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Chapter

7. Chapter. The Political Economy Of Foreign Direct Investment. FDI in Ireland grew from $164m (1985) to $24b (2000) By 2000 two-thirds of Irelands top exporters were MNEs Reasons for Ireland’s success Member of EU (access to EU markets) Highly educated workforce Good infrastructure.

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  1. 7 Chapter The Political Economy Of Foreign Direct Investment

  2. FDI in Ireland grew from $164m (1985) to $24b (2000) By 2000 two-thirds of Irelands top exporters were MNEs Reasons for Ireland’s success Member of EU (access to EU markets) Highly educated workforce Good infrastructure Case: FDI and the Irish miracle

  3. Political ideology and FDI Radical View Pragmatic Nationalism Free Market

  4. Marxist view, that MNE’s exploit less developed host countries Extract profits Give nothing of value in exchange Instrument of domination not development Keep less-developed countries relatively backward and dependent on capitalist nations for investment, jobs, and technology Radical view

  5. Radical view was popular (1945-80) among Communist countries (China, Cuba) Socialist countries in Africa Nationalistic countries (Iran, India) Radical view

  6. By end 1980s radical view was in retreat Collapse of communism Bad economic performance of countries that embraced the radical view Strong economic performance of countries who embraced capitalism rather than the radical view Radical view-short lived?

  7. . Nations specialize in goods and services that they can produce most efficiently Resource transfers benefit and strengthen the host country Positive changes in laws and growth of bilateral agreements attest to strength of free market view However, all countries impose some restrictions on FDI Free market view

  8. FDI has benefits and costs Allow FDI if benefits outweigh costs Block FDI that harms indigenous industry Court FDI that is in national interest Tax breaks Subsidies Pragmatic nationalism

  9. Three main ideological positionsregarding FDI

  10. Resource-transfer effects Capital Technology Management Employment effect Direct indirect Benefits of FDI to host countries

  11. Balance-of-payments effect. Current account-surplus/deficit Capital account Increases competition and spurs economic growth Benefits of FDI to host countries

  12. Resource-transfer effects • Capital • Technology • Management

  13. Brings jobs that otherwise would not be created Direct: Hiring host-country citizens Indirect: Jobs created by local suppliers Jobs created by increased spending by employees ofthe multi-national enterprise Questions remain on whether net jobs gained Employment effects

  14. Host country benefits from initial capital inflow when MNC establishes business Host country records current account debit on repatriated earnings of MNC Host country benefits if FDI substitutes for imports of goods and services Host country benefits when MNC uses its foreign subsidiary to export to other countries Balance-of-payments effects

  15. Current account deficit occurs when imports are greater than exports Current account surplus occurs when exports are greater than imports Capital account records transactions that involve the purchase or sale of assets Balance of payment accounts

  16. U.S. Balance of payments accounts

  17. Increased productivity growth product and process innovation greater economic growth FDI can Increase market competition Lower prices Create greater consumer choice Stimulate capital investments Effect on competition and economic growth

  18. Improves balance of payments for inward flow of foreign earnings Creates a demand for exports. Export demand can create jobs Increased knowledge from operating in a foreign environment Benefits the consumer through lower prices Frees up employees and resources for higher value activities Home country FDI benefits

  19. Can drive out local competitors or prevent their development Profits brought home ‘hurts’ (debit) a host’s capital account Parts imported for assembly hurt trade balance Can affect sovereignty and national defense Costs of FDI to host countries

  20. Improves balance of payments for inward flow of foreign earnings Creates a demand for exports Export demand can create jobs Increased knowledge from operating in a foreign environment Benefits the consumer through lower prices Frees up employees and resources for higher value activities Home country FDI benefits

  21. Negative effect on Balance of Payments Initial capital outflow MNC uses foreign subsidiary to sell back to home market MNC uses foreign subsidiary as a substitute for direct exports Potential loss of jobs Home country problems with FDI

  22. Risk insurance (Home) Elimination of double taxation (Home) Tax incentives (Host) Low interest rates (Host) Stable government and stable policies Government incentives for FDI

  23. Limit capital outflows (Home) Manipulate tax code to encourage domestic investment (Home) Political restrictions on investing in certain countries (Home) Ownership restraints. (Host) Performance requirements (Host) Government disincentives for FDI

  24. Objective: reach an agreement that benefits both parties In the international context, we must understand the influence of norms and value systems Be sensitive to how these factors influence a company’s approach to negotiations The nature of negotiation

  25. The four Cs of negotiation Fig 7.1

  26. Determinants of bargaining power

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