Theoretical Framework of Fdi

2. Why do companies tend to thrive in global markets when their country of origin enjoys a comparative advantage

Schoenberger (1985) examined the growing phenomenon of foreign manufacturing investment in the US in order to develop an understanding of the factors that draw production to the US market despite relatively high cost of production in the international context. This study founds that technology-intensiveness is an important factor in the foreign firm¡¦s decision to locate production at the US market; moreover a supply constraint is also considered an important factor to penetrate into US market. It is said that new developed product requires continued scientific and engineering inputs into the production process. Production must remain close to supplies of this type of labour, especially in advanced industrial areas and, more specifically, in the area the product was first innovated.

FDI allows the home country to invest into the host country to produce, advertise, and distribute products, in order to upsurge their market share and provides a long-term investment and enhancement. (Moosa, 2002)

Companies tend to be most competitive when they can benefit from comparative advantage in their country of origin. According to the Heckscher-Ohlin model which incorporates realistic production characteristics into Ricardo’s (1817) theory of comparative advantage, “capital abundant countries will export capital intensive goods.” (Suranovic, 2006)

On the basis of previous studies of foreign direct investment (FDI) in insurance services industries by Moshirian (1997 and 1999), this study applies the similar model and variable with those previous studies to present analysis and discussion about FDI in insurance services industries in America from 1987 to 1998. As the extension on prior studies, this study found that the relative wage rate of the US versus the source countries, and FDI in manufacturing industries both are highly important determinants of FDI in insurance services industries in America in statistic. However, this result is different from Moshirian’s (1997), due to majority of factors which are valued important in his study are unimportant in this study. The

The approach that the authors take to this issue is to ask to quantitative questions. The first is "are there productivity spillovers from FDI to domestic firms?" and the second is "If so, how much should countries be willing to pay to attract FDI?" The authors note that

Foreign direct investment (FDI) has played a huge part of the international economy influencing economic growth globally with a total of $1.2 trillion spending via it in 2014 (UNCTAD, 2015). Over the past five years from 2011 to 2016 the UK has seen its FDI increase by almost double to 2213 individual FDI projects, this being an increase of 11% from 2014/15 to 2015/16 (Department for International Trade, 2016). The UK also stands out as the clear leader in attracting this FDI into the UK taking a total of 20.9% of the market share of FDI in the European union (Ernst & Young LLP, 2016). FDI is becoming an influential power within the economic system for the UK. A current FDI project underway seeing the constructing of a new nuclear power

FDI is thought to bring certain benefits to national economies. It can contribute to Gross Domestic Product (GDP), Gross Fixed Capital Formation (total investment in a host economy) and balance of payments. There have been empirical studies indicating a positive link between higher GDP and FDI inflows (OECD a.), however the link does not hold for all regions, e.g. over the last ten years FDI has increased in Central Europe whilst GDP has dropped. FDI can also contribute toward debt servicing repayments, stimulate export markets and produce foreign exchange revenue.

Inward foreign investment is believed to boost the economic growth of host countries directly through employment creation and capital formation, and indirectly through knowledge, technology, and information spillovers. It is argued that multinationals have superior technologies, technical know-how, and managerial and marketing experiences than domestic firms. Similarly, exporting firms, whether domestic or foreign, have advantages over non-exporting firms regarding access to advanced technologies that are more productive and efficient. However, multinationals and exporters may not fully internalize the benefits of these assets. The benefits may spillover to domestic and non-exporting firms through market interactions, competition, and public nature of the assets.

As we discuss in the second chapter, inward foreign investment is believed to boost the economic growth of host countries directly through employment creation and capital formation, and indirectly through knowledge, technology, and information spillovers. Multinationals have superior technologies, technical know-how, and managerial and marketing experiences than domestic firms. Similarly, exporting firms, domestic or foreign, have advantages over non-exporting firms regarding access to advanced technologies that are more productive and efficient. However, multinationals and exporters may not fully internalize the benefits of these assets. The benefits may spillover to domestic and non-exporting firms through market interactions,

Foreign Direct Investment (FDI) is defined as an investment made by individuals in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company. The key feature of foreign direct investment is that it is an investment that establishes either a majority of control or an influence on the decision making of a business. Based on the graph below, Chile has a foreign direct investment growth of over 18% of GDP growth based on the years of 2010 and 2012. Since 2010, around 30% of the increase is based on the average investment of FDI. Based on Santander Banks, companies in Chile with overseas shareholders pay wages that are on average 130% higher than locally-owned companies of the same size in the same sector. The countries in 2013 with the highest foreign direct investments in Chile are the United States with 16.7 %, the Netherlands with 14.8%, Spain with 10.4%, Canada with 5.1%, the UK with 4.3 %, Japan with 3.8 % , Bermuda with 2.9 %, Brazil with 2.7 % , and Luxembourg with a low of 2.2%. Chile’s main investments are mining 44.9 %, services 17.6 %, electricity, gas and water 10.2 %, manufacturing 4.7 %, transportation and communications 3.4 %, trade 1.2%, construction 1.0 % and agriculture and fishing 0.2%.

After World War II, with the appearance of multinational corporations, intra-industry trade and the increase of horizontal trade within developed countries, some situations can no longer be explained by traditional theory. Such as why United State who is abundant in capital imports more capital-insentive goods than its export of that (known as Leontief Paradox). During that time, new international trade theory enslaved the global market, among which, new trade theory points out that a firm’s ability to attain economies of scale and to enter an new market first gain advantage of trading abroad over other countries. Following that, Porter’s new comparative advantage theory states that the competitiveness of a firm in an industry bases on the combination of four mutually reinforcing attributes containing firm characteristics, demand condition, factor endowment, related and supporting industries. New trade theory stresses the role of luck and capacity of innovation, while Porter’s theory states that a firm’s competitive performance results from four components

Multinational corporations are evidently playing a starring role in the current process of globalization. This has been fueled by the rising share of cross-border capital flows attributable to foreign direct investment of such multinationals. Further, the multinational corporations have played an integral role in linking financial and product markets globally through transfers of technology, physical capital as well as management techniques. However, in order to venture into foreign markets, corporations have to use well-thought strategies to avoid failure. Some of the strategies used include, operating production facilities in a foreign market to cater for that market and the entire region, fragmenting its global production and research and design, or operating wholesale-trade outlets to import and distribute products into new markets.

In previous studies of FDI and its effect on output and economic growth, many economists’ researchers have concluded that foreign investment has a positive impact on economic development. There are several studies of FDI “as an engine for growth” in China.Zhang (2006)

Domestic firms in host countries can benefit from foreign firms through imitation and labour turnover which transfers managerial and production skills. However, foreign firms are more likely to pay higher wages than domestic firms. This would limit the spillovers from labour turnover. In addition, foreign firms are more likely to prevent technological spillovers to domestic firms to avoid competition.