MOTILAL NEHRU COLLEGE
UNIVERSITY OF DELHI
Academic Year 2023-24
DEPARTMENT: COMMERCE
● Name: Aman Kr. Thakur , Rahil Mahajan ,
Veronika Singh
● Class: B.COM (HONORS)
● Section: A
● Roll number: BCH22027, BCH22019, BCH22069
● Subject: International Business
PROFESSOR SIGN
FOREIGN DIRECT INVESTMENT
(FDI)
This presentation provides a comprehensive overview of Foreign Direct
Investment (FDI), a critical driver of economic growth in the globalized
world. The content is structured as follows:
(I) Basic Introduction: We begin with a fundamental understanding of
FDI, its importance, and its role in the global economy.
(II) Types of FDI: This section explores the various types of FDI, providing
a broad perspective on how businesses invest across borders.
1. Greenfield and Brownfield Investments: Here, we delve into the
specifics of Greenfield and Brownfield investments, two primary forms of
FDI, and discuss their respective characteristics and implications.
2. Mergers and Acquisitions (M&A): This part focuses on M&A as a
strategy for FDI, discussing its advantages and potential challenges.
3. Strategic Alliances: We then explore strategic alliances as another
form of FDI, highlighting its unique benefits and potential pitfalls.
(III) Benefits of FDI: This section outlines the various benefits of FDI, both
for the investing company and the host country.
(IV) Challenges of FDI: Despite its benefits, FDI comes with its own set of
challenges. This section discusses these challenges in detail.
(V) Conclusion: We conclude the presentation with a summary of key
points and a discussion on the future trends of FDI.
(I)
Foreign Direct Investment (FDI): An
Overview
Foreign Direct Investment (FDI) is a critical driver of global economic
growth. It involves a business or individual in one country owning a
business interest in another country. This can take the form of establishing
business operations or acquiring business assets in the foreign country,
such as ownership or controlling interest in a foreign company.
History of FDI
The history of FDI dates back to the era of colonialism when countries like
Britain and France established colonies around the world. However, the
modern concept of FDI evolved after World War II with the expansion of
multinational corporations (MNCs). The 1980s and 1990s saw a significant
increase in FDI due to globalization, liberalization, and technological
advancements. Today, FDI is a key element of the global economy,
contributing to technology transfer, job creation, and economic
development in host countries.
Regulatory Bodies
FDI is regulated by various international and national bodies. At the
international level, the World Trade Organization (WTO) provides a
framework for the conduct of international trade, including FDI. The United
Nations Conference on Trade and Development (UNCTAD) also plays a
crucial role in shaping policies related to FDI.
At the national level, each country has its own regulatory bodies and
policies governing FDI. These can include investment promotion agencies,
central banks, and ministries of commerce or finance. The regulations can
vary widely from country to country, depending on factors such as the
country’s economic development, strategic interests, and political climate.
Pattern of FDI
The pattern of FDI has evolved over time, influenced by factors such as
economic cycles, policy changes, and technological advancements. In the
early days, FDI was primarily driven by the desire to access natural
resources and new markets. However, modern FDI is increasingly driven
by factors such as access to skilled labor, technology, and innovation.
Geographically, developed countries have traditionally been the largest
sources and recipients of FDI. However, in recent years, developing
countries have been attracting a growing share of global FDI. Sector-wise,
while manufacturing and natural resources were the primary sectors
attracting FDI in the past, the services sector has emerged as a significant
recipient of FDI in recent years.
In conclusion, FDI is a complex and dynamic phenomenon that plays a
crucial role in the global economy. Understanding its history, regulatory
framework, and patterns can provide valuable insights for policymakers,
businesses, and investors alike. As the global economic landscape
continues to evolve, the role and impact of FDI are likely to continue to
change, presenting both opportunities and challenges for all stakeholders
involved.
How does the pattern of FDI differ between developed and developing
countries?
The pattern of Foreign Direct Investment (FDI) varies significantly between
developed and developing countries due to differences in economic
structures, market dynamics, and policy environments.
Developed Countries: FDI in developed countries is often driven by
market-seeking and efficiency-seeking motives. Companies invest in these
countries to access large, affluent consumer markets and to take
advantage of advanced infrastructure, highly skilled labor, and
technological capabilities. However, FDI flows to developed countries can
be more volatile, as they are often directed towards the services sector,
which can be subject to economic cycles and market fluctuations. For
instance, in 2022, FDI flows to developed economies fell by 36.7% to $378
billion.
