Foreign Direct Investment in the APA area

INDEX

Section A
About Alexandra plc
Introduction
Reasons for cross-border investing in Malaysia and Australia
Motivation of the host country
Conclusion

Section B
Introduction
Evaluation and Preparation of Country Risks
Conclusion

Section A

This report discusses why Alexandra plc should invest internationally using FDI and why nations in the Far East and Oceania attempt to encourage them to do so. The author recommends Australia and Malaysia as its regional platforms for business activities because these countries would be most suitable for Alexandra plc to invest.

In the second part of the report, the author advices how Alexandra plc can evaluate and prepare for the risks, that might occur in international investment.

About Alexandra plc

They are UK's no.1 range of uniforms and work wear. The key acquisitions de Baer Corporate Clothing and Prima Corporate Wear in 2005 consolidates Alexandra’s position.

They are a leading supplier of work clothing dedicated to innovative garment design, providing clients with top quality at the best prices and the highest level of service and support.

Introduction

Foreign direct investment (FDI) is defined as a company from one country making a physical investment into building a factory in another country.

According to OECD (2006) FDI is more than just capital, as it offers access to internationally available technologies, raw materials and management know how.

Reasons for cross-border investing in Malaysia and Australia

The World Investment Report (2006) ascribes the following main motives influencing investment decisions.

Market-Seeking FDI depends mainly on the size and income growth of host countries. It means investments that aim at either penetrating new markets or maintaining existing ones. (Knickerbocker 1973)

Efficiency-Seeking FDI means investments, which firms hope, will increase their efficiency by exploiting the benefits of economies of scale and scope, productivity-adjusted labor costs, of common ownership etc. (Dunning 1993)

Resource-Seeking FDI means investments that seek to acquire factors of production that are more efficient than those obtainable in the home economy i.e. complementary factors of production, labor, physical infrastructure, raw materials etc.

According to UNCTAD (1998), resource-seeking FDI and market-seeking FDI are more relevant in respect to Greenfield FDI.

FDI inflows have increased about 22% in 2006 especially in the Asia and Oceania region. (World Investment Prospects 2006) As a growth pole in the world economy, the region is becoming increasingly attractive to market-seeking FDI.

There a several location advantages of FDI for Malaysia and Australia such as market size and growth prospects, natural and human resources, openness to international trade and access to international markets and the regulatory and policy framework from which Alexandra plc can benefit. (UNCTAD 1998)

Some of Alexandra’s competitors are already present in Malaysia and Australia such as Wacoal Corporation and Liz Claiborne Inc. (Icon Group)

They have invested there due to lower labor and production costs, market potential, advanced infrastructure, geographical location etc. (MIDA 2005)

Alexandra could benefit from lower labor costs, as the wage per hour is around 1 ₤ in Malaysia compared to 10 ₤ in the UK. In Australia, the labor costs have decreased in the last years. (Labor Statistics 2005)

Malaysia represents an important and developed market concerning textile industry and offer much potential for penetration. The textile industry benefits from a well-developed infrastructure, and it has proved to be an attractive target of foreign investment. Malaysian textiles are recognized worldwide for their quality and reliability. (MIDA 2005)

Australia’s excellent industry capabilities and the unique cultural and geographic advantages lead to Australia's impressive reputation as an investment destination. (WCY 2003)

Motivation of host countries

Since recent financial crisis in Asia, developing and newly industrialized countries have been advised to rely primarily on FDI in order to supplement national savings by capital inflows and to promote economic development on a sustainable basis.

Such capital has now become an important source of growth for these countries. Nonetheless, countries’ experiences have varied, and there have been questions about the economic effects of FDI, the stability of FDI, and the right approach to FDI policies. (Puckahtikom 2002, IMF)

FDI can provide the host country with new markets, cheaper production, access to new technology, products, management skills, and as such can provide a strong impetus to economic development. FDI has the potential to generate employment, raise productivity, transfer skills and technology, enhance exports and contribute to the long-term economic development. (UNCTAD 2004)

Host countries can take advantage of the technology know-how transferred by Alexandra plc. Moreover, through human capital enhancement FDI Alexandra will create new jobs in the host country.

Malaysia is attracting foreign investment in the textile industry in order to improve production efficiency and global competitiveness of Malaysian textiles. (Malaysia Info 2001) Competition is essential to spread the benefit of foreign investments. Without competitive markets, the entry of foreign investors will have little impact on inefficient domestic incumbents and productivity.

The McKinsey Global Institute (2004) found out that efficiency-seeking FDI has limited impact on host countries as the companies use the resources mainly for export. However, the consumers benefit from foreign investors due to broader product selection. Nevertheless, host countries must continue to build a strong infrastructure and seek to attract export-oriented foreign investment.

Furthermore, host countries intervene in the flow of FDI in order to protect their cultural heritages, domestic companies and jobs. They can enact laws and create regulations with which foreign companies must deal if they wish to invest in the host country. The main two reasons why host countries intervene are the balance of payment (BOP) and obtaining resources and benefits (technology, management skills, employment).

As FDI inflows are recorded as additions to the BOPs, the host country gets a BOPs boost from an initial FDI inflow. Furthermore, foreign companies can become suppliers to the production and therefore reduce the imports and improve its BOPs. (Grundy et al. 2006)

Incentives from host countries are a popular mechanism to attract FDI. Malaysia and Australia offer a wide range of attractive incentives for companies. These include pioneer status, special investment capital allowances, and a variety of tax deductions, access to government-sponsored industrial estates, and concessional grants and loans from government agencies. (OECD 2004)

If host countries want the total benefit from FDI, they should focus, beside incentives and regulations, on stabilizing their economy. Macroeconomic instability discourages long-term investment as it makes a forecast concerning demand, prices, and interest rates difficult. (McKinsey Global Institute 2004) Moreover, host countries need to consider a policy of openness to international trade. The most important locational determinants of FDI are the economic factors determining the prospects for MNCs to engage profitably in production activities. If theses factors are favorable, there is an inducement for MNCs to invest in a country. The extent and nature of any FDI will depend upon the precise combination of the economic opportunities available, the friendliness of the policy framework, and the ease of doing business in a country.

[...]