The focus of this paper is to provide a report of the question which requires analysis and explanation of the changing trends in FDI since 1990. The paper will be divided into four main sections to answer the question. The first part seeks to define the general topic at hand showcasing the history of the FDI and the changing trends experienced over the years. This includes a definition of FDI and the theories that explain the trends and the complications associated with FDI.
FDI is defined as an investment of a large amount of capital in foreign locations. The global Foreign Direct Investment has undergone a lot of changes over the years. The shift in the 1990s evolved from the 1980s where the market shifted its focus to the revitalization of the local and foreign markets, ( Sheppard, Porter, Faust, Nagar, 2009 pp 325).
This was exceedingly common in the developed countries during the rule of Reagan and Thatcher. An enormous amount of experts emphasized studying the trends in the market from a local form of investment to that of international. This new form of trade is a direct result of the globalization process. The developing countries, on the other hand, were more concerned with the market-oriented approaches that could boost their chances of investing successfully, in the foreign and local markets.
One of the commonly used models was the flying geese model making it a vital element in investment. Developing countries were also considering making their border open to foreign investors who would help make the market more profitable, (Iqbal, 1997 pp 76). This meant that the countries were no longer interested in local investment. The local investment was taken over by outside investors by changing the market conditions and terms making them more bearable and easy to manage.
Despite the bold stand, most of these countries had reservations and laid down conditions for any interested investor. The most common condition enforced was that the investors could freely venture into the new market. They, however, had to go into partnership with a local investor to promote the interest of the economy. This joint venture led to the development of alliance capitalism which was quite different from the common chain of capitalism that was common during these years, (United Nations, Division for the Advancement of Women, Joint International Law Program, 2006 pp 210).
Trends in the development of FDI
The beginning of the 1990s era marked a new start for foreign investors. This was the inception of a new global environment that focused on joint business ventures and more open border transactions compared to the 1980s. There are many causes for the shift in business operations. One of the causes is the collapse of the famous Berlin Wall which opened up the market-based operation in the European zone countries and the other parts of Europe and Asia. The open cross border business transactions also catalyzed the change in the business operation and increase foreign direct investments.
The other factor that enhanced the shift in operations is the technological revolution. This was defined by the shift from the agrarian system of government to the industrial revolution. This led to the emergence of the digital age that required the consumption of digital services in all aspects. These helped in managing businesses from anywhere around the globe without a physical presence, ( Patterson, International Monetary Fund, 2004 pp 103).
Technological advancements also went a long way in improving the innovative power of investors and other stakeholders in the business sector. This led to an increase and improvement in goods and services produced. This also bridged the gap that existed between the already developed countries and the developing ones. One of the results was an increase in transactions around the globe due to the improved innovational capabilities, (World Bank, 1996 pp 43).
Another factor that led to the shift of the business operation in the foreign market is the competitive nature of investors. Investors wanted to make their names known to prove their abilities in the business market. The investors maximized their activities making investments in as many counties as possible to prove their might and increase their domain. The third world countries also shifted their focus from the traditional business operations to MNEs. This saw the inclusion of the Asian countries and other third world countries, in the participation of foreign direct investors, (Nayar, East-West Center Washington, 2006 pp 243).
Globalization also played a significant role in the shift in business operations. Globalization enabled the investors to evaluate the business opportunities in the different parts of the world and analyze their chances of success. Globalization affected other functions such as technological innovation, which invested in foreign countries more accessible than when the countries had nothing to link them together. It also led to the utilization of local resources in the foreign market hence increasing investments in foreign countries.
Using local resources in the foreign market made such business ventures less expensive when compared to those using purchasing foreign resources. The level of competence and performance of a country and its investors also plays a key role in boosting the shift of operations. It proves the abilities of the local investors to go into joint ventures and assure success in any venture. The level of competence is acquired by ensuring a politically stable environment conducive for trade. Countries can prove their (March, Slaughter, Maurice, Council on Foreign Relations, Greenberg Center for Geoeconomics Studies, 2008 pp 435).
