Foreign Direct Investment (FDI) - (A Credit Management Topic)
Foreign direct investment (FDI) refers to long term participation by a country A into country B (in this case Pakistan). It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative). Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization.
Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intro company loans". In a narrow sense, foreign direct investment refers just too building new facilities. The numerical FDI figures based on varied definitions are not easily comparable. As a part of the national accounts of a country, and in regard to the GDP equation Y=C+I+G+(X-M) [Consumption + gross Investment + Government spending +(exports - imports)], where I is domestic investment plus foreign investment, FDI is defined as the net inflows of investment (inflow minus outflow) to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.
A foreign direct investment (FDI) is a controlling ownership in a business enterprise in one country by an entity based in another country.
Foreign direct investment is distinguished from portfolio foreign investment, a passive investment in the securities of another country such as public stocks and bonds, by the element of "control". According to the financial Times, "Standard definitions of control use the internationally agreed 10 percent threshold of voting shares, but this is a grey area as often a smaller block of shares will give control in widely held companies. The origin of the investment does not impact the definition as an FDI, i.e., the investment may be made either "inorganically" by buying a company in the target country or "organically" by expanding operations of an existing business in that country.
Definitions Explained
Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans". In a narrow sense, foreign direct investment refers just too building new facilities. The numerical FDI figures based on varied definitions are not easily comparable. As a part of the national accounts of a country, and in regard to the GDP equation Y=C+I+G+(X-M)[Consumption + gross Investment + Government spending +(exports - imports)], where I is domestic investment plus foreign investment, FDI is defined as the net inflows of investment (inflow minus outflow) to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. FDI is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. Stock of FDI is the net (i.e., inward FDI minus outward FDI) cumulative FDI for any given period. Direct investment excludes investment through purchase of shares. FDI is one example of international factor movements.
Types
- Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI.
- Platform FDI Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country.
- Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country.
Methods
The foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods:
- by incorporating a wholly owned subsidiary or company anywhere
- by acquiring shares in an associated enterprise
- through a merger or an acquisition of an unrelated enterprise
- participating in an equity joint venture with another investor or enterprise
Forms of FDI incentives
Foreign direct investment incentives may take the following forms:
- low corporate tax and individual income tax rates
- tax holidays
- other types of tax concessions
- preferential tariffs
- special economic zones
- EPZ – Export Processing Zones
- Bonded warehouses
- Maquiladoras
- investment financial subsidies
- free land or land subsidies
- relocation & expatriation
- infrastructure subsidies
- R&D support
- derogation from regulations (usually for very large projects)
Governmental Investment Promotion Agencies (IPAs) use various marketing strategies inspired by the private sector to try and attract inward FDI, including Diaspora marketing.
- By excluding the internal investment to get a profited downstream.
Importance and barriers to FDI
The rapid growth of world population since 1950 has occurred mostly in developing countries. This growth has been matched by more rapid increases in gross domestic product, and thus income per capita has increased in most countries around the world since 1950. While the quality of the data from 1950 may be of question, taking the average across a range of estimates confirms this. Only war-torn and countries with other serious external problems, such as Haiti, Somalia, and Niger have not registered substantial increases in GDP per capita. The data available to confirm this are freely available. An increase in FDI may be associated with improved economic growth due to the influx of capital and increased tax revenues for the host country. Host countries often try to channel FDI investment into new infrastructure and other projects to boost development. Greater competition from new companies can lead to productivity gains and greater efficiency in the host country and it has been suggested that the application of a foreign entity’s policies to a domestic subsidiary may improve corporate governance standards. Furthermore, foreign investment can result in the transfer of soft skills through training and job creation, the availability of more advanced technology for the domestic market and access to research and development resources. The local population may be able to benefit from the employment opportunities created by new businesses. In many instances, the investing company is simply transferring its older production capacity and machines, which might still be appealing to the host country because of technological lags or under-development, in order to avoid competition against its own products by the host country/company.
Different Countries of the world
A 2010 meta-analysis of the effects of foreign direct investment on local firms in developing and transition countries suggests that foreign investment robustly increases local productivity growth. The Commitment to Development Index ranks the "development-friendliness" of rich country investment policies.
- China
- India
Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then finance minister Manmohan Singh. As Singh subsequently became the prime minister, this has been one of his top political problems, even in the current times. India disallowed overseas corporate bodies (OCB) to invest in India. India imposes cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%. Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010–2012. As per the data, the sectors that attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, U.S and UK were among the leading sources of FDI. Based on UNCTAD data FDI flows were $10.4 billion, a drop of 43% from the first half of the last year. Nine from 10 largest foreign companies investing in India (from April 2000- January 2011) are based in Mauritius. List of the ten largest foreign companies investing in India (from April 2000- January 2011) are as follows:
- TMI Mauritius Ltd. ->Rs 7294 crore/$1600 million
- Cairn UK Holding -> Rs6663 crores/$1492 million
- Oracle Global (Mauritius) Ltd. -> Rs 4805 crore/$1083 million
- Mauritius Debt Management Ltd.-> Rs 3800 crore/$956 million
- Vodafone Mauritius Ltd. – Rs 3268 crore/$801 million
- Etisalat Mauritius Ltd. – Rs 3228 crore
- CMP Asia Ltd. – Rs 2638.25 crore/$653.74 million
- Oracle Global Mauritius Ltd. – Rs 2578.88 crore / $563.94 million
- Merrill Lynch(Mauritius) Ltd. – Rs 2230.02 crore / $483.55 million
- Name of the company not given (but the Indian company which got the FDI is Dhabol Power Company Ltd.)
