increase in the share of FDI from the main oil companies. In 1929, the international investments reached US $ 55 billion, the share of the United States was about US $ 15.7 billion(Akrami, 2008). The share of the United Kingdom in the international investments was about US $ 19 billion while the share of the Latin America was about US $ 13 billion (Twomey, 1998).
The foreign investments have slowed a lot after the great depression of 1929 until the period before the Second World War. This decline was due to the collapse of international trade, increased unemployment, lower commodity prices, worsening political unrest and imposing restrictions on foreign exchange, especially during the great depression 1929-1932. Table1-2 shows the yearly British and U.S. investments in the period 1919-1938. After the crisis, both the United States and Britain sought re-stream the capital through an established many investment projects in the first sector and the services sector(Taylor & Wilson, 2011, p. 273). By 1940, direct investments were about 60 percent of U.S. private outward investments
Table 1- 2. Average Yearly British and U.S. Investments 1919-1938(US $ Million)
Abbildung in dieser Leseprobe nicht enthalten
Source:Author’s elaboration according to (Akrami, 2008, p. 137).
At Recovery Period of Foreign Investments, after the Second World War (1946-1969), economists around the world expected that the great recession could be followed by inflationary boom after the war. The recession appeared after few years in 1949, and it was both mild and short-lived(Blyth, 2013). The United States controlled the global foreign direct investment inflows after the end of World War II. The United States got about three-quarters of foreign direct investments (including profit reinvested) in the period 1945-1960. The net flow of foreign direct investments in the period 1951-1955 were about US $ 3.3 billion, mostly in developed countries. Since that time, the FDI has become a global phenomenon(Anand, 2006, p. 43).
The U.S. companies dominated foreign direct investments through the Marshall Plan, the wars and crises in the period 1950 to 1965. The value of foreign direct investments abroad in the United States increased from 62 percent in 1950 to 65 percent in 1960. The total foreign direct investment in the world was US $ 67 billion in 1960. The United State had the biggest share of that with about US $ 33 billion, and United Kingdom US $ 11 billion(Twomey, 1998).
Over the period "between" 1961-1964 the European countries got from the U.S. investments about 50 percent of the total American investments abroad. In 1964, the foreign investments in the United States had increased by 8.9 percent, and most were from Britain.
After the mid-sixties, Japan and Germany had become the largest exporter of the volume of FDI investment instead of U.S. When the European investors’ started investing in the U.S., the Japanese industry competed with U.S. industry as well. The direct investment inflow to the U.S was less than 10 percent of the total inflow to developed countries in 1960 and 17 percent in 1967-1969(Lipsey, 1993, p. 116).
The Modern Trends of Foreign Investments as a phenomenon started at the beginning of the seventies of the last century. Here, we can divide this stage into the following periods;
the seventies of the twentieth century, the eighties of the last century, the beginning of the nineties until 2010.
The seventies of the twentieth century is a stage characterized by the operations' development of multinational companies in product, volume of sales, with an increase in the integration of market economies. As well as the crisis transmission of the U.S. dollar to the rest of the world, has led to a crisis of global recession. Also, there was the process of correction in oil prices in 1973, and the second correction in 1979. This led to large financial surpluses and had an active role in feeding the international financial market. The funds of about US $ 590 billion in 1979 including US $ 64 surpluses to OPEC (Bergendahl, 1984, p. 37), were employed mostly as deposits with international banks and international financial institutions.
The bulk of geographical distribution of foreign investments during this period was among the developed countries. The share of the Organization for Economic Cooperation and Development countries* in the total global investment inflows was about 95 percent (Qasm, 1987, p. 116). The share of the developed economies in the global total foreign direct investment was more than 75 percent in the period 1970-1979(Sundaram, Schwank, & Arnim, 2011, p. 10). The FDI inflows in Arab countries were about US $ 0.5 billion in 1970, to US $ 1.4 billion in 1975, and decreased in 1979 amounting to US $ -0.1 billion**. FDI inflows in Eastern and South- Eastern Asia excluding China were about US $ 0.6 billion in 1970, increased in 1975 to reaching US $ 2.5 billion, and increased to US $ 2.6 billion in 1979 (see Table 1-3).