The result of the increasing globalization is the rise in the cost of localization. This is a result of the emergence of different institutions that aid the FDIs in their daily activities. These institutions include the operations of the people hired by investors and organizations that help in running investments like banks. The cause of an increase in the localization funds is a result of the difference in their level of competence, mindset on the enterprise and qualifications, (Gledhill, 2001 pp 213).
The most vital concepts that however pushed investors and firms to shift to foreign direct investment were the need to compete with the other investors and the asset-augmenting. The theory behind the asset-augmenting is that the investors seek to acquire new facilities by venturing into the new open market. It further states in the foreign direct investments that investors should not participate to exploit the different factors that might come up in such an investment.
The firms became more interested in the locality of an investment rather than the recipient country. The advantage of making an investment based on the location of the business and not on the country and its prevailing conditions is that the country’s situation does not determine the success of the business. This may, however, be tricky owing to the exceedingly difficulty in separation of the location of a place without relating it to a country. The two concepts work closely together as they are interdependent.
According to the UNCTAD annual reports on the developments of the Foreign direct investments, the interdependence and inter development has contributed to the removal of many rules that restricted the cross border investments. The cause of the removal of these restrictions about inter development is the increase in the services and products that attract international investors and buyers. The geographical aspect of inter development is also a decisive factor in the changing trends in Foreign Direct investments, (Iyanda, 1999 pp 142). Developing countries face a high risk if the foreign direct investment slows down. A decrease or downturn in the investment or a change in the conditions that attract the FDI can lead to an adverse effect on the country and other countries, in the same geographical region.
FDI in third world countries
FDI activities in third world countries have risen over the years due to the change in social factors that changed the dynamics of trade. Asset augmenting about foreign direct investment has a key role in the increase in foreign direct investments in third world countries. The cross border investment ventures took a slow turn in the mid-1990s in the third world countries and only started picking up again in the first years of the new millennium. The next phase of investment that saw the changing forces behind the foreign direct investments were from Asia as opposed to the western countries.
This varies from the 1990s that witnessed the United Kingdom and the United States as witnessed in the 1990s revolution. The Chinese and the Indian acclivities in developing countries have refueled the FDI spirit. The technological advancements in the communication sector also boosted the location of foreign domestic investments from the parent country to other countries. Outsourcing has also since improved due to the enhanced technological advancement regards with communication, ( Nocke, Yeaple, National Bureau of Economic Research, 2004 pp 89).
The other factor that has improved the foreign direct investment in the developing countries is the economic knowledge that investors have of the country. Investors have a wide variety of knowledge that they can from their long time in the investment industry. The knowledge acquired in one part of the world is also applicable to any other location. Few adjustments are necessary however regarding the resources of the country in question. Understanding the market well gives the investors much-needed confidence to invest in any locality. This is despite the risks that accompany such investments as they will prepare for the risk beforehand, (Moosa, 2002 pp 32).
Alliance capitalism is also a contributing factor in the changing trends in foreign direct investment in third world countries. The alliances between two or more countries to venture into business in more profitable and less risky as compared to a single country. Investors from different countries are forming alliances and going into a business venture into third world countries. This way they share the cost and raise more capital for making their investments. The other form of the alliance is where a foreign direct investor goes into partnership with a local investor. This is particularly helpful to the foreign investors the local investor will know the market better and is also in a better position of predicting the prevailing condition in the market.
The emerging market trends in the third world countries is also a crucial aspect that has led to the change in investment dynamics used in foreign direct investments. Many terms led to the rise in the demands of third world countries including the high population that demands extra effort to maintain. A high population enables a country to produce a hard-working nation which in turn improves productivity levels. The discovery of resources in third world countries has also gone a long way in attracting these foreign direct investors.
