This is very useful for M-com And MBA students.

1. FOREIGN DIRECT INVESTMENT
[FDI] BY UMAIR FAROOQ MUGHAL
M-COM FROM PU
E-mail & Mobile no
umair_farooq123@yahoo.com
+92 331 3366205
Working as a Teacher & Banker in
MCB Bank. Currently Teach
International business & finance,
Interpersonal skill, I to B, MBF,
Economics, Computer, EOP, BCRW,
Audit and B-Law in The house of
accounting and New Stars College.
INVEST in YOURSELF
You can afford it, trust me.
‘’CHANGE YOUR FOCUS, FROM MAKING MONEY TO
SERVING MORE PEOPLE, SERVING MORE PEOPLE MAKES
THE MONEY COME IN.’’
BY UMAIR FAROOQ MUGHAL

2.  After studying this Slide, you should be able to:
 What is Foreign Direct Investment [FDI]
 FDI Definitions
 Structure of FDI
 Flow of FDI
 Types of FDI / Methods/ Strategies/ Entry Modes
 Determinants of FDI
 Benefits & Costs of FDI for Host Country
 Benefits & Costs of FDI for Home Country
 Government Policy Instruments and FDI / How Does Government
Influence FDI
 Political Ideology and FDI (What Are The Theoretical Approaches To FDI)
 Theories of FDI (Why Choose FDI?)
 Advantages of FDI
BY UMAIR FAROOQ MUGHAL
Learning Objectives

3.  Introduction:
Foreign direct investment (Direct Investment) means when we invest our
money in other country market or product. Once a firm undertakes foreign
direct investment it becomes multinational enterprises. FDI is not just a
transfer of ownership as it usually involves the transfer of factors
complementary to capital, Including management, technology and
organizational skills. FDI is distinguished from portfolio foreign investment
(Indirect investment) a passive investment in the securities of another country
such as public stocks and bonds by the element of control
 Examples:
 Motorola sets up a plant in China to manufacture cell phones.
 Starbuck purchases an existing UK firm, “British Coffee,” to sell coffee, tea
and desserts in the UK
What is Foreign Direct
Investment
BY UMAIR FAROOQ MUGHAL

4. Definitions:
‘’FDI accurse when a person directly invest in facilities
to produce or market a product in a foreign country.’’
‘’FDI includes mergers and acquisitions, building new
facilities, reinvesting profits earned from overseas
operations and intra company loans.’’
‘’ A foreign direct investment is a controlling
ownership in a business enterprise in one country by
an entity based in another country.’’
BY UMAIR FAROOQ MUGHAL
What is Foreign Direct
Investment

5. BY UMAIR FAROOQ MUGHAL
Structure of FDI
Flows
Inflow
Outflow
Entry Modes
Green Field Investment
Brown Field Investment
Horizontal
Vertical
Platform
Entry Route
Automatic
Government
Foreign
Investment
Promotion Board
[FIPB]

6.  Flow of FDI:
‘’Flow of FDI refers to the amount of FDI undertaken over a
given time period
Outflows:
Outflows of FDI are the flows of FDI out of a country.
Inflows:
Inflows of FDI are the flows of FDI into a country.
Stock of FDI:
The stock of FDI refers to the total asset accumulated by a
country into a foreign country.
BY UMAIR FAROOQ MUGHAL
Flow of Foreign Direct
Investment

7.  Green Field FDI
 Brown Field FDI
 Horizontal FDI
 Vertical FDI
 Platform FDI
 Green Field FDI:
‘’The establishment of a wholly new operation in a foreign country’’
‘’Start newly business in foreign country is called green field FDI.’’
 Brown Field FDI / Acquisition:
‘’Invest in already existing business like acquisition, merger etc. in other
countries is called brown field FDI.’’
‘’Acquisitions or mergers with existing firms in the foreign country’’
BY UMAIR FAROOQ MUGHAL
Types of Foreign Direct Investment/
Methods/ Strategies/Entry Modes