- United States
Broadly speaking, the United States has a fundamentally "open economy" and low barriers to FDI. U.S. FDI totaled $194 billion in 2010. 84% of FDI in the United States in 2010 came from or through eight countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg, the Netherlands, and Canada. A major source of investment is the real estate, the foreign investment in this area totaled $92.2 billion in 2013, under various forms of purchase structures (considering the U.S. taxation and residency laws). A 2008 study by the Federal Reserve Bank of San Francisco indicated that foreigners hold greater shares of their investment portfolios in the United States if their own countries have less developed financial markets, an effect whose magnitude decreases with income per capita. Countries with fewer capital controls and greater trade with the United States also invest more in U.S. equity and bond markets. In 2011, Rick Kimball, Gordon M. Goldstein, Daniel Zwirn, et al. created a study in behalf of Brooking Institution on the role and importance of foreign capital funds in the United States. The study reviews practices of Global Public Investors and recommends promoting of investment in U.S. infrastructure development. White House data reported in 2011 found that a total of 5.7 million workers were employed at facilities highly dependent on foreign direct investors. Thus, about 13% of the American manufacturing workforce depended on such investments. The average pay of said jobs was found as around $70,000 per worker, over 30% higher than the average pay across the entire U.S. workforce. President Barack Obama said in 2012, "In a global economy, the United States faces increasing competition for the jobs and industries of the future. Taking steps to ensure that we remain the destination of choice for investors around the world will help us win that competition and bring prosperity to our people. In September 2013, the United States House of Representatives voted to pass the Global Investment in American Jobs Act of 2013 (H.R. 2052; 113th Congress), a bill which would direct the United States Department of Commerce to "conduct a review of the global competitiveness of the United States in attracting foreign direct investment". Supporters of the bill argued that increased foreign direct investment would help job creation in the United States.
- Canada
Foreign direct investments by country and by industry are tracked by Statistics Canada. Foreign direct investment accounted for CAD$634 billion in 2012, eclipsing the United States in this economic measure. Global FDI inflows and outflows are tabulated by Statistics Canada.
- United Kingdom
The UK has a very free market economy and is open to foreign investment. Prime Minister David Cameron has sought investment from emerging markets and from the Far East in particular and some of Britain's largest infrastructure including energy and skyscrapers such as, The Shard have been built with foreign investment.
- Russian Federation
History of Foreign Investment Law
In 1991, for the first time, Russia regulated the form, range and favorable policy of FDI in Russia. In 1994, a consulting council of FDI was established in Russia, which was responsible for setting tax rate and policies for exchange rate, improving investment environment, mediating relationship between central and local government, researching and improving images of FDI work, and increasing the right and responsibility of Ministry of Economic in appealing FDI and enforcing all kinds of policies. In 1997, Russia starts to enact policies for appealing FDI on particular industries, for example, fossil fuel, gas, woods, transportation, food reprocessing, etc. In 1999, Russia announced a law named FDI of Russian Federation, which aimed at providing a basic guarantee for foreign investors on investing, running business, earnings. In 2008, Russia banned on FDI on strategic industries, such as military defense and country safety. In 2014, president Putin announced that once abroad Russian investment inflows legally, it would not be checked by tax or law sector. This is a favorable policy of Putin to appeal Russian investment to come back.
Structure of foreign investment in Russia
Direct investment: Investing directly with cash. Basically, investment more than 10% of the item is called direct investment. Portfolio investment: Investing indirectly with company loans, financial loans, stocks, etc. Basically, investment less than 10% of the item is called Portfolio investment. Other investment: Except for direct and portfolio investment, including international assistance and loans for original country.
