Foreign direct investment

Foreign direct investment (English Foreign Direct Investment, FDI short ) are investments abroad by a domestic investor ( natural or legal persons). In contrast to portfolio investment are the influence and control of the business abroad and thus to achieving the yield important criterion of demarcation with a direct investment. So it flow not only capital, but also knowledge and technology. Direct investment are therefore part of the international movement of capital.

Characteristics of a direct investment, according to the International Monetary Fund a participation of at least 10 % of the company abroad, being usually considered taking into account the control aspect of a stake of 25 % and more.

Definition

Direct investment have a river, a portfolio and an income component.

The most common is the analysis of the resulting from a direct investment relationship transactions. This flow-based observation consistent with the role of direct investment in the balance of payments, in which they form a part of the capital account.

The cash flows include the information needed to set up a direct investment relationship transactions and all subsequent transactions between the direct investor and the direct investment enterprise. For the former, the acquisition of shares or other investments in existing companies abroad and of shares in their reserves and the transfer of capital is part of the creation of enterprises abroad ( investment on greenfield sites ). Second, in addition to capital include corporate loans from the parent to the subsidiary and reinvested foreign source income of the subsidiary.

Another focus has existed based perspective that considers the capital stocks in direct investment enterprises at any given time. This view is consistent with the role of direct investment in foreign assets. The capital stock includes the pro rata by a direct investor in a direct investment enterprise held equity and credit relations between the two.

Although capital flows affect the capital stock, can be inferred from the change in the capital stock is not directly on the cash flows or vice versa. The change in capital stock is subject to various influences which do not lead to capital movements. Thus, the capital stocks also be altered by exchange rate changes, new policies ( zBAnpassung to international accounting standards) etc..

Finally, the income-based perspective highlights the progress in direct investment enterprises income of the direct investor and their distribution. Direct investment income consist of reinvestment of income and dividends transferred to the direct investor. This view is consistent with the role of FDI in the current account, where they form a component of capital income.

Topics

There are various motives for direct investment. In focusing on large enterprises Bruce Kogut published in 1985 an overview. Under that system, large companies can achieve benefits in the following areas:

• Relocation of production - which either the direct costs of production can be reduced or economies of scale are achieved.
• Tax reduction - where the tax rate differential between countries is used as an advantage.
• Financial markets - where the simple and easy access to financial markets, a company is commanded by improved liquidity or debt financing.
• Information Arbitrage - Knowledge and experience differences in the production, marketing or organizational structure can come to fruition through direct investments in various markets. A company that is able to identify such differences, can thus achieve a direct competitive advantage in such markets.
• Global co-ordination - By certain activities are met centrally where the conditions for this activity are optimal coordination of the activities can be achieved by centralizing.
• Reduction of political risk - Different countries have different high risks, through state intervention to lose capital. In regions of relative political stability high investments are safer than in regions with high instability.

The growing competition on the traditional home markets is driving companies to take these benefits. However, can be achieved as competitors tread the same means and ways by such factors hardly lasting benefits.

Eclectic paradigm of Dunning

Among the theories of direct investment Dunning's theory applies as the most comprehensive, as it tries as much as possible to summarize all the various approaches into one. It means that companies doing business always FDI if three conditions are met:

The model is however critical to consider: It does not distinguish between different forms of internationalization (direct investment, licensing agreements, etc.). It can be made direct investment, if all three conditions (ownership advantage, location advantage, internalization ) are met and the profits of direct investment exceed the costs. These costs (more precisely, transaction costs ) are not precisely specified. It is also not clear what form of internationalization promises the highest net profit in comparison to other forms. To this end, the model gives no clues.

Microeconomic viewing

It is necessary to distinguish between foreign direct investment ( FDI ) and indirect foreign investment (portfolio investments ). In the first case it is the investor important to control the means of production acquired directly. In indirect foreign investment it is for the investor contrast, only a question to participate in the current profits of a controlled from other production.

Foreign investment, both for investors and for the country in which the investment is made, bring problems. For the investor, it is above all the safety of his facility and to the right to send profits back to his home country. On the other hand, developing countries in particular have problems with the fact that investors partially encourage corruption there, and that often international standards are not observed in environmental protection and occupational health and safety ( extreme case: sweatshops ).

