DEFINATION
Foreign direct investment has many forms. Broadly, foreign direct
investment includes "mergers and acquisitions, building new facilities,
reinvesting profits earned from overseas operations and intracompany
loans".In a narrow sense, foreign direct investment refers just to building
new facilities. The numerical FDI figures based on varied definitions
are not easily comparable.
Difficulties limiting FDI
Foreign direct investment may be politically controversial or
difficult because it partly reverses previous policies intended to
protect the growth of local investment or of infant industries. When
these kinds of barriers against outside investment seem to have not
worked sufficiently, it can be politically expedient for a host country
to open a small "tunnel" as focus for FDI.
The nature of the FDI tunnel depends on the country's or
jurisdiction's needs and policies. FDI is not restricted to developing
countries. For example, lagging regions in the France, Germany, Ireland,
and USA have for a half century maintained offices to recruit and
incentivize FDI primarily to create jobs. China, starting in 1979,
promoted FDI primarily to import modernizing technology, and also to
leverage and uplift its huge pool of rural workers.
To secure greater benefits for lesser costs, this tunnel need be
focused on a particular industry and on closely negotiated, specific
terms. These terms define the trade offs of certain levels and types of
investment by a firm, and specified concessions by the host
jurisdiction.
The investing firm needs sufficient cooperation and concessions to
justify their business case in terms of lower labor costs, and the
opening of the country's or even regional markets at a distinct
advantage over (global) competitors. The hosting country needs
sufficient contractual promises to politically sell uncertain
benefits—versus the better-known costs of concessions or damage to local
interests. The benefits to the host may be: creation of a large number
of more stable and higher-paying jobs; establishing in lagging areas
centers of new economic development that will support attracting or
strengthening of many other firms without costly concessions; hastening
the transfer of premium-paying skills to the host country's work force;
and encouraging technology transfer to local suppliers.
Concessions to the investor commonly offered include: tax exemptions
or reductions; construction or cheap lease-back of site improvements or
of new building facilities; and large local infrastructures such as
roads or rail lines; More politically difficult (certainly for
less-developed regions) are concessions which change policies for:
reduced taxes and tariffs; curbing protections for smaller-business from
the large or global; and laxer administration of regulations on labor
safety and environmental preservation. Often these un-politick
"cooperations" are covert and subject to corruption.
The lead-up for a big FDI can be risky, fraught with reverses, and
subject to unexplained delays for years. Completion of the first phase
remains unpredictable — even after the contract ceremonies are over and
construction has started. So, lenders and investors expect high risk
premiums similar to those of junk bonds. These costs and frustration
have been major barriers for FDI in many countries.
On the implicit "marriage" market for matching investors with
recipients, the value of FDI with some industries, some companies, and
some countries varies greatly: in resources, management capacity, and in
reputation. Since, as common in such markets, valuations can be mostly
perceptual, then negotiations and follow-up are often rife with threats,
manipulation and chicanery. For example, the interest of both investors
and recipients may be served by dissembling the value of deals to their
constituents. One result is that the market on what's hot and what's
not has frequent bubbles and crashes.
Because 'market' valuations can shift dramatically in short times,
and because both local circumstances and the global economy can vary so
rapidly, negotiating and planning FDI is often quite irrational. All
these factors add to the risk premiums, and remorses, that block the
realization of FDI potential.
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