FOREIGN DIRECT INVESTMENT

Presented to:Sir Ahmed Ghazali

GROUP MEMBERS

Muhammad Mansha 13024854-001 Hassam Khalid 13024854-009 Hafeez Ur Rahman 13024854-036 Faisal Naseer 13024854-048 Muhammad Waqas 13024854-050 Atif Afzal 13024854-064

CONTENTS Introduction Types of FDI Forms of FDI Source of FDI Theories of FDI Stages of FDI Decision Framework for FDI

INTRODUCTION

Foreign Direct Investment mean an individual, a group of individuals, an incorporated or un- incorporated entity or a public or private company investing his money in other country.

CONTINUE

Increasing foreign direct investment is usually used as one indicator of growing economy. Foreign direct investment (FDI) plays a positive role in the process of economic growth.

TYPES OF FDI

1) Inward Foreign Direct Investment: Inward FDI for an economy can be

defined as the capital provided from a foreign direct investor (i.e. the coca cola company) residing in a country, to that economy, which is residing in another country.

EXAMPLE

Procter & Gamble (P &G) decides to open a factory in Pakistan. They are going to need some capital. That capital is inward FDI for Pakistan.

TYPES OF FDI2) Outward Foreign Direct Investment:

Foreign direct investment by a domestic firm establishing a facility abroad. Contrasts with outward FDI.Example:

Q mobile wants to establish a new facility in UAE. Q mobile needs capital to establish new facility in UAE. It is outward FDI for Pakistan.

Muhmmad Mansha13024854-001

FORMS OF FDI

Two main forms of FDI:1) Greenfield Investment2) Merger & Acquisition

FORMS OF FDI

Greenfield Investment: A green field investment is a form of foreign direct investment where a parent company builds its operations in a foreign country from the ground up. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees.

EXAMPLE

A company start its operations in new country from the ground up that is Greenfield investment.

FORMS OF FDIMerger & Acquisitions:

Mergers and acquisitions (M&A) is a general term that refers to the consolidation of companies or assets. While there are several types of transactions classified under the notion of M&A, a merger means a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed.

EXAMPLEPakistani operation of America and emirates banks were sold to union bank. Later on Union Bank and Standard Charted Bank merge and new name is Standard Charted Bank.

Faisal Naseer13024854-048

GREENFIELD VS MERGER & ACQUISITION

Greenfield: M & A: You will have control

over your staff you will have control

over your brand. It is likely to cost more.

The entry process may take years.

You gain access to an established market.

You have skilled workers

Easy and Less Risky A merger can lead to

less choice for consumers

WHY FDI?

There is a strong relationship between foreign investment and economic growth. Larger inflows of foreign investments are needed for the country to achieve a sustainable high trajectory of economic growth.

Exporting Licensing

CONTINUEExporting: Exporting is a function of international trade whereby goods produced in one country are shipped to another country for future sale or trade.Licensing: A business arrangement in which one company gives another company permission to manufacture its product for a specified payment .

CONTINUE

Draw backs of Licensing: Valuable Technology/Formula Strategies no given Management

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THEORIES OF FDI

MAC Dougall-Kemp Theory Industrial Organization Theory (Hymer) Location Specific Theory (Hood & Young) Product Cycle Theory

MAC DOUGALL-KEMP THEORYA two-country model – one being the

investing country and the other being the host country – and the price of capital being equal to its marginal productivity, they explain that capital moves freely from a capital abundant country to a capital scarce country and in this way the marginal productivity of capital tends to equalize between the two countries.

INDUSTRIAL ORGANIZATION THEORY (HYMER)

The industrial organization theory is based on an oligopolistic or imperfect market in which the investing firm operates. Market imperfections arise in many cases, such as product differentiation, marketing skills, proprietary technology, managerial skills, better access to capital, economies of scale, government-imposed market distortions, and so on.

LOCATION SPECIFIC THEORY (HOOD & YOUNG)

Hood and Young (1979) stress upon the location-specific advantages. They argue that since real wage cost varies among countries, firms with low cost technology move to low wage countries. Again, in some countries, trade barriers are created to restrict import. MNCs invest in such countries in order to start manufacturing there and evade trade barriers.

Muhammad Waqas13024854-050

STAGES OF FDI

Innovation stage. Industrialization stage.Standardization stage.

INNOVATION STAGE

Exports

Develop Countries

INDUSTRIALIZATION STAGE

Imports Consumption

Production

Exports

Industrial Counties

STANDARDIZATION STAGE

consumption

Exports

Imports

Production

Developing Counties

Presented By

Atif Afzal13024854-064

DECISION FRAMEWORK FOR FDI

Are Transportation cost is high? No

ImportBarrier

sNo

Export

Yes

FDI

Yes

Easy to License

Tight Control Necessary

Protection Possible or not

Licensing

Yes

No

Yes

No

Yes

No

BENEFITS FOR HOST COUNTRY Inflow of equipment and technology Increase Employment Contribution to export growth Improved consumer welfare through reduced

cost, wider choice & improved quality. BOP Surplus

DRAWBACKS FOR HOST COUNTRY

Crowing of local industryEffect on national environmentEffect on cultureBOP deficit in form of currency outflow

Benefits for Home Country

BOP Surplus (Foreign earning) Variable Skill

Drawbacks for Home Country Employment