The second period covers the eighties of the last century. The inflows of global foreign direct investments increased by 28 percent- from US $ 42.2 billion in 1979, amounting to US $ 54.1 billion in 1980. In 1985, the inflows of global FDI increased to US $ 56.1 billion. However, the United Nation in the first world investment report noted that the worldwide outflows of foreign direct investment rose by 20 percent in both 1988 and 1989, amounting to US $ 198.3 billion (UNCTAD, 1991, p. 3).
Moreover “according to International Monetary Fund data, during the second half of the eighty’s world FDI increased by average yearly rates of 41 percent”(Bajo-Rubio & Muñoz, 2000, p. 3).
The FDI inflows in developed countries increased from US $ 33.7 billion in 1979, amounting to US $ 46.5 billion in 1980. In 1985, the FDI inflows in developed countries decreased to US $ 41.8 billion and to US $ 166.9 billion in 1989. However, the share of the developed economies of the world's total foreign direct investment was 75 percent for the period 1980-1989(Sundaram, Schwank, & Arnim, 2011).
The FDI inflows in Arab countries have significantly decreased by 3000 % in 1980, from US $ -0.1 billion in 1979, to record US $ -3.1 billion in 1980. In 1985, the FDI inflows in Arab countries increased to US $ 2 billion and reduced to US $ 1.6 billion in 1989. Table 1-3 shows the Regional Distribution of FDI Inflows over the period 1970–1989 (US $ Billion).
Table 1- 3. Regional Distribution of FDI Inflows, 1970–1989 (US $ Billion)
Abbildung in dieser Leseprobe nicht enthalten
Source: Author’s elaboration according to(UNCTAD, a).
The final period was from the beginning of the nineties until 2010. At the beginning of 1990s global foreign direct investment inflows growth was at much higher rates than global economic growth or trade(Carson, 2003). In 1990, the total inflows of foreign direct investment in the world amounting to US $ 208 billion by average growth 5 percent of the previous year. Developed countries attract over four-fifths of global foreign direct investment inflows in 1990. The Japan, United States, and the European Community accounted for 70 percent of global inflows(United Nations, 1992, pp. 1-3).
The FDI inflows in Arab countries decreased by 25 percent to the amount of US $ 1.2 billion in 1990, from US $ 1.6 billion in 1989. The FDI inflows in Arab countries significantly increased by 83 percent in 1991, to reach US $ 2.2 billion (see Table1-4).
In 1992, the global inflows of foreign direct investment to US $ 167.4 billion with average growth 8 percent of the previous year. In this year, the FDI inflows in Arab countries significantly increased, compared to the second year with 73 percent, to reach US $ 3.8 billion.
In 1993, after a two-year slowdown in global inflows of foreign direct investment, it recovered to reaching US $ 222.7 billion, by average growth 33 percent. The FDI inflows in Arab countries increased slightly with 3 percent, to reach US $ 3.9 billion, comparing with US $ 3.8 billion in the previous year.
In 1994, the Mexican financial crisis* has started. According to the World Investment report 1995, the devaluation of the Mexican peso had a mixed effect on foreign direct investment. On the one hand, the devaluation has created a new possibility for export-oriented investment and lowered the cost in exchange. On the other hand, the domestic market-seeking investment was suffering from the recession(UNCTAD, 1994; UNCTAD, 1995). The annual average of foreign direct investments was US $ 200 billion during the period 1989-1994(UNCTAD, a). Table1-4 shows the regional distribution of FDI inflow for the period, 1990–1994.
In 1994, the global inflows of foreign direct investment reached US $ 255.9 billion, by average growth 15 percent. The FDI inflows in Arab countries decreased by 10 percent, to reach US $ 3.5 billion, compared to US $ 3.9 billion in 1993.
Table 1- 4. Regional Distribution of FDI Inflows, 1990–1994 (US $ Billion)
Abbildung in dieser Leseprobe nicht enthalten
Source: Author’s elaboration according to(UNCTAD, a).