Developing Countries: FDI in developing countries is often driven by
resource-seeking and market-seeking motives. Companies invest in these
countries to access natural resources, low-cost labor, and growing
consumer markets. FDI in developing countries can contribute to economic
development by bringing capital, technology, and managerial skills.
However, these countries often face challenges in attracting and benefiting
from FDI due to factors such as political instability, weak institutions, and
underdeveloped infrastructure1. Despite these challenges, FDI flows into
developing economies rose by 4.0% in 2022, reaching a historic peak of
$916 billion2.
It’s important to note that the impact of FDI can vary widely depending on
the specific context of each country. Therefore, both developed and
developing countries need to have effective policies in place to attract FDI
and ensure that it contributes to sustainable development.
(II) TYPES OF FDI
(1) GREENFIELD AND BROWNFIELD FDI
Greenfield Investments:
Definition: A Greenfield investment refers to the establishment of new
operations or facilities in a foreign country. It involves constructing new
infrastructure, facilities, and operations from scratch, often on undeveloped
land.
Key Features:
New Ventures: Greenfield investments involve the creation of entirely new
ventures or subsidiaries in a foreign market.
Build from Scratch: Companies build everything from the ground up,
including physical infrastructure, manufacturing plants, and administrative
offices.
Control and Flexibility: Since the investment is new, the investing
company has greater control over the design, location, and operations of
the project.
Longer Timeframe: Greenfield investments typically require longer
timeframes for planning, construction, and operational setup compared to
Brownfield investments.
Example: Toyota's decision to build a new manufacturing plant in India is a
classic example of a Greenfield investment. Instead of acquiring an existing
plant, Toyota chose to construct a new facility to produce vehicles, allowing
them to have full control over the production process and facility design.
Greenfield FDI examples
● Tesla Gigafactory in Nevada (USA): In 2014, Tesla decided to build
a brand new electric vehicle battery factory from the ground up in the
Nevada desert. This is a classic example of greenfield FDI, where the
company constructed a completely new facility on undeveloped land.
● IKEA setting up stores in India: When IKEA entered the Indian
market in 2016, they didn't acquire existing furniture stores. Instead,
they built their own stores specifically designed for the Indian market
and consumer preferences. This is another example of greenfield
FDI.
Brownfield Investments:
Definition: A Brownfield investment involves the acquisition or merger with
existing operations or facilities in a foreign country. Instead of starting from
scratch, companies purchase or merge with an already established
business.
Key Features:
Acquisition or Merger: Brownfield investments involve acquiring existing
businesses, facilities, or assets in a foreign market.
Utilization of Existing Infrastructure: Companies leverage the existing
infrastructure, facilities, and resources of the acquired business to expand
their operations.
Immediate Market Entry: Brownfield investments offer a faster entry into a
foreign market compared to Greenfield investments since the infrastructure
and operations are already in place.
Risk Mitigation: By acquiring an existing business, companies may reduce
the risks associated with starting from scratch, such as regulatory hurdles
and market uncertainties.
Example: Microsoft's acquisition of LinkedIn is a notable Brownfield
investment. Instead of building a professional networking platform from
scratch, Microsoft opted to acquire LinkedIn, leveraging its existing user
base and infrastructure to expand its portfolio of services.
In summary, Greenfield investments involve building new operations or
facilities from the ground up, offering greater control but requiring longer
timeframes, while Brownfield investments involve acquiring existing
businesses or assets, providing immediate market entry and risk mitigation.
Both types of investments have their advantages and considerations,
depending on the company's strategic goals and the characteristics of the
foreign market.
Brownfield FDI examples
● Ford acquiring Volvo Cars (Sweden): In 2010, Ford, the American
automaker, purchased Volvo Cars, the Swedish car manufacturer. This
deal involved acquiring an existing company with its production facilities,
brand name, and distribution network. This is a clear example of brownfield
FDI.
● Tata Motors buying Jaguar Land Rover (UK): In 2008, Tata Motors, the
Indian automotive giant, acquired Jaguar Land Rover, the renowned British
carmaker. This deal involved purchasing an established company with a
strong brand legacy and existing production facilities in the UK. This
exemplifies brownfield FDI.
