Motives for Dfi

MOTIVES FOR DFI

Prospects of profit from such investment are greater than that anticipated from other uses (e.g. investment in domestic economy):

“… given the investment climate at home and abroad, expected profits (allowing for risk) from an incremental investment in foreign countries exceeded profits expected from such activity in the domestic economy.”

Factors affecting the aforementioned “climate” may include:

General level of economic activity;

Existing/anticipated tax and tariff policies.

International profit differentials within an industry.

Additionally, business organisations may offer reasons other than purely profit for DFI:

a)Cost Considerations (investment is “cost reducing”)

Motive is the need to obtain raw materials from abroad, as they are either unavailable at home or are available at extremely high cost. For example, investments in the extractive industries by the US. Such investment is complementary to labour/capital employed in the source economy, without which the latter would be harmed.

Motive is to take advantage of lower labour costs in foreign countries. Resultant savings may be offset to some extent by productivity differentials. This type of investment is definitely not complementary to FOPs in the source economy

Motive may be to take advantage of policies of the foreign government favourable to DFI (e.g. special tax concessions).

b)Marketing Considerations

Familiarisation with foreign markets via exports may lead to the setting up of foreign branches;

The need to cater to the specific needs of the foreign market may result in the setting up of own distribution channels; and eventually the setting up of foreign production facilities and gearing of product line towards local tastes;

Local anti-trust laws may preclude the possibility of expansion through the purchase of local competitors.

FOREIGN INVESTMENT AND ECONOMIC WLFARE (REAL INCOME)

World Welfare

Free mobility of resources leads to the beneficial allocation of such;

If capital is attracted by a higher rate of return, then it will flow from where it is cheap (and abundant) to where it is expensive (and scarce) until returns are equalised;

Raises real total output

Host Country

Benefits from DFI:

Real product increases as a result of the contribution to the economy of the new capital;

There is a managerial/technology transfer from the source to the host country;

External benefits may include a better trained labour force, and a newer and higher economic growth path for the host country.

Disadvantages of DFI (whether real or imagined):

Exploitation of the host country’s labour and natural resources;

Research and development activities tend to be performed in the source country, only the routine work being allocated to the foreign branch in the host country

Source Country

Advantage of DFI:

If investment is related to extractive industries, then this will provide access to raw materials not otherwise available in the domestic economy

Disadvantages of DFI:

Revenue loss to domestic government;

Foreign investment increases the productivity of foreign labour, and provides indirect benefits to the host country (e.g. labour quality and production technologies improved, establishment of superior organisational forms etc.)