In 1995, the global inflows of foreign direct investment reached US $ 331.1 billion, by average growth 29 percent compared to the previous year. Table1-5 shows the regional distribution of FDI inflows for the period 1995–2000. The FDI inflows in Arab countries were reduced by 20 percent to the second year, to reach US $ 2.8 billion, comparing with US $ 3.5 billion in 1994. According to the United Nations, China has been the largest developing-country recipient of FDI since 1992(UNCTAD, 1995). In 1996, the global inflows of foreign direct investment reaching US $ 384.9 billion, by average growth 16 percent of 1995. The foreign direct investments inflows in Arab countries were increased by 75 percent, to reaching US $ 4.9 billion, comparing with US $ 2.8 billion in 1995.
In 1997, the Asian crisis originated in South East Asia, with two periods: the first from July 1997 to December 1997, when the first international aid was provided. While the second from the middle of 1998, when crisis expanded outside the region such as, China, Brazil, and Russia. Also, many Southeast Asian countries had a breakdown in economic growth rates and decreased in foreign direct investment’s projects because of the crisis. (Karunatilleka, 1999, pp. 3-36). The South East Asian companies got a competitive trade advantage from the depreciating currencies. The Asian economies started investing abroad to keep the exchange rates of their currencies low. As a result, capital flowed from Asia to internet stocks in the United States, which led to rising stock prices (McKibbin, Warwick J; Stoeckel, Andrew, 2009, p. 4). The Global foreign direct investments inflows were about US $ 478 billion in 1997, with annual growth 24 percent of 1996. The FDI inflows in Arab countries are increased by 24 percent, reaching US $ 6.1 billion, comparing with US $ 4.9 billion in 1996.
Table 1- 5. Regional Distribution of FDI Inflows, 1995–2000 (US $ Billion)
Abbildung in dieser Leseprobe nicht enthalten
Source: Author’s elaboration according to (UNCTAD, a).
In 1998, the global FDI inflows growth increased by 45 percent to reach US $ 692.5 billion. The FDI inflows in Arab countries were reduced by -16 percent, to reaching US $ 5.1 billion in 1998, comparing with US $ 6.1 billion in 1997. In 1999, the global FDI inflows growth increased by 55 percent to reach US $ 1075 billion. Developed countries increased by 67 percent and reach US $ 853 billion in 1999.
The FDI inflows in Arab countries dropped by the same percentage achieved in 1998 by -16 percent, to reach US $ 4.3 billion in 1999, compared with US $ 5.1 billion in 1998.
In 2000, the global FDI inflows growth increased by 18 percent to reach US $ 1270.8 billion. The FDI inflows in Arab countries in 2000 were increased by 35 percent, to reaching US $ 5.8 billion, comparing with US $ 4.3 billion in 1999 (see Table1-5)(UNCTAD, 2001).
In 2001, the global FDI inflows declined sharply by -34 percent from about US $ 1270 billion in 2000 to US $ 837.7 billion (see Table1-6). That decrease due to the microeconomic and macroeconomic factors such as the sharp decrease in cross-border mergers, weak economic growth, and low corporate profits(UNCTAD,b). The FDI inflows in Arab countries in 2001 were increased by 62 percent, to reaching US $ 9.4 billion, comparing with US $ 5.8 billion in 2000. In 2002, the inflows of global FDI in the world declined by -25 percent of the previous year to reaching US $ 628.7 billion. The FDI inflows in Arab countries in 2002 reduced by -23 percent, to reaching US $ 7.2 billion, comparing with US $ 9.4 billion in 2001.
Table1- 6.Regional Distribution of FDI Inflows, 2001–2005 (US $ Billion)
Abbildung in dieser Leseprobe nicht enthalten
Source: Author’s elaboration according to (UNCTAD, a).
In 2003, for the third year the total FDI inflows in the world reduced by -4 percent from US $ 628.7 billion in 2002, to US $ 604.3 billion in 2003. That was the lowest level since 1998. Several factors, such as landing the pace of privatization in some countries were behind the slowdown in economic growth in many countries(UNCTAD, 2003, p. 13).
