Theories and Regulation of Foreign Direct Investment (Essay Sample)

Theories and Regulation of Foreign Direct Investment
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Theories and Regulation of Foreign Direct Investment
Introduction
Foreign Direct Investments are key to the world economic development, especially in the growth of an economy. The FDIs have numerous benefits to the host countries through provision of resources that may not have been otherwise available. Technological advancements, proper management of resources and the supply of capital may be some of the few benefits that may be of benefit to the host country. However, there are costs that are incurred by the same country while handling the aspect of foreign investment. Increase in foreign investments may have adverse effects on the national sovereignty of the country. This essay will analyze the theories of FDI in relation to the costs and benefits of the host country and the regulations that control FDI activity because of the risen costs to the country (Kirkpatrick Parker & Zhang 2006, p. 148). The essay will also evaluate the effects associated with the application of the theories and attempts of various countries to manage FDI activities.
Theories of FDI Activities
Eden (2009, para. 2) states that the implication of FDI to host countries are usually packaged in terms of the management skills, technological advancements and the provision of capital to the host country. The study by economists in attempting to analyze further benefits to the country is mainly done through the assessment of various theories that attempt to explain FDI. Various theories have attempted to explain FDI, and they include the theory of the international product lifecycle, Japanese FDI theories, and the internalization theory.
The international product life cycle theory was developed by Raymond Vernon, and it attempts to explain the patterns of international trade. Vernon’s theory suggests that a product undergoes several stages, which include the introduction stage where the goods are introduced into the local market before they are introduced to other countries that have the same needs and preferences. The growth stage involves introduction of a similar product in the home country and the international market. The maturity stage involves the concentration on the producer with the lowest costs of production while the saturation stage involves the stability of the product on the market. The decline stage constitutes the markets for the products when the demand decreases (Denisia 2010, p. 106).
The flow of FDI in a particular country with reference to the product life cycle theory involves the maturity and decline phase. Based on this theory, firms usually set up in countries where the products have already achieved success, and the cost of production is at its least. The benefits are derived by the host country when a foreign firm stays in the market of the host country, which will increase the profits and economic growth. The competition in the market changes based on the existing international goods on the market with little focus placed on the quality of the goods (Yoo 2010, p. 646).
Das (2013, p. 6) states that the Japanese FDI theories are based on Micheal Porter’s ideas (Porter’s five forces) of analyzing the business environment. The Japanese FDI theories center on a foreign market entering a country that is not well developed to take advantage of lower production costs. This means that there is a minimum outflow of FDI from the country, but the maximum inflow of the same. As more FDIs flow in, the economy of the country increases and the costs of labor increase, which in turn raises the standards of living for the people and improves the economy. As the country becomes more innovative, the FDI is motivated by technological and market factors because the country is well developed through foreign investments.
The application of the Japanese FDI theory analyzes market competitiveness and economic development based on the five forces by Michael Porter. These include the threats of new entrants, the bargaining power of buyers and suppliers, threats of substitute products and the rivalry among the competitors in the market (Porter, 2008, para. 5). The factors affect the levels of foreign investments for both internal and external investors, which in turn affect the growth of the economy, which is a benefit to the host country.
Lopes (2010, p. 6) describes the internalization theory as the alternate ways in which international firms may analyze its competence with reference to different regions of investment. The internalization theory of FDI is based on the growth of the multinational companies because of their motivations to achieve FDI. Buckley and Casson (2009, p. 16) describe the theory as one that defines the boundaries of organizations and where the boundaries of the host country lie in terms of foreign investments. The benefits derived from the FDI by the host country range from innovative and corporate growth, which is also affected by the cultures of the country. The restrictions in the country bring about the aspect of rationalization by both the firm and the host country where they brainstorm on the best ways for each party to benefit from the FDI.
Regulations of Controlling FDI Activities
According to Srijanee, Slaughter& May (2012, p. 7), even as the significance of the FDIs increase in the global economy, economists across the globe have identified the need for stable and well-tailored FDI regimes. This is due to increasing concerns about sustainability and the national well-being of different countries. For example, numerous countries across the globe have adopted regulations as one of the factors used to influence the patterns and volume of investment in foreign countries. Recently, there has been an ongoing debate concerning the appropriateness of placing restrictions on foreign direct investments. This is because the free flow of money creates concerns about the potential loss of national sovereignty and other undesirable impacts. Foreign direct investment involves giving large multinational companies a large controlling stake in domestic companies. Due to these concerns, governments have imposed restrictions on inward FDI.
There are different types of FDI barriers that are placed and restrictions to foreign ownership are the most common. Majority domestic ownership requirements exist in the Japanese telecommunication industry, the European Union, and North American countries, as well as the shipping in the US. Domestic ownership is allowed for natural resources. Furthermore, foreign ownership is prohibited in various countries in various sectors perceived to be sensitive to an economy. For example, in Iceland the fishing and energy sectors are prohibited, as well as the oil industry in Mexico.
Some countries have placed FDI restrictions in the form of obligatory screening and approval procedures. Regulations are imposed such that foreign investors must prove their benefit. The stipulations inflate the cost of entry and thus discourage foreign investors. This regulation is imposed in some industries in Japan and acquisition of more than 49% stake in Mexican companies.
Restrictions are placed on foreign citizens to work in or manage foreign firms. In insurance companies of countries in the European Union, financial services in Canada and transport companies in Japan, the domestic country’s citizens must form the majority of the board of directors. Some countries such as Turkey restrict the employment of foreign citizens. Operational requirements imposed by European Union countries with reference to restrictions through non-members at Cabot age for marine transport reduces the profits earned by foreign owned corporations.
FDI inflows can also be regulated by opaque informal public or private measures. For instance, the system of corporate control in Japan limits investments by United States companies. In addition, regulatory practices in the telecommunication industry, the European Union restrain FDI inflows from the United States. The administrative guidance to Japan’s industries by the government limits foreign domination on Japan’s industries.
According to Greg (2010, p. 216), in Australia many nations have a negative attitude towards foreign direct investment, and they do not appreciate the economic benefits that derive from access to such investment. The Lowy Institute Poll conducted in 2008 carried out on the Australians’ views on foreign direct investment reported that 90% of those surveyed said that the authority has a duty to keep Australian companies in majority Australian control. 85% of those interviewed expressed that there is a need for strict regulation of the investments made by companies controlled by foreign governments as compared to the local organizations. In 2009, another poll was conducted, and it reported that 50% of those surveyed said that there was too much investment from China allowed by the Australian government. Foreign investments in Australia are regulated by the Foreign Acquisitions and Takeovers Act of 1975, as well as the Australian government’s Foreign Investment Policy.
Currently, the Australian government determines what is against the government interest. One of the policies put in place is that foreign persons must seek approval to acquire and control 15% and above of the voting rights in an Australian company. The government also restricts investments by foreign persons in the banking, civil aviation, telecommunication, airports and airlines, shipping and medi...