Foreign Direct Investments (fdi) Macroeconomic Analysis icon

Foreign Direct Investments (fdi) Macroeconomic Analysis




НазваForeign Direct Investments (fdi) Macroeconomic Analysis
Дата29.06.2013
Розмір445 b.
ТипДокументи


Foreign Direct Investments (FDI)

  • Macroeconomic Analysis,

  • Topic 4


Central Idea and Keywords

  • Central Idea:

  • Government Policies attracting investments into

  • technically “primitive” and

  • low-value-added

  • sectors



Lecture Plan

  • What is FDI (or FDI: Myth and Reality)

  • How to attract investors (or Principle determinants of FDI)

  • Where to direct investments (or Efficient reallocation of investments in a country)

  • Investment strategies: leaders versus loosers

  • Developing countries: Latin America and Asia

  • Europe: EU-15 and Turkey

  • CIS: (i) gas and oil exporters; (ii) market oriented countries; (iii) stagnation countries



Literature:

  • Mandatory:

  • Foreign Direct Investment in Emerging Market Countries—Report of the Working Group of the Capital Markets Consultative Group, September 2003 //http://imf.org/external/np/cmcg/2003/eng/091803.HTM

  • Білоцерковський О. та ін. Інвестування в Україні як процес відбору. // Welcome. – 2002, №7. – с.3-6.

  • Ярош О. Інвестиційний клімат як елемент польської стратегії економічних реформ. // Welcome. – 2002, №7. – с.27-30.



Lecture Plan

  • What is FDI (or FDI: Myth and Reality)

  • How to attract investors (or Principle determinants of FDI)

  • Where to direct investments (or Efficient reallocation of investments in a country)

  • Investment strategies: leaders versus loosers

  • Developing countries: Latin America and Asia

  • Europe: EU-15 and Turkey

  • CIS: (i) gas and oil exporters; (ii) market oriented countries; (iii) stagnation countries



FDI: Myth and reality

  • FDI Investor :

  • Controls at least 10% of shares (or “voting minimum”)

  • Owns buildings and land

  • Establishes a local subsidiary having clearly defined responsibilities (“top-down”, “hands off”, “hybrid” approaches)



FDI: Myth and reality



FDI: Organization, Expansion, & Risks Diversification

  • Organization:

  • Strategic investor - Owns 100% of a company

    • Total control of management
    • Maximum profit
  • Joint Venture – risk diversification

    • Local partner
      • Aware of local peculiarities
      • Access to cheap recourses
    • If the investors feels safer, it tend to buy 100% of assets


FDI: Organization, Expansion, & Risks Diversification

  • Expansion:

    • Issuing new shares
    • Profit reinvesting
    • Getting loans from the headquarter
    • Getting loans from commercial banks
      • Using reputation of the headquarter (big international banks)
      • (recent trend) Using reputation of a subsidiary (local banks)


FDI: Organization, Expansion, & Risks Diversification

  • Risk Diversification:

    • Minimum risk – profit is reinvested locally
    • High risks - profit is expropriated by a headquarter (to be reinvested in other countries)


Lecture Plan

  • What is FDI (or FDI: Myth and Reality)

  • How to attract investors (or Principle determinants of FDI)

  • Where to direct investments (or Efficient reallocation of investments in a country)

  • Investment strategies: leaders versus loosers

  • Developing countries: Latin America and Asia

  • Europe: EU-15 and Turkey

  • CIS: (i) gas and oil exporters; (ii) market oriented countries; (iii) stagnation countries



Principle determinants of FDI

  • Economic:

  • Market size and growth prospects

  • Wage – adjusted productivity of labor

  • Availability of infrastructure

  • Reasonable level of taxation; tax regime stability

  • Institutional:

  • Stable political environment

  • Quality of bureaucracy (including corruption)

  • Predictable legal system



Market size

  • Market-seeking investments focus on:

  • Large markets:

    • GDP
    • Per capita income
    • Share of middle class
  • Promising growth prospects of the market size (participation in trade integration schemes is critical)



Wage – adjusted productivity of labor

  • (Low cost of local labor per se is not that important for efficiency-seeking investments)!!!!!

  • Critical:

  • Wage-adjusted productivity of L =

  • = (Labor Productivity)/Wages

  • High-skilled labor (slightly cheaper than in industrialized countries):

    • “Technical” skills
    • Knowledge of foreign languages
    • Market – oriented skills


Availability of infrastructure

  • Investors need well-developed and high quality infrastructure!!!!