The FDI inflows in Arab countries have a significant growth in 2003 with 122 percent, to reaching US $ 16 billion, comparing with US $ 7.2 billion in 2002.
In 2004, the global FDI inflows rose first time after three years of declining inflows with average annual 22 percent and reaching US $ 737.6 billion. According to the UNCTAD, foreign direct investment rose especially in developing countries and Transition Economies due to the growth of competition between many companies, and the high prices of many goods industries. This stimulated the inflows of FDI to countries with many natural resources such as minerals, gas, and oil(UNCTAD, 2005a, p. 7). The FDI inflows in Arab countries in 2004 increased by 58 percent, to reaching US $ 25.2 billion, comparing with US $ 16 billion in 2003.
In 2005, for the second year after the events of September 11 in 2001, the total FDI inflows in the world rose by 35 percent from US $ 737.6 billion in 2004, to US $ 996.7 billion in 2005. According to the UNCTAD, the merger of cross-border companies in 2004 stimulated the increases in FDI (UNCTAD, 2006, p. 17). The FDI inflows in Arab countries in 2005 increased by 88 percent, to reaching US $ 47.4 billion, comparing with US $ 25.2 billion in 2004. Table1-6 shows the Regional Distribution of FDI Inflows, 2001–2005 (US $ Billion).
The global FDI inflows rose in 2006 to reach US $ 1461.8 billion with average growth of 47 percent from the previous year (see Table1-7). This reflects the strong economic performance in many parts of the world(UNCTAD, 2008b). The FDI inflows in Arab countries in 2006 increased by 48 percent, to reaching US $ 70.1 billion, comparing with US $ 47.4 billion in 2005. The rise in global FDI inflows in part because the corporate profits all over the world and resulted in rising stock prices that raised the value of merger of cross-border companies(UNCTAD, 2007, p. 16).
In 2007, the global FDI inflows growth and rose by 35 percent to reach US $ 1970.9 billion, exceeding the record level achieved in 2000 by about US $ 700 billion. The inflows of FDI continued growth in some economic groups, despite the start of the financial crisis in 2007. The FDI inflows in Arab countries in 2007 increased by 17 percent, to reaching US $ 82 billion, comparing with US $ 70.1 billion in 2006.
At September 15, 2008, Lehman Brothers filed for bankruptcy, the global financial crisis has sent a wave of risk on financial markets around the world; banks stopped lending to each other. Cross-border bank lending decreased a lot and lending fell by 58 percent on average between countries(Haas & Horen, 2012). At this time, Losses in securities based on debt in the housing sector amounted to about US $ 500 billion(Mishkin F. S., 2010).
At this time, the international banks played a significant role in transferring the crisis to the economies of other countries(Contessi & Pace, 2011, p. 2). As a result, in 2009, the global financial crisis has been largest, and, many of developed economies faced a deep recession. Warwick J McKibbin and Andrew Stoeckel, study, showed that the financial crisis that started in the United States was not limited only to the United States but had an impact on the global economy (McKibbin & Stoeckel, 2009).
How can that affect the economic crisis on the size of foreign investments flowing to developing countries? Three main channels accord to study for United Nations University 2009 in Finland(Naudé, 2009, pp. 4-7):
reductions in domestic lending, and banking failures, reductions in export revenues, reductions in financial inflows to developing countries.
Table 1- 7. Regional Distribution of FDI Inflows, 2006-2010 (US $ Billion)
Abbildung in dieser Leseprobe nicht enthalten
Source: Author’s elaboration according to (UNCTAD, 2011b, p. 187; UNCTAD, a).
In 2008, the global FDI inflows growth reduced by -12 percent to reach US $ 1744.1 billion. In 2008, developing countries FDI inflows grew by 15 percent from the previous year, to reach US $ 658 billion. Developed countries reduced by 22 percent and reached US $ 1032.3 billion. This reduction in investments in developed countries led to increasing the share in global FDI inflows to developing economies, and Transition Economies(UNCTAD, 2009b). The FDI inflows in Arab countries in 2008 increased by 19 percent, to reaching US $ 97.6 billion, comparing with US $ 82 billion in 2007.
