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Foreign Direct Investment
A POSITIVE APPROACH CAN YIELD A LOT
Let us first have a quick look at what is going on right now globally so far as Foreign Direct Investment (FDI) is concerned. The slow recovery in Greenfield FDI in 2011 ground to a halt in 2012, with the second biggest decline in FDI since the start of the world recession. All regions of the world experienced a decline in FDI, the main exceptions being Chile, Spain, Indonesia, Poland and Oman, all of which experienced strong growth in inward investment projects.
Chile replaced Brazil as the star performer of 2012. Investment to Chile is driven by sustained 5 percent+ GDP growth rates and, in 2012, an influx of renewable energy investments (attracted by excellent conditions for solar power and electricity demand from the mining sector).
As far as BRIC economies are concerned it has been shown they have in recent years attracted over 22 percent of global FDI projects (share declined in 2012 to 17.6 percent). FDI into China, India, and Russia peaked in 2008 and has not recovered since. FDI into Brazil (after a record high in 2011) declined in 2012. The number of FDI projects recorded in China and Russia in 2012 was the lowest level in the last decade. With Brazil struggling to regain growth, Russia meddling along, and growth levels in China and India falling, now the expectation is that the market share of BRIC in global FDI would continue to decline in 2013.
UKTI rightly observed that the special focus on tax and FDI shows that multinational enterprises (MNEs) minimize their tax burden through their overseas operations and provides new evidence indicating the strong link between corporate tax rates and FDI performance. Governments face a huge challenge in ensuring MNEs pay the tax due without undermining their attractiveness for FDI. Coordinated multilateral action would seem the only way to achieve this.
Whatever the case is, India’s position must not be belittled. During 2011-12 India emerged as the fifth largest investor with 81 projects, creating 5,454 jobs. For 2012-13, India has emerged as the fourth largest investor in the UK. As per UK Trade and Investment (UKTI) which published its '2012/13 Inward Investment Annual Report' it was revealed that 89 Indian FDI projects had helped create as many as 7,255 jobs in Britain (software services major Infosys led the team of inward FDI by a total of 28 Indian companies, which generated 429 additional jobs for the London economy in the last year alone) – one of the top five inward investors’ economies in the UK with the US leading the charge with 396 projects and 48,802 jobs, followed by Japan with 113 projects yielding 7,442 jobs. Italy and France come in a joint third with 93 projects each and 6,892 and 16,001 jobs respectively. China, with just 70 projects in 2012/13, has slipped from its position as the third largest investor with 92 projects in 2011/12 to sixth after Germany with 78 projects.
Looking to the future, the increased funding in the Autumn Statement 2012 will help deliver an ambitious package of support designed to reinforce the UK as the location of choice for Europe bound investors, and to help deliver its aspiration to become the number one or two European destination for FDI from emerging markets, enhancing investment support in emerging markets including India and China accordingly.
To summarize on this score, the UK received a major vote of confidence from foreign investors confirming that the UK remains a world leading business destination.
The UK saw a total of 1,559 investment projects secured over the last year, marking an 11 percent increase in the number of projects recorded during the previous year. Attracting foreign investment is an important element of the UK government's economic and growth programme and UKTI is all set to continue to work with companies to help create and sustain a globally attractive, highly competitive and truly international economy.
Historically speaking, the growth of foreign direct investment in the last four decades had been phenomenal. FDI can take the form of a foreign firm buying a firm in a different country or deciding to invest in a different country by building operations there. With FDI, a firm has a significant ownership in a foreign operation and the potential to affect managerial decisions of the operation.
| Is it not a fact that foreign direct investment helped several countries when they faced economic hardship? Is it not also a fact that economies like China, South Korea, Singapore as well as the Philippines availed maximum benefits that helped them to fly high? |
The international growth of Spain’s Telefonica is something to take note of. Until the 1990s Telefonica was a typical state-owned firm. Since then it expanded into Latin America and Europe, among other regions. Mittal Steel is another example on this score with its expansion from a small, family-run operation in India to being the world’s largest steel company headquartered in Rotterdam. Mittal Steel’s growth strategy involved acquiring companies in distress at low prices, improving their efficiency, and capitalizing on a growing demand for steel. Mittal Steel also used its growing power in the industry to drive down the prices of raw materials. Mittal Steel’s most recent acquisition involved European steel maker Areclor, which was acquired in a hostile takeover in 2007 to create ArcelorMittal. Today, the firm boasts sales of $110 billion and a net income of $10.2 billion.
Now, at this juncture, the question arises - Is it that FDI - a measure of foreign ownership of domestic productive assets such as factories, land and organizations – all bad or is all well? Why not examine the same as a neutral observer?
The growth of FDI in the last three decades has been phenomenal. While developed economies still account for the largest share of FDI inflows, recent datum show and indicate that stock and flow of FDI has not only jacked up, but are moving towards developing economies also – more specifically to the fast emerging economies, globally! Apart from using FDI as an investment channel plus a method of reducing operation costs, many blue chip companies are looking at FDI as one of the ways to internationalize. Side by side, the reality is that the movement from the developed to the developed zone still remains higher compared to that between developed to developing or developing to developing zone. Still, the stock and flow of FDI has gone up and moving towards the developing zone and more so in the emerging economies.
The positive side of FDI must not be missed as otherwise any analysis on this score is bound to be biased. Opposition for opposition’s sake is never desirable nor a fit case to be entertained by responsible quarters. The sole important thing is whether the economy loses control or allows it to act in a way which is detrimental to the economy’s well being and interest.
One of the advantages of FDI is that it helps in the economic development of the particular country where the investment is being made. This is especially applicable for developing economies - during the 1990’s FDI was one of the major external sources of financing for most countries that were growing economically.
Is it not a fact that foreign direct investment helped several countries when they faced economic hardship? Is it not also a fact that economies like China, South Korea, Singapore as well as the Philippines availed maximum benefits that helped them to fly high? So, a realistic step could yield better result for such economies too.