  • Infrastructure:

  • Roads, airports, ports

  • Pervasive electricity and water supply

  • High-quality telecommunications (including swift Internet)



Taxation

  • * Resource - Seeking Investments:

  • Natural resources

  • Labor – intensive activities



Institutional determinants of FDI

  • Political stability

  • Physical and personal safety (exception – Russia)

  • Rule of law:

    • Secured property rights of domestic and foreign investors (exceptions – Turkmenistan, UA)
    • Contract enforcement
    • Availability of legal market – oriented framework
    • Transparent rules (e.g. licensing, land ownership)


Warning!

  • If the above-mentioned economic and institutional principles are violated, resource-seeking rather than efficiency-seeking investors are attracted



Benefits of efficiency - seeking investors

  • Boost international trade

    • Circumvent trade barriers
  • Facilitate international migration of labor force

    • Upgrade wages of high-skilled labor
  • Adjust

    • Technology
    • Corporate governance standards


Lecture Plan

  • What is FDI (or FDI: Myth and Reality)

  • How to attract investors (or Principle determinants of FDI)

  • Where to direct investments (or Efficient reallocation of investments in a country)

  • Investment strategies: leaders versus loosers

  • Developing countries: Latin America and Asia

  • Europe: EU-15 and Turkey

  • CIS: (i) gas and oil exporters; (ii) market oriented countries; (iii) stagnation countries



Investments and Growth: Typical mistake

  • Economic growth results from investments in

  • fixed capital and inventories.

  • However:

  • Poland, 1970s – huge investments in coal mines and metallurgical plants lead to depression

  • USSR, 1970s-1980s – 60% of GDP were directed to “capital” investments; nevertheless an economy end up in collapse

  • New Priorities:

  • In transition economies it is vitally important to invest in institutions’ renovation.



Institutions’ renovation

  • Macroeconomic:

  • Implement policies discussed in previous chapter:

  • Political stability

  • SBC abolishing

  • Secured property rights

  • Contract enforcement

  • Availability of legal market – oriented framework

  • Transparent rules



Institutions’ renovation

  • Microeconomic (government investments):

  • Invest in profitable firms only

  • Selected profitable firms are to be characterized by

    • High productivity
    • High liquidity
    • Promising development prospects
  • Business plans are mandatory; business plans are to be backed by marketing analysis

  • Investments are to be followed by restructuring:

    • Technological and/or product renewal
    • New markets’ intake
    • Corporate governance/ Management change


Where to direct investments: Self-test questions

  • Does it make sense to continue subsidizing distressed coal mines and agriculture (without insisting on their restructuring)?

  • Does Ukraine benefit from moratorium on land private ownership?

  • Does it make economic (versus political) sense to provide short-term loans to economic agents (e.g. sowing campaign)?



Lecture Plan

  • What is FDI (or FDI: Myth and Reality)

  • How to attract investors (or Principle determinants of FDI)

  • Where to direct investments (or Efficient reallocation of investments in a country)

  • Investment strategies: leaders versus loosers

  • Developing countries: Latin America and Asia

  • Europe: EU-15 and Turkey

  • CIS: (i) gas and oil exporters; (ii) market oriented countries; (iii) stagnation countries



Latin America and Asia



CIS: Major Problems

  • Prevailing State Ownership:

  • Archaic management and corporate culture

  • Managers rely on personal contacts rather than efficiency considerations

  • Outdated technology

  • Giant plants

  • Pervasive Government Intervention:

  • Gov/t determines market entry/exit (e.g. licensing, certification)

  • Gov/t sets prices (e.g. electricity); determines the list of inputs’ sellers and/or goods’ buyers

  • Inadequate remuneration of manages:

  • Negative selection of managers in public sector



CIS: Major Problems

  • Gov/t support to non-perspective economic agents:

  • SBC

  • Inadequate fulfillment of Bankruptcy Procedure

  • Toleration of monopoly

  • Primitive financial sector:

  • Lack of the full set of market financial institutions

  • Lack of competition among existing financial institutions

  • Low savings – restricting rules on bank credits (including credit rationing)



CIS (read Foreign Direct Investment in Emerging Market )

  • (i) Gas and oil exporters:

  • Azerbaijan

  • Kazakhstan

  • Russia

  • Turkmenistan

  • (ii) Market oriented countries:

  • Ukraine

  • Georgia

  • (iii) stagnation countries



Leaders versus Loosers: Self-test questions

  • Why FDI in Poland are tremendously high compared to Ukraine although their market size and labor qualification are similar?

  • Why Georgia, which is persistently involved in armed conflicts, are considered by investors as attractive as UA?

  • Why per capita investments in Russia are dramatically low albeit of its market size and resources availability?

  • What countries invest in UA aggressively?

  • Major advantages and disadvantages of UA investment strategy.



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