Choosing Between Greenfield and Brownfield:
The choice between greenfield and brownfield FDI depends on various
factors like:
● Speed of Entry: Greenfield projects take longer to set up due to
construction, permitting, and establishing operations. Brownfield
investments offer a faster entry into the market.
● Costs: Greenfield projects can be expensive due to land acquisition,
construction, and infrastructure development. Brownfield investments
might require upfront costs for acquiring the existing facility, but
ongoing operational costs may be lower.
● Risk: Greenfield projects involve higher risks as the company is
starting from scratch. Brownfield deals may have hidden problems
with the existing facilities or outdated technologies.
● Level of Control: Greenfield projects allow for complete control over
design, layout, and operations. Brownfield investments may require
adapting to existing infrastructure and processes.
(2)
Mergers and Acquisitions (M&A)
M&A in FDI refers to the consolidation of companies or their assets
through financial transactions, allowing a foreign company to enter a new
market or expand its existing presence.
Concept:
There are two main types of M&A transactions:
● Merger: Two companies combine to form a completely new entity.
● Acquisition: One company purchases and absorbs another
company into its own operations.
Types of M&A in FDI:
● Horizontal Merger: Companies in the same industry but different
markets merge to expand their geographic reach. (e.g., A US
fast-food chain merging with a European chain)
● Vertical Merger: Companies in different stages of the production
process for a good or service merge to gain greater control over the
supply chain. (e.g., A car manufacturer acquiring a mining company
that supplies essential metals)
● Conglomerate Merger: Companies in unrelated industries merge to
diversify their business portfolio. (e.g., A media company merging
with a food production company)
● Acquisition: A foreign company acquires a domestic company to
gain immediate access to the local market, resources, and customer
base. (e.g., A Chinese tech company acquiring a local social media
platform in India)
Benefits of M&A in FDI:
● Market Entry: Provides a quicker and less risky way to enter a new
foreign market compared to greenfield investments.
● Increased Efficiency: Merging or acquiring existing operations can
lead to economies of scale and cost savings.
● Acquisition of Resources: Provides access to the target company's
technology, expertise, and distribution channels.
● Enhanced Market Share: Allows the acquirer to gain a larger market
share and stronger competitive position.
Challenges of M&A in FDI:
● Integration Difficulties: Merging different corporate cultures,
management styles, and work practices can be complex and
challenging.
● Regulatory Hurdles: Foreign companies may face regulatory
restrictions or lengthy approval processes for M&A deals.
● Valuation Issues: Disagreements over the fair market value of the
target company can lead to deal breakdowns.
● Post-Merger Integration Costs: Absorbing the target company's
operations can lead to unexpected costs and disruptions.
Examples of M&A in FDI:
● Nestlé's acquisition of Hsu Fu Chi International: A Swiss food
giant acquiring a leading Chinese confectionery company to expand
its Asian market presence.
● Shell's acquisition of BG Group: An Anglo-Dutch oil and gas
company acquiring a British competitor to strengthen its exploration
and production portfolio.
M&A is a powerful tool for foreign companies to expand their global reach.
However, careful consideration of the benefits, challenges, and different
deal structures is crucial for a successful FDI strategy.
(3)
Strategic Alliances in Foreign Direct Investment (FDI)
Strategic alliances represent a collaborative approach to FDI, where
companies from different countries join forces to achieve a specific
business goal. This partnership offers a less resource-intensive
alternative to setting up a wholly-owned subsidiary abroad.
Here's a breakdown of strategic alliances in FDI:
● Concept: An agreement between a foreign company and a
local company in the target market to share resources,
knowledge, and expertise.
● Benefits:
○ Market Entry: The foreign company gains access to the local
partner's market knowledge, distribution network, and
established customer base, easing market entry.
○ Reduced Costs: Shared resources and expertise can minimize
operational costs associated with establishing a new presence
abroad.
○ Risk Sharing: Partners share the risks associated with entering
a new market.
○ Technology Transfer: Partners can leverage each other's
technological advancements and capabilities.
● Types of Strategic Alliances in FDI:
○ Joint Ventures: A separate legal entity is established, jointly
owned and controlled by the foreign and local companies.
