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Unit 27: FDI : Types and Issues

As an incentive to FDI, a host government can tailor subsidies to reflect the relative importance of the Notes
cost or risk factor in a firm’s decision to locate in the host country. Krueger indicates that the objective
of this type of investment is generally rooted in the desire of a country to increase employment and
output, to encourage certain kinds of activities, to promote regional development within the host
country, to improve the balance of payments and to alleviate the scarcity of hard currency. Tyler
argues that although such policies do not necessarily imply investment in import-displacing industries,
this in fact has been the most common practice in the past.
Government-initiated investment, despite its benefits, inevitably creates a high degree of
interdependence between the investor and the host-country government, and an uncertain
environment for both parties. Home-country government may also be drawn into the arrangements
directly or indirectly. Given that the success of the incentive depends largely on the continuation of
the host country’s subsidies in various forms, the investor loses much of his bargaining power once
the investment is committed. The investor is therefore likely to demand excessively favourable terms
at the outset as a condition for making the investment to compensate for the possible erosion of these
terms once a commitment is made. The host government for its part tends to be excessively generous
in the first instance in the hope of being able to change the terms of its support once investments have
been committed. On this basis, the stage is set for relatively difficult relationships to develop between
investors and governments. Owing to their interdependence and in order to minimise conflict,
investment of this kind tends to give greater emphasis to joint ventures, minority interests for foreign
investors and other conditional forms of FDI.
27.2 Issues of FDI

In 2006, the proposed acquisitions of major operations in six major U.S. ports by Dubai Ports World
(DP World) and of Unocal by the China National Offshore Oil Corporation (CNOOC) sparked intense
concerns among some Members of Congress and generated a debate over what role foreign investment,
particularly foreign acquisitions of certain types of firms, plays in U.S. national security. The United
States actively promotes the national treatment of foreign investors as an international standard.
This open-door policy stands in marked contrast to several provisions of law, various Executive
Orders, and extensive efforts aimed at limiting foreign access to the Nation’s industrial base, especially
in sectors deemed to be critical to the economy or to areas of importance to national security. In
addition, some Members of Congress and others are concerned about the extent to which foreign
government-owned companies should be allowed access to the Nation’s industrial base and technology
through foreign direct investment.
This dual role means that globalization, or the spread of economic activity by firms across national
borders, has become a prominent feature of the U.S. economy and that through direct investment the
U.S. economy has become highly enmeshed with the broader global economy. Foreigners invested
$180 billion in U.S. businesses and real estate in 2006 and invested $277 billion in 2007, according to
data published by the Department of Commerce, as Figure 27.1 shows. The rise in the value of foreign
