Blog 5: Pros and Cons of Foreign Direct Investment

I am going to talk about advantage and disadvantage of foreign direct investment (FDI).

Appear of FDI has increased international trade in global. It dissolves capital controls which mean there are no restrict of taking in or out of money anymore. Also, FDI grows substantially to support multinational business in other countries. It impacts Transnational Companies (TNC) which becomes major role in international production. As the result, the economy of world becomes more interdependent to create greater integration of financial market.

The inflow of FDI keeps increasing during recent years. FDI increase mainly in three groups of economies, they are developed countries, developing countries and transition economies of South- East Europe. Vast majority of FDI from developed country to developed country. It is because European Union is the largest host region within the developed country group that attracts almost two thirds of total FDI inflows. Also, the United States keeps its position as the largest FDI recipient country. (WIR, 2008) However, the growth of recession in US and uncertainty economic might lead investors to have cautious attitude. Therefore, investors may think about invest in developing countries. The best example is China.

Developing countries include Egypt, Nigeria, Morocco and South Africa. But China and Hong Kong still are the two largest FDI destinations in Asia. We might think about why FDI in China and Hong Kong? It is because it is risky for FDI in poor countries due to poor market strength and political uncertainty which are economic and political risk. Also, the quality of infrastructure in China was better than other countries. They have adequate roads, airports, power and world class network for FDI. The most attractive reason is that they provide low cost for labour, low tax rates and rich natural resources.

Developing countries encourage FDI because investor might obtain overseas resources, increase access to return markets and increase local capital markets. They attract FDI by resource transfer such as capital, technology, management skills. On the other hand, FDI provide employment opportunities to the developing countries. An example is the relationship between Apple and Foxconn. Foxconn, the world’s largest electronics manufactures which employs 1 million people in China. As the labour cost and material are low cost in China. Therefore, Apple chooses China to produce its product rather than exporting domestic production. Thus, Foxconn is licensed to manufacture apple product and therefore Apple is Foxconn’s biggest customer. Apple provides a lot of employment opportunity in China as there are large amount of parts and complicated production processes are required to make consumer electronic products. For Apple, it has to transfer its technology to Foxconn for them to make Apple’s products.

Also, Foxconn has attracted more than 20 of smaller supplier facilities to establish of new Foxconn. Analysts estimate that more than 100,000 of Foxconn’s 800,000 workers in China are working on Apple products. (Financial Times) Apple works its plants in Shanghai and Shenzhen, near Hong Kong where labour costs are outpacing the rest of the country. As we know, Apple announced to launch iPad 2 in this few days, due to the increasing demand of Apple’s product from the public, the employment in Foxconn should be obviously increased.

However, FDI flows have been mixed. At the firm level, companies have to transfer their product knowledge, technology, management skills and the knowledge of marketing as well as through their core product to the joint venture With committing product knowledge and technology to other companies, this may lead to direct competitors occurs. An example is Schwinn and Giaant, after Schwinn transfer intellectual knowledge (technology how to make the bike, management skill, cost control) to Giant. Giant make cheaper bikes than Schwinn and then enters into business itself.

Also, the company may lose control of product quality because they cannot supervise the produce process directly. Thus, it may ruin reputation of their brand.

And following competitors would appear, some corporation moves their business overseas to follow its domestic competitors in oligopoly structure markets and reduce the number of competitors.

In conclusion, companies may choose FDI due to the advantage as mentioned above. However, they still have to consider those problems would occur in FDI to have a win-win situation for both local and oversea companies.