Equity Alliances: The foreign company acquires a stake (minority or
majority) in the local company, fostering a close collaboration.
○ Non-Equity Alliances: Partners collaborate on specific
projects or activities without any ownership exchange. This
could involve co-branding, marketing agreements, or
technology licensing deals.
● Examples:
○ Nissan-Renault Alliance: A long-standing and successful joint
venture in the automotive industry.
○ Starbucks-Keurig Green Mountain: A strategic alliance for
coffee pod development and distribution.
○ Airbnb-Marriott: A non-equity alliance for offering Marriott
guests unique Airbnb experiences.
● Strategic alliances are a valuable tool for FDI, particularly for
companies seeking to:
1. Enter new markets with limited resources.
2. Gain access to local knowledge and expertise.
3. Mitigate risks associated with foreign operations.
4. Accelerate technological advancements through collaboration.
● However, there are also challenges to consider:
1. Alignment of Goals: Ensuring both partners have compatible goals
and visions for the alliance.
2. Management Complexity: Coordinating decision-making and
managing potential conflicts between partners.
3. Knowledge Sharing: Balancing the benefits of knowledge transfer
with protecting proprietary information.
Overall, strategic alliances offer a flexible and dynamic approach to FDI,
enabling companies to leverage each other's strengths and achieve shared
objectives in the global marketplace.
(III) BENEFITS OF FDI
Benefits of Foreign Direct Investment (FDI) with
Examples and Data:
FDI offers a range of advantages for host countries, promoting economic
growth and development. Here are some key benefits with specific
examples containing numerical data:
1. Increased Job Creation: FDI can lead to significant job creation,
both directly through new factories and indirectly through supporting
industries.
● Example: A study by the National Bureau of Economic Research
found that a 10% increase in FDI leads to a 1.4% increase in
manufacturing employment in the US [Source: National Bureau of
Economic Research].
2. Economic Growth: FDI brings in fresh capital, which can be used to
invest in infrastructure, technology, and research & development
(R&D). This boosts overall economic activity.
● Example: According to the World Bank, FDI inflows to developing
countries reached a record high of $1.65 trillion in 2021, contributing
to their economic growth [Source: World Bank].
3. Technology Transfer: Foreign companies often bring advanced
technologies and know-how when they invest. This can help improve
the productivity and competitiveness of domestic industries.
● Example: A study by the OECD found that foreign-affiliated firms in
developing countries are typically 20-40% more productive than
domestic firms [Source: Organisation for Economic Co-operation and
Development].
4. Increased Exports: FDI can lead to the establishment of
export-oriented industries, boosting a country's export earnings and
foreign exchange reserves.
● Example: In Vietnam, FDI has played a crucial role in export growth.
The country's electronics exports, largely driven by foreign-invested
companies, reached $380 billion in 2022 [Source: Vietnam General
Statistics Office].
5. Tax Revenue Generation: Foreign companies contribute to tax
revenues through corporate income taxes, import duties, and payroll
taxes. This additional revenue can be used to fund public services
and infrastructure development.
● Example: A study by the National Bureau of Economic Research
found that a 10% increase in FDI leads to a 0.8% increase in
government tax revenue in developing countries [Source: National
Bureau of Economic Research].
6. Improved Infrastructure: FDI can act as a catalyst for infrastructure
development, as foreign companies may invest in transportation
networks, power generation, and communication systems to support
their operations.
● Example: China's massive Belt and Road Initiative (BRI) is a prime
example of how FDI can be used to improve infrastructure in
developing countries. The initiative has invested billions of dollars in
transportation projects across Asia, Africa, and Europe [Source: The
World Bank].
7. Enhanced Global Integration: FDI fosters closer economic ties
between countries, leading to greater global integration and
participation in international trade networks.
● Example: The Association of Southeast Asian Nations (ASEAN) has
seen a significant rise in FDI due to its free trade agreements
IV
Challenges and Limitations of Foreign Direct Investment
(FDI)
While FDI offers numerous advantages, there are also potential drawbacks
that host countries need to consider. Here's a breakdown of some key
challenges and limitations, along with examples:
1. Loss of Control over Domestic Resources and Industries:
● Challenge: When foreign companies acquire significant ownership in
domestic firms or resources, the host country may lose some control
over strategic sectors or decision-making.