8.  Horizontal FDI:
‘’Investor invest in only one country is called horizontal FDI.’’
Where the company carries out the same activities abroad as at
home for example Toyota assembling cars in both japan and the UK
 Vertical FDI:
‘’Investor invest his money more than one country is called
vertical FDI.’’
 Platform FDI:
‘’FDI from a source country into a destination country for the
purpose of exporting to a third country’’
BY UMAIR FAROOQ MUGHAL
Types of Foreign Direct Investment/
Methods/ Strategies/ Entry Modes

9. Determinants of FDI
 Natural Resources
 Physical
Infrastructure
 Financial
Infrastructure
 Technological
Infrastructure
 Investment
protection &
Promotion
 Culture
 Insurance Facilities
 Low Interest Loan
 Tax Concession
 Subsidies
 Productivity
Expense
 Economic
Development
 Government Policies
 Labor Cost
 Human Capital
 Urbanization
 Market Size
 Market Growth
 Excess to Market
 Openness to
International Trade
BY UMAIR FAROOQ MUGHAL
Determinants of Foreign Direct
Investment

10. BY UMAIR FAROOQ MUGHAL
Benefits & Cost of FDI
 Benefits & Costs of FDI for Host Country:
Benefits Cost
 Increase Employment
 Improve Technology
 Increase Foreign Reserve
 Improve Labour Skill
 Good Infrastructure
 Effect Balance of Payment
Competition
 Adverse Effect on Balance of Payment
o After initial inflow of capital, subsequent outflow of capital
from the earnings of the FDI
o FDI may import inputs from abroad
 National Sovereignty and Autonomy
o Key decisions that affect the host country’s economy may be
made by a foreign parent that has no real commitment to the
host country
 Adverse Effect on Competition
o MNEs may have “too much” power and kill off competition
 Increase Labour Salary

11.  Benefits & Costs of FDI for Home Country:
BY UMAIR FAROOQ MUGHAL
Benefits & Cost of FDI
Benefits Costs
 Low Labour Cost
 Increase Foreign Reserve
o Effect on the capital account of the home country
balance of payments from the inward flow of foreign
earnings
 Learn Skills
o MNEs may learn skills from exposure (Experience) to
foreign countries
 Employment Effect
o FDI may import intermediate goods or inputs for
production from the home country, creating jobs
o Employment effect due to outward FDI
 Learning New Trends
 Transfer Technology
 Resource Transfer
 Balance of Payment
o From the initial capital outflow
required to finance the FDI
o Current account suffers if FDI is
to serve home market from low-
cost production location
 Employment Effect
o Employment may also be
negatively affected if the FDI is
substitute for domestic
production

12.  Host Country Policies
 Home Country Policies
BY UMAIR FAROOQ MUGHAL
Government Policy Instruments and FDI /
How Does Government Influence FDI
Host Country Policies
Encouraging Inward FDI
 Tax concessions
 Low-interest loans
 Grants
 Subsidies
 Offer Incentives
To encourage inward FDI, host countries usually offer
incentives for investment like tax breaks, low interest
loans, or subsidies.
Why would countries offer these benefits to foreign firms?
Because they want to gain the benefits of FDI that we
talked about earlier! Kentucky for example, offered a $112
million package to Toyota to get it to build its U.S. plants
in the state!
 Restricting Inward FDI
 Ownership restraints
 Why do so?
 To protect national interest (defense,
etc.)
 To facilitate resource-transfer
 Performance requirements
 Local content, exports, technology
transfer, and local participation in top
management
When a country wants to restrict FDI, it will usually
implement ownership restraints or performance
requirements. In Sweden for example, foreign companies
aren’t allowed to invest in the tobacco industry.

13. Home Country Policies
Encouraging Outward FDI
 Insurance programs to cover major types of
foreign investment risks
 Special funds or banks to make government
loans
 Political influence to encourage host
countries to relax restrictions on incoming FDI
Some countries have also developed special loan
programs for companies investing in developing
countries, created tax incentives, and encouraged
host nations to relax their restrictions on inward FDI.
Restricting Outward FDI
 Limit capital outflows
 Manipulate tax rules to encourage
investment at home
 countries may restrict firms from investing
in certain nations for political reasons
To discourage outward FDI, countries regulate the
amount of capital that can be taken out of a country,
use tax incentives to keep investments at home,
and actually forbid investments in certain countries
like the U.S. has done for companies trying
(annoying) to invest in Cuba and Iran.
BY UMAIR FAROOQ MUGHAL
Government Policy Instruments and FDI /
How Does Government Influence FDI

