Page 300 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes Export-oriented investment tends to be highly profitable even in the short term. The investing
company’s control over the market and the rapid depreciation of its investment is made possible by
high cash throw-off and is sometimes enhanced by technological obsolescence. If competitive
conditions become less favourable in the host country relative to somewhere else then the firm can
move its investment quite quickly. Moreover, because of this high mobility, countries can easily find
themselves competing with each other in making concessions to such investors in order to make their
investment platforms more attractive, which in turn reduces the risk of this type of investment and
hence an advantage to both the host country and the investor.
Reuber states that this type of investment is less commonly found producing final products for sale
directly to consumers abroad. One may speculate on a variety of reasons for this, such as the difference
in comparative advantage associated with different parts of the production process, handling and
transportation costs, the reluctance of investors to assume the risk of relying entirely on any country
for the production of a full product line, and the advantages from the standpoint of sale and the
service of having final assembly take place in the major markets where the product is sold, as in most
cases the host country’s markets are more oriented to raw materials.
There are many ways by which export-oriented FDI can help to enhance a host country’s manufacturing
and export competitiveness. In order to attract this type of investment and to ensure that the investment
translates into development gains, a host country needs to find the most effective ways of making the
choice of locations as well as the target segments conducive to the kind of export activities the host
country aims to foster. In today’s rapidly globalising world, successful exporting needs not only
competitive products, but also marketing expertise and access to international markets. Giving greater
access to export-oriented FDI can provide major benefits to the host country in this respect, especially
in markets in which established brand names and large distribution networks are important assets.
This type of investment can also be an effective means of providing resources such as skills, training,
technology, capital goods and intermediate inputs needed to exploit a country’s existing comparative
advantages.
The most prominent role played by this type of FDI in the exports of developing countries is in the
manufacturing sector. In this sector, foreign affiliates tend to be leaders in export-oriented investment
and in marketing. The impact of foreign affiliates on the domestic entities’ export activities can be
both direct and indirect. Direct effects occur when exporting foreign affiliates establish backward
linkages with local firms which then become indirect exporters. Indirect effects of the presence of
export-oriented foreign affiliates occur when local firms manage to copy the operations of foreign
affiliates, employ staff of foreign affiliates, and benefit from improvements in infrastructure and
reduction in trade barriers undertaken in response to demand by the host country for foreign
operations/investors.
Market-development Investment
Unlike the export-oriented type of FDI, the objective of making a market-initiated type of FDI is to
sell the final output in the host country’s market. However, a common feature of both types is that
they thrive on feasibility of reduction in production cost. Another key consideration by the investor
is the potential growth in the size of the host country’s market in the long term. Although in the short
to medium term the investment may not yield the expected return, if the long-term view is that the
host country’s market will grow in size and hence become profitable, the investment may then be
undertaken. The growth in the host country’s market is, however, dependant on the general economic
outlook of the host country and hence the macroeconomic variables and the effectiveness of the
economic reform policies, other policy directives like tariffs, trade controls, taxes, subsidies and so
forth, as well as various regulations imposed on foreign investors by the host country, become
fundamental to the decision to invest.
The policies referred to in the previous paragraph are for the most part general in scope. They apply
to foreign investment generally or to broad sectors of the economy rather than to particular projects
or industries. Moreover, many of these policies confer the same advantage on domestic industries.
The initiative to undertake such investment is taken by the investor and although the incentives
provided by the host country frequently have some influence on the decisions made, investors may

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