Білет № 6 Foreign Direct Investment

Foreign portfolio investments are sometimes called indirect investments as opposed to foreign direct investments. According to the classification adopted in the USA any investment be il acquisition of new assets or simple crediting is considered to be a foreign direct investment as lon£ as the investor owns or receives more than 10% of shares in a foreign firm. Here are several examples illustrating both types of foreign investment.

Thus the main difference between foreign direct and foreign portfolio investments lies in the sphere of control over a foreign firm.

US foreign direct investment

1. Acquisition by ALKOA

corporation of 50% shares in a newly founded Jamaican firm producing bauxites.

2. Loan given by Ford

corporation to a Canadian subsidiary

producing spare parts, in which Ford owns 55% of shares.

US foreign portfolio investment

1 .Acquisition by ALKOA corporation of 5% shares in a newly founded Jamaican firm producing bauxites.

2. Loan given by Ford corporation to a Canadian company, in which Ford owns 8% of shares.

By definition foreign direct investment (FDI) is the transfer by a transnational corporation (TNC) of capital, managerial and technical assets from its home country to a host country. FDI involves equity participation (property rights) which can be 100% (a wholly owned foreign subsidiary) or less (a joint venture with foreign participants), managerial control and day-to-da> operational activity on the part of TNCs.

The primary motivation of FDI is to take advantage of lower costs of production, local ta> benefits and, especially in the case of American firms, U.S. tariff schedules that encourage foreigr production of component parts. FDI tends to be sector-specific and is usually based on the existence of some competitive advantage over local firms. Until the last quarter of the XX century the twc most important types of FDI were manufacturing investments in developed OECD economie: (countries-members of the Organization for Economic Cooperation and Development) and extractiv* industry investments, especially petroleum, in the less developed countries (LDCs). In later decade: more and more FDIs are directed into services.

For a number of decades, U.S.-based TNCs dominated in terms of both the flow and stock o FDI. The total FDI stock of the U.S.-based TNCs, for instance, increased from 7.7billion US dollar in 1929 to over 232.5 billion US dollars at the end of 1985. In 1981, American FDI was more thai two-fifths of the world's total FDI.

By the early 1970s the flow of international investment began to shift. European and late Japanese TNCs also began to invest heavily and to produce abroad; the TNCs of several NICs wer investing abroad. TNCs started crisscrossing investments in one another's home economies. Fc instance, the FDI into the United States by the end of 1989 was valued at 390 billion USD, whil U.S.FDI abroad was estimated at 368 billion USD.

The pattern of FDI has been considerably changed in recent decades. Previously FDI wa "horizontal", that is the investing firm replicated abroad some aspects of its domestic operatior Nowadays firms increase "vertical" investments, i.e. they invest in activities that 1) provide inpul for the home production process, 2) use the output of home plants. Thus, vertical FDI entails th fragmentation of the production process and dispersing throughout the world of various stages c component production and final assembly of components

Through increasing mobility of capital international competition for FDI has intensifie< Using tax policies, the erection of trade barriers and even the creation of a skilled and discipline labour force (e.g. Taiwan), governments try to attract investments and influence the intemation „location of economic activities.

Білет № 7

Foreign Investment and the World Economy

Foreign investments by the companies of advanced economies in the economies of less developed countries have a long history. In the modern world there have been three waves of such investments.

In the period of the "old colonialism" of the 17-18 centuries Spanish, Dutch and English companies established mines and plantations in the New World and in parts of Asia. These activities mainly aimed at exploiting the native people for their mineral and other natural resources. During the second wave of the "new imperialism" in the late 19th century, Africa, Southeast Asia and other lands were brought within the several imperial systems. Although exploitation continued, European investments in ports, railroads and urban centres at that time created an infrastructure that is still important to many less developed countries/LDCs/.

The third wave began in the 1960s when the less developed countries chose the economic strategy of industrialization and started many import- substitution projects. Through tax policies, erection of trade barriers and other policies the less developed countries encouraged companies of the advanced economies to establish manufacturing subsidiaries within their borders. Corporations set up branch plants to produce components and intermediate goods.

Foreign investment flow into less developed countries benefited local economies. It resulted in transforming a number of countries such as Mexico, Taiwan and South Korea into the Newly Industrialising Countries (NICs), serving as a model of economic development.

Traditionally when dealing with international flows of capital economists distinguish between private and government investments, longterm and short-term investments, direct and portfolio investments in the following way.