14.  Radical View
 Free Market View
 Pragmatic Nationalism
BY UMAIR FAROOQ MUGHAL
Political Ideology and FDI
(What Are The Theoretical Approaches To FDI)
Radical View:
Don’t give value to host country. They
argue that MNEs [Multinational Enterprises] extract profits form the
host country and take them to their home country, giving nothing of
value to the host country in exchange.
They note for example that key technology is tightly controlled by the
MNE, and that important jobs in the foreign subsidiaries of MNEs go
to home country nationals rather than to citizens of the host country.
In 1980s the radical view was very influential in the world economy.
The radical view was in retreat everywhere by the end of the 1990s.

15.  Free Market View:
Give value to host country. Free market view argues that FDI is a benefit to
both the source country and the host country. In the free market view argues that international
production should be distributed among countries according to the theory of comparative
advantage.
Consider a well-publicized decision by IBM in the mid-1980s to move assembly operations for many
of its personal computers from the United States to Mexico. IBM invested about $90 million in an
assembly facility with the capacity to produce 100,000 PCs per year, 75% of which were exported
back to the United States. According to the free market view, moves such as this can be seen as
increasing the overall efficiency of resource utilization in the world economy.
Mexico due to its low labor costs has a comparative advantage in the assembly of PCs. According to
the free market view by moving the production of PCs from the United States to Mexico, IBM frees
US resources for use in activities in which the United States has a comparative advantage e.g., the
design of computer software, the manufacture of high value added components such as
microprocessors. Due to this the cost of PCs reduces and both country get benefit due to low cost.
BY UMAIR FAROOQ MUGHAL
Political Ideology and FDI
(What Are The Theoretical Approaches To FDI)

16.  Pragmatic Nationalism:
Benefits and Cons for Both Countries.
FDI has both benefits (Inflow of capital, technology,
skills and jobs) and costs (return of profits to the home
country and a negative balance of payments effect.
BY UMAIR FAROOQ MUGHAL
Political Ideology and FDI
(What Are The Theoretical Approaches To FDI)

17.  Exporting
 Licensing
 Internalization Theory
BY UMAIR FAROOQ MUGHAL
Theories of FDI (Why Choose FDI?)
 Exporting:
‘’Producing goods at home and then shipping them to the receiving
country for sale’’
• Exports can be limited by transportation costs and trade barriers
• FDI is more common as compare to export. In FDI we directly invest in
other countries and start manufacturing activities in other country. Due
to we chose FDI as compare to export because we bear more expense in
export like transportation, trade barriers etc.

18. Licensing:
‘’written contract under which the owner of
copyright, know how, patent, service mark, trademark,
or other intellectual property, allows a licensee to use,
make, or sell copies of the original.’’
While licensing agreements are mainly used in
commercialization of a technology, they are also used
by franchisers to promote sales of goods and services.
BY UMAIR FAROOQ MUGHAL
Theories of FDI (Why Choose FDI?)

19. Internalization Theory:
Internalization theory suggests that licensing has
many drawbacks as compare to FDI
• Lower income
• Loss of control of the licensee manufacture and marketing
operations and practices leading to loss of quality
• Foreign partner also can become a competitor by selling its
production in places where the parent company has a
presence.
• Transfer technology
BY UMAIR FAROOQ MUGHAL
Theories of FDI (Why Choose FDI?)

20.  Economic development
 Create jobs
 Resource transfer
 Exchange of knowledge
 Transfer skill and technology
 Increase productivity
 Consumer benefit
 Increase saving and investment
BY UMAIR FAROOQ MUGHAL
Advantages of FDI

21.  Country Wise FDI Inflows ($ Million)
BY UMAIR FAROOQ MUGHAL
Foreign Investment inflows in
Pakistan($Millions)
COUNTRY 2013-2014 2014-15 [JUNE]
USA 212.1 175.7
UK 157.0 77.5
UAE (78.1) 163.3
JAPAN 30.1 51.1
Hong Kong 228.5 72.4
Switzerland 209.8 (3.4)
Saudi Arabia (40.1) (95.5)
China 695.8 178.3
Others 255.4 92.7