FDI in Pakistan
An investment abroad, usually where the company is invested in is controlled by the foreign corporation. Foreign direct investment or foreign investment refers to long-term participation by country A into country B. It is well documented in the literature that foreign direct investment (FDI) plays a positive role in the process of economic growth. Thamos, et al. (2008) argued that foreign affiliates of transnational corporation (TNCs) succeed in developing new products and technologies faster than local firms, thereby exerting competitive pressure and forcing local firms to imitate and innovate. FDI is more than an external resource inflow FDI can modernize industry and better integrate the economy into international production. Market-seeking FDI is viable in current global recession. Export-oriented FDI is a desirable medium-term objective
Types of FDI
- Inward Foreign Direct Investment:
- Outward Foreign Direct Investment‡
5 Key Reasons to Invest In Pakistan
- Geo-strategic Location
- Trained Workforce
- Economic Outlook
- Investment Policies
- Financial Markets
Foreign Investment Inflows in Pakistan ($ Million)
Year Green Field Investment Privatization Proceeds Total FDI
2005-06 1981.00 1540.00 3521.00
2006-07 4873.20 266.40 5139.60
2007-08 5276.60 133.20 5409.80
2008-09 3719.90 0.00 3719.90
2009-10 2150.80 0.00 2150.80
2010-11 (Jul-Jan) 974.00 0.00 1181.80
Green Field Investment
A form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees.
Privatization Proceeds
Selling off public assets to private operators can create a win-win situation for developing countries looking to unload expensive and unsustainable assets.
Main Greenfield Projects, Inward Investing In Pakistan
Investing company Home economy Industry Investment Value (US $)
China Mobile China Communication 500
Total France Petroleum 406
Yamaha Japan Transport equipment 150
Metro Germany Trade 55
Coca-Cola U.S Beverages 100
Procter & Gamble U.S Chemicals 100
Toyota Motor Japan Transport equipment 180
Credit Suisse Group Switzer Land Finance 33
Country Wise FDI Inflows ($ Million) 2010-2011 Jul-Jan
USA 142.9
UK 127.6
U.A.E 158.3
Japan 1.1
Hong Kong 91.8
Switzerland 23.3
Saudi Arabia 5.9
Germany 9.1
Korea (South) 1.5
Norway 0.4
China 4.9
Others 380.2
Sector Wise FDI Inflows ($ Million)
Sector 2010-2011(Jul-Jan)
Oil & Gas 296.4
Financial Business 114.1
Textiles 14.0
Trade 27.6
Construction 37.5
Power 86.4
Chemical 19.5
Transport 54.7
IT & Telecom 77.3
Others 219.5
Foreign Direct Investment, Net Outflows
6000 Pakistani companies operating in the UAE e.g. Netsol’s (a Pakistani software company).
- Pakistanis have invested 6.7B Dirham's in Dubai real estate.
- Fosh Tech dealing in electronic field in Singapore
- Most banks invest in many countries such as HBL.
How Can A Foreign Investor Invest His Funds?
The foreign direct investor may invest in by any of the following methods in Pakistan:
- By incorporating a wholly owned subsidiary or company, by acquiring shares in an associated enterprise.
- Through a merger or an acquisition of an unrelated enterprise.
- Participating in an equity joint venture with another investor or enterprise.
FDI Increase by 12% during fiscal year 2014 (July 16, 2014)
With an increase of 12 percent, Pakistan fetched some $1.6 billion Foreign Direct Investment (FDI) during the last fiscal year (FY14). "For the last few years FDI was on decline because of several domestic and external issues, including energy crisis, adverse law and order situation and lack of infrastructure," economists said. However, with the arrival of new political set-up in May last year FDI is presenting an improved picture as foreign investors have some hopes for betterment in the Pakistan's economy.
Economists said major inflows of direct investment have arrived in two sectors, including telecommunication and oil and gas exploration sector. "Rising FDI inflows is a good sign for the developing economy of Pakistan and now government is required to adopt investment friendly policies aimed to attract the new investment. In addition, some serious measures are also required for an improved law and order situation and other issues", they added. The State Bank of Pakistan on Tuesday revealed that foreign investors have invested some $1.631 billion as FDI in Pakistan during FY14 as compared to $1.456 billion in FY13, depicting an increase of $175 million. FDI inflows, during the last fiscal year, stood at $2.641 billion as against outflow of $1 billion. Month-on-Month basis, FDI has posted a surge of 47 percent during last month of FY14. FDI stood at $189 million in June 2014 as against $128.3 million in June 13, showing an increase of 60 million. Followed by improvement in the country's equity market, the second component of foreign investment, i.e. Foreign Portfolio Investment (FPI) also registered upward trend. With an increase of 428 percent or $511 million, FPI reached $631 million in FY14 compared to $119.5 million in FY13.
Net foreign private investment comprising foreign direct investment and portfolio investment have risen by 42.5 percent or $686 million to $2.262 billion end of last fiscal year. In addition, net inflows of foreign investment in Pakistan comprising foreign private investment and foreign public investment reached $4.377 billion in FY14 as compared to $1.58 billion, depicting an increase of 177 percent or $2.79 billion.
Economists said although foreign investment has posted some surge, however it feels that adverse law and order situation and energy crisis are still major hurdles in foreign investment. "We are expecting more foreign investment in oil, gas and energy sector as the country is facing energy crisis from last few years", they added. They said that Pakistan has successfully launched some $2 billion worth Euro bond in April this year in the international bond market, while the government is also planning to launch some one billion dollar worth Islamic bond-Sukuk. $1.1 billion rose from 3G, 4G auction
Comments
Post a Comment