With the regulation of the international climate for foreign investments in particular UNCTAD has been first employed. In this context, developing countries have had some influence, but it does not come to an agreement with the industrial countries. End of the nineties there was within the OECD a draft Multilateral Agreement on Investment (MAI ), inter alia, but against the the French Government filed objections. Now being negotiated under the World Trade Organization on a regime.

The benefits of foreign investment and the approaches to address this are discussed controversially in the context of the debate on globalization and neoliberalism. The debate about the Multilateral Agreement on Investment is seen by some as the point of origin of the critique of globalization as a stand-alone approach.

Macroeconomic viewing

From a macroeconomic perspective, the sum of the foreign investment ( net foreign investment ), which by definition is identical to the export of capital interested. From the inflowing foreign investment form contrast the import of capital, together, these two positions, the capital account.

As a ( foreign) direct investment is defined as the financial contribution of the investor ( direct investor, the parent company) in an enterprise in another country ( direct investment enterprise, subsidiary), which is mostly designed to circumvent possible barriers to market entry (eg barriers ) and the ( also ) is determined by the nature and scope to exert a lasting influence on the commercial policy of the company. According to international standards ( see section ) is expected from the required " lasting impact " if the participation is at least 10 % of the capital of the direct investment enterprise.

From the perspective of the interior, a distinction ( foreign direct investment ) and inward FDI (foreign direct investment in Germany ) between active direct investment.

Direct investment and globalization

Direct investment are considered a key indicator of globalization. They usually form from direct, stable and long -term linkages between economies and there are world before comparable data. Direct investment as a percentage of nominal gross domestic product (GDP ) is considered the most widely used, can be derived from the direct investment statistics measure of the globalization of the economy. This indicator is created for the inflows, stocks or income from direct investment. For longer-term considerations, particularly the capital stock as a percentage of GDP is.

There are several reasons for foreign investment.

• Development of new markets
• Take advantage of more favorable production locations ( low-wage country ) see also: Outsourcing
• Avoid exchange rate risks by shifting production capacity to the country of ( natural hedging )
• Diversification of the investment portfolio

International standards

The basic handbook for direct investment is the Balance of Payments Manual of the International Monetary Fund ( IMF). It is supplemented and specified by a manual of the OECD, the so-called "benchmark". Both of these manuals are based on the data on direct investment in most countries. Although there are regular according to studies by the OECD and the IMF in the implementation in individual countries still partly considerable differences, which are, however, earlier become smaller compared to.

Investment protection and risk hedging

Investments abroad are first of all the legal system of the host country. In addition, foreign direct investments, unlike portfolio investment, including protected yet customary international law.

The risks today represent not so much obvious uncompensated expropriation or confiscatory measures, as these are now generally regarded as illegal under international law.

Beginning of the 20th century was still represented by the Calvo Doctrine of the opinion that foreigners, for example in the case of nationalization in the host country only equal treatment with own nationals are entitled, so no diplomatic protection law exists. The contrary was the Hull formula that the expropriating State, adequate ( reasonable value ) and effective ( convertibility of the currency of payment ) compensation is bound to an immediate ( no installment ).

Today there are a variety of bilateral and multilateral investment protection agreements, investment protection through regional trade agreements (European Communities, North American Free Trade Agreement, ASEAN and Mercosur ) and corresponding agreements in the framework of the OECD and the WTO.

As a result, certain forms of state risk hedging are not permitted if they are seen as a hidden export promotion. Thus a race of export subsidies should be prevented.

On the other hand, direct investment are also better protected against subtle forms of trespass, such as subsequent disproportionate and discriminatory regulatory Auflagungen. , under the pretext of environmental protection, etc. This protection exists in applications outside their own regional economic agreement especially when the corresponding investment protection agreement provides protection by ICSID (International Centre for Settlement of Investment Disputes )

Swell

• IMF Balance of Payments Manual, fifth edition 1993, Washington DC
• OECD Benchmark Definition of Foreign Direct Investment, third edition 1996, Paris.
• IMF: Foreign Direct Investment Statistics - How Countries Measure FDI 2001, 2003, Washington DC
• Groht, Volker: Waiting for the Boom - direct investment in the Eastern European accession countries: wishful thinking and facts, 2005, Berlin, ISBN 3-89404-526-4
• Schaefer, Karl Christian: German portfolio investment abroad 1870-1914, Münster contributions to Cliometrie and quantitative economic history 2, Münster, 1995, ISBN 3-8258-2124-2