Global FDI inflows reduced in 2009 by -32 percent of 2008, to reach US $ 1185 billion. The FDI inflows in Arab countries in 2009 reduced by -16 percent, to reaching US $ 82.4 billion, comparing with US $ 97.6 billion in 2008. Global FDI inflows increased in 2010 by 5 percent of 2009, to reach US $ 1243.6 billion. This growth was mainly the result of higher inflows to developed countries and the USA. According to United Nations, the FDI inflows in 2010 were about 37 percent below their peak in 2007, and about 15 percent below their pre-crisis average (UNCTAD, 2011b, p. 2). The FDI inflows in Arab countries in 2010 reduced by -17 percent, to reaching US $ 86.6 billion, comparing with US $ 82.4 billion in 2005. Table1-7 shows the Regional Distribution of FDI inflows for the period 2006-2010 (US $ Billion).
The process of making decision relating to foreign direct investment by multinational corporations, is the most powerful force in the investment activity in the world, from the most complex processes. These issues are discussed thoroughly in the economic literature and by applied research specialist. According to the literature there are many factors which determine investment decisions of multinational corporations. To assess the investment attractiveness we need to refer to determinants of investments and they are different. Determinants of investment are the factors that stand in the way of the inflow of investments into the country. It might be different views of investment attractiveness. If you are looking for the regional definition it is described as a set of incentives for investment i.e. offering wide-ranging benefits that may be gained when managing business activities in given areas(Nizielska, 2012, p. 55). But when we are looking for more objective definition of investment attractiveness it is defined as a set of factors that help to provide a suitable investment climate.
The term of the investment climate refers to the economic and financial conditions in a country that affect whether individuals and businesses are willing to do investment there. International attractiveness for investment is the ability of the country in a given period of time to attract investment projects in a various fields, and attract production companies and components of capital, expertise and creativity in various fields(The Arab Investment & Export Credit Guarantee Corporation, 2013).
There are several types of motives for foreign investment, including search for natural resources, search for efficiency, and the search for markets(Mottaleb & Kalirajan, 2010, p. 2). The first studies tried to find the factors that affect foreign direct investment decision in developed countries(Barclay, 2002, p. 3). Perhaps the determinants of investments depend on the sector, type and motivation of foreign direct investments. If a country is going to attract foreign direct investments, which depends on the knowledge, this is difficult without enough human resources and local technology. Moreover, it is difficult to attract foreign direct investments for efficiency-seeking business if the conditions of the investments are not proper. To know the factors of FDI attractiveness it is necessary to know the determinant factors that attract FDI(Kokkinou & Psycharis, 2004). The main factors affecting FDI inflow are the determinant factors of FDI(Collier & Gunning, 1999). Taylor pointed out that local and global factors are important in determining the quantity and quality of investment inflows to developing countries (Taylor & Sarno, 1997, pp. 451-470). Within these factors there are various categories such as regulatory framework, resourcefactors, infrastructure, the stability of political and macroeconomic situation and the capacity for economic management(The World Bank, 1997, pp. 49-50).
These categories can overlap, and sometimes it is difficult to differentiate between them. Numerous studies have addressed the attractiveness of foreign direct investment, and many studies have focused on the motives of investment. Most empirical studies have looked at different keys of these factors, and their results were different not only regarding the importance or statistical significance of these factors but the direction of the effect. Therefore, the literature review shows there are several categories of these factors; some economists divide them into (Kawash, 2010; Soumia & Abderrezzak, 2013; Alavinasab, 2013; Hasen & Gianluigi, 2007; Hailu, 2010; David & Ashoka, 1992):
market size, or the economies of scale (GDP per capita), which is one of the most important determinants of FDI it is usually measured as the total GDP (Population x GDP per capita) produced(Heshmati & Davis, 2007, p. 11), the quality and developing basic infrastructures, such as road transport, railway transport, telecommunications, information,and energy is a major determinant of the FDI in the host countries. The good infrastructure is necessary to keep country’s economic growth, because its make the operating cost low, which can increase the return on investment and, therefore, improve FDI (Soumia & Abderrezzak, 2013, p. 303), the level of trade openness, the Trade-to-GDP ratio often used to measure the openness of trade, human capital and technology considered as a determinant of economic growth. Human capital also effects on growth through its dealing with FDI. Some studies suggest the secondary school enrollment as a factor refers to the skills, macroeconomic and political stability, and developing the financial system of the host country are an important factor to attract FDI, the rate of return on investment, the profitability of investments is of key importance to foreign investors. For this, the decision to invest in the host economy depends on the risk and return on investment in the economy.