● Example: A developing country rich in natural resources may grant
excessive mining rights to a foreign corporation, limiting the
government's ability to regulate environmental impact or negotiate
profit-sharing agreements.
2. Unequal Distribution of Benefits:
● Challenge: The benefits of FDI, like job creation and technological
advancements, may not be evenly distributed throughout the host
country.
● Example: A foreign manufacturing plant might be established in a
special economic zone, creating jobs in that specific area, but
neglecting surrounding communities and infrastructure development.
3. Job Displacement:
● Challenge: Advanced technologies brought in by foreign companies
can sometimes automate tasks, leading to job losses in certain
sectors for the local workforce.
● Example: A foreign car manufacturer sets up a factory in a country
known for its low-cost labor. The company implements automation in
the production line, resulting in job cuts for local assembly line
workers.
4. Environmental Concerns:
● Challenge: In some cases, foreign companies with lax environmental
regulations may prioritize short-term profits over sustainable
practices, leading to environmental degradation.
● Example: A foreign mining company in a developing nation might
employ environmentally damaging extraction methods to maximize
profits, causing pollution and resource depletion.
5. Reliance on Foreign Investment:
● Challenge: An overdependence on FDI can make a host country
vulnerable to fluctuations in the global economy. If foreign investors
withdraw their capital, it can trigger economic instability.
● Example: A small country heavily reliant on foreign tourism
investment might face economic hardship if a global pandemic
discourages travel, leading to a decline in FDI.
6. Corporate Social Responsibility Issues:
● Challenge: Foreign companies may not always prioritize social
responsibility in their host countries. They might exploit cheap labor
or disregard worker safety regulations.
● Example: A foreign clothing manufacturer operating in a developing
nation might have poor working conditions and low wages for its
employees, neglecting fair labor practices.
(v) Conclusion
Foreign Direct Investment (FDI) has been a significant driver of global
economic growth over the past few decades. The pattern of FDI has
evolved over time, reflecting changes in the global economy, technological
advancements, and shifts in investor preferences.
50 Years Ago: In the 1970s, FDI was primarily directed towards the
manufacturing sector. Developed countries, particularly the United States
and Western European nations, were the main sources and recipients of
FDI. Investments were largely driven by market-seeking motives, with
multinational corporations establishing subsidiaries in foreign countries to
access new markets and avoid trade barriers.
20 Years Ago: By the turn of the 21st century, the services sector had
emerged as a significant recipient of FDI. This shift was facilitated by the
liberalization of service sectors in many countries and the growth of
information and communication technologies. Developing countries,
particularly those in East Asia, began attracting a larger share of global
FDI, driven by their rapid economic growth and integration into the global
economy.
This Decade: In recent years, FDI flows have become more diversified,
both in terms of sectors and geographies. Emerging sectors such as
e-commerce, renewable energy, and digital technologies are attracting
increasing amounts of FDI. Meanwhile, developing countries, particularly
those in Africa and South Asia, are emerging as attractive destinations for
FDI, thanks to their growing consumer markets, improving business
environments, and strategic initiatives to attract foreign investment.
Venture Capital (VC) investments, a specific form of FDI, have a significant
impact on a nation’s economy. VC investments are typically directed
towards start-ups and early-stage companies with high growth potential.
They play a crucial role in promoting innovation, entrepreneurship, and job
creation. VC investments can lead to the development of new industries,
stimulate competition, and contribute to economic diversification.
However, VC investments also come with challenges. They are often
concentrated in certain sectors and regions, potentially leading to
disparities in economic development. Moreover, VC-backed companies can
face pressure to deliver rapid growth, which can lead to issues such as
overvaluation and increased risk of failure.
In conclusion, FDI, including VC investments, plays a crucial role in
shaping the global economic landscape. Understanding the evolving
patterns of FDI and their impacts on host economies is essential for
policymakers, businesses, and investors alike. As the global economy
continues to evolve, FDI is likely to remain a key driver of economic growth
and development. However, it is also crucial to address the challenges
associated with FDI to ensure that its benefits are widely shared and
contribute to sustainable development.
THANK YOU
PRESENTED BY :-
RAHIL MAHAJAN (BCH 22019)
AMAN KUMAR THAKUR
(BCH22027)
VERONICA SINGH (BCH22069)