The governments are also changing the conditions and policies for foreign direct investments making them more conducive than before to make their markets more accessible. The host nation plays a decisive role in determining the number of foreign direct investors that come into the country and the part they will play in improving the countries’ economy. It is however not only up to the host country to make a healthy business environment for the investors. Foreign investors also play a significant role when making investments that will benefit the country. This means that the activities of the foreign direct investors have to play a part in the improvement of the micro-regional advancements and the geographical region.
Cross border and Human environment
Cross border investments have a significant effect on foreign direct investments about the Human environment. The human environment includes all the things that contribute to the well being of human beings. This includes the culture of the people which tends to differ from one country to the other. Culture plays a vital role in shaping the political, social and economic aspects of any country. The social beliefs and ideas of different people also play a key role in determining the attitude of the country when taking part in foreign investments ( Razin, Sadka, 2008 pp 321).
These concepts affect the FDI operations and are determined in two different ways which are distance and inter-country differences. The distance can either be physical or institutional depending on the cost incurred in bridging the distance. The cultures, norms, and ideologies of people make up the physical aspects of the distance. This might be very difficult to bridge because the difference is significant and investors have to weigh the risks involved in investing in such countries.
Countries or locations that are in the same geographical regions tend to have the same market. This is because they tend to share considerable aspects of their culture. Venturing into such a market requires adequate knowledge of one of the countries. The institutional distance is the whole concept of things that influence the thinking and decision making capacities of those in the investment industry, ( Hill, & Richardson, McKaig, 2006pp 435).
These are regulations that limit the investors to a certain line or way of doing things. This can prove to be difficult to manipulate in that they are more complex structures as opposed to the physical distance. This is because it includes the rules that regulate the entry of investors into the local market. All these factors have helped in shaping the current global trends in foreign market investments as they are of immense importance to any investors. An investor has to know the kind of market he or she is going to encounter to prepare to handle these risks ( Huang, 1997, pp 53).
Theories on investment
Many theories can apply to the changing trends in foreign direct market investment. One of the main theories is the Keynesian theory of investment rates. The interest rates are very vital to the operations of the investors and go a long way in determining the profits that the investor will get, (Dobson, Yue Chia, International Development Research Centre, Institute of Southeast Asian Studies, 1997 pp 235).
The interest rates are essential in guiding the private investors on what they need to do about their investments. The theory states that the decrease in the interest rates in any economy leads to a reduction in the capital or cash needed to invest when compared to the possible outcomes and profits. Using the theory helps the investor to plan for an investment that can be beneficial as it provides the investor with the basic steps to follow when investing.
The theory focuses on the investment aspect of the business and not on the capital requirements. The foreign investors using this particular theory believe in the investment part of the business and can go ahead and invest in a place where they can predict good returns on investment, ( Wei, Balasubramanyam, 2004 pp 104). The culture and social norms of the location influence this theory rather than the adjustments that need to be made on the capital.
The other theory that is applicable in this case is the Hayden theory on adjustment to equilibrium. The theory tries to bring a balance to the need to make an investment based on the capital requirements of the investments. It has to take to set up the business about the money required during the process, (Flüchter, 1995 pp 143). The theory gives a foreign direct investor and the rough estimate of the total amount of money that he or she needs and also provides a rough picture of the efficiency of setting up the business.
Investors have to decide on the amount of capital that it has at its disposal to invest. If the capital they wish to spend is not enough then they have to consider making an investment decision. However, if the capital set aside for the investment is not enough then the investor decides whether to invest or not, (Breitfeld, 2010 pp 342). The theory stipulates that the capital requirement is the key factor in making an investment decision. The decision may become complicated if there are no funds at disposal at that time, and the investor has to make a study to see whether making small investments will be beneficial to him or not.
The standings of foreign direct investments as of 2007 are decidedly different from its operations in the 1990s. The developing countries most of which are African countries and others like China and India are portraying an unusually high percentage in economic growth. The growth is through foreign direct investments as compared to the developed countries. This has seen countries like China and India records their economies as economies with one of the highest developing countries.