Table 1- 8. The Determinants of the Host Country for FDI
Abbildung in dieser Leseprobe nicht enthalten
Source:(UNCTAD, 2009a, p. 8).
Agarwal survey in 1980, on the determinants of economic attractiveness of the country, suggested three main factors(Sekkat & Ange, 2004, p. 4):
the difference in the rate of return on capital between countries,
diversify investors' portfolio,
the size of the market in the host country.
The difference in the rate of return depends on the incentives for foreign investors and the supply of cheap labour. However, the study showed that the incentives offered by the host country have only a small effect on FDI. Table1-8 displays the Determinants of the Host Country for FDI.
Study to J.H.Dunning, shows the same three main key factors in Table 1-8 but in different names. He refers to three groups of factors: policy framework for FDI, business facilitation, and economic determinants(Pilarska & Wałęga, 2014, p. 1169).
Abbildung in dieser Leseprobe nicht enthalten
[*] Productivity is commonly defined as a ratio of a volume measure of output to a volume measure of input use(OECD, 2001).
* The terms "corporation'', "firm", and "company", are generally used interchangeably, the term "enterprise" is sometimes preferred as clearly including a network of corporate and non-corporate entities in different countries joined together by ties of ownership. The term "multinational” refers to the activities of the corporation or enterprise involving more than one nation. Certain minimum qualifying criteria are often used in respect of the type of activity or the importance of the foreign component in the total activity. A transnational corporation (TNC) regarded as an enterprise comprising entities in more than one country. (Department of Economic and Social Affairs, 1973)
* There is no single agreed-upon definition of the multinational (or transnational) companies because in fact that these companies has many dimensions and may be viewed from any of several different perspectives –economic, political, legal, managerial, and others. Some observers regard ownership as the key criterion in their view the companies becomes multinational only when the headquarters or parent company is effectively owned by nationals of at least two countries. Second definitions see that an international company is seen as multinational only when the managers of the parent company are nationals of several different countries. Another definition see that an international company is seen as multinational only when the parent company that controls a large cluster of corporations of various nationalities. For more details see(Franklin R, 1990)
* Imperfect market means a market where information is not quickly distributed to all its participants and where pairing of buyers and sellers is not immediate. Forms of imperfect competition include oligopoly, in which there are few sellers of a product.
* In 1970 the Organization for Economic Cooperation and Development including: Austria, Belgium, Canada, Denmark, Finland, France, West Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States(OECD).
* *Data on FDI flows presented on net bases (capital transactions' credits less debits between direct investors and their foreign affiliates). Net decreases in assets or net increases in liabilities recorded as credits (with a positive sign); while net increases in assets or net decreases in liabilities are recorded as debits (with a negative sign). Hence, FDI flows with a negative sign called reverse investment or disinvestment, in another meaning the registration of foreign direct investment on a net basis: where are recording direct investment flows during the period usually years. Flows such creditor or contained; buy tools from the original equity capital minus debit flows like pulling an investor who has already pumped in periods previous, which explains the emergence of a statement contained direct investment flows to state what is negative during some years(UNCTAD, a).
* There is no precise definition of "financial crisis,” but a common vision is that the turmoil in the financial markets rises to the level of crisis when credit inflow to households and businesses it restricted, and the real economy of goods and services adversely affected. The financial crises have common elements and multi-dimensional and it is difficult to distinguish using a single index. It comes in many forms. Often the financial crisis is associated with one or more of the following cases (the budget deficit, government support, change in asset prices, the change in the volume of credit, and a collapse in the financial markets) (Claessens & Kose, 2013; Jickling, 2008)
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