FDI flow are determined by thee concurrent forces :
(i) global saving imbalances, which determine the total official and non-official flows of foreign investment;
(ii) the comparative advatages of countries in particular industries, which make them attractive to investor; and
(iii) the competitive advantages of individual firms, which enable them to pursue globalization strategies.
In the 1960s the United States dominated world FDI. In the 1980s Japan was also prominent. Today there is much wider spread of investor countries from both Western Europe and East Asia. Perhaps more importantly, most industrialised countries are now at the same time both host and home countries. There is now wide recognition of the role and benefits of FDI.
Why Should host countries allow FDI ?
Any country which wants to invest more than it saves must utilise foreign savings to do so. FDI offer a host country advantages over portfolio investment in that it normally bring the transfer of technology and know-how, it reduces vulnerability to downturns in world economic conditions (by tying foreign repayments to ability to pay) and it helps to reduce volatility in financial markets.
The question is frequently debated as to whether it is necessary for a host country to regulate the inflow of FDI. FDI Carries the potential risk that decisions of importance may be made abroad in disregard of the national interest of the host country. In defence of its national interest, a host country may wish to regualte FDI in sensitive sectors (for example, in the defence industry, the media industry and in the ownership of land). Althaough regulation of FDI tends to impose economic cost on the host country by dampening down the overall level of economic acivity and reducing the inflow of foreign technology and know how, many countries prefer to bear these cost in sensitive sectors.
Options for doing business
In debates about FDI, the emphasis is usually on the question of why a firm invests in a given country. This is natural because host countries compete to attract FDI. It is useful, however, to change the emphasis and ask instead the more practical question of why a firm would choose to invest in a given country as its preferred method of doing business there. After all, FDI is not the only boption.
If a firms possesses a competitive advantage, it may adpot a globalization strategy. But it need not choose FDI to exploit this competitive advatage; it could simply license its production technology to a local firm in the host country, or, instead of investing upstream in raw materials or components procurement, the firm could choose instead to negotiate a long term supply contract with a hos country source. (taken from Economic Development, Foreign Investment and the law : R. Pritchard).
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