The FDI is more into the distribution of the stocks in the different world markets as compared to the previous operations where the distribution of stock took place among some capitalist countries. The countries are now sharing common goals in the development and change in the economic trends across different nations. The developing countries benefit from the foreign direct policy with China being the leading country in the world, ( Froot, 1993 pp 134). China is no longer a developing country because it opened its borders to all investors while ensuring that there were mutual benefits to both parties in the investment. This involved shifting from a socialist system of government to that of a capitalist way of investment. The developed countries like the United States are the center of the MNE operations, ( Mody, 2007, pp 156).
There are also changes in the barriers that were there in the 1990s regarding the conditions that the investors had to meet. However, the rise in inflation rates and the increase in interest rates in most developed countries in the world are a total barrier-free trade. This is because the rise in the cost of energy and pollution, revolts around the world especially in third world countries are a significant source of a set back to FDI. This sets the process of internationalization of the common chain of events to a slow-motion because of the need to control carbon emission through taxation.
The approach of foreign direct investors in the institutional distance is also changing to a systematic approach. This seeks to evaluate the advantage and disadvantages of a place based on the L concept of the OLI paradigm. This means that investors are keen on accepting the institutional distance of the location based on the resources at disposal, and not on the expenses that they will incur in the location.
The level of infrastructure needed in developing countries has been evolving since the beginning of 2000. The developing countries have been dynamic in terms of workers’ abilities. Workers are no longer semi-skilled or unskilled. Most of them are now skilled meaning that foreign direct investors have incurred more labor costs than they did before. This led to a shift from labor-intensive investments to a technologically advanced form of labor.
This increased the cost of investment due to the increase in human resource and capital requirements. This, in turn, led to rapid infrastructure developments to accommodate the change in labor from unskilled to skilled workers. Inward foreign direct investors are now settling for the locations that have an ideal and valuable capital especially the social capital (Bora, 2002 pp 123). This is because these locations have an attractive cultural and ethical background that is essential for any inward FDI.
There has been a continued revitalization of resources in most developing countries in Africa. These countries have underlying minerals that are not in use due to a lack of funds. The developed countries like China and India are in the countries exploiting the minerals by funding the whole process. There has also been a development of a common bond according to the geographical regions that have commonalities in terms of economical and social activities.
Foreign direct investment is now keen on reaching the countries whose economy and infrastructure are slow. This is because developed countries have realized the benefit for them to invest in the least developed nations. This, as a result, helps ease the burden on the developed economies. The main goal of this decision is to reduce poverty in developing countries by providing them with employment opportunities. However, the projects have been facing many setbacks due to an increase in the intricacies of the global economy. The situation is even difficult when the increasing global warming is in the picture, (Barclay, 2002, pp 98)
Foreign direct investors have come a long way since their inception in the early 1980s. There have been several changes that have changed the dynamics of FDI way of trade. The changes experienced in foreign direct investments are credited to the availability of social aspects such as the changing economy, globalization, global warming, technology and change in distances. The institutional and physical distances are the greatest hindrance to cross border transactions. It takes an immense amount of funds to venture into countries whose institutional distance is immense.
There has been a lot of progress to ensure the physical and institutional distances are minimal to attract more investors. The changing technology served to accelerate the growth of foreign direct investors as it made communication and evaluation of markets easy. The technological advancements also led to the improvement of infrastructure that in turn, led to the change of skill of the workers. It also led to globalization that boosted the growth of foreign direct investment especially in developing countries in Africa and Asia.
The human environment is also another aspect of the foreign direct investment that determines the choice of the locality of an investor. The cultural beliefs and norms of a place can either attract a foreign direct investor or can push him or her from investing in the country. Countries have as a result been trying to create a healthy locality that will attract foreign investors. Investors venture into countries for different purposes. Their paramount goal is to improve the economy and infrastructure of the country, especially in developing countries. Many investors, however, prefer a venture or investment that will be beneficial for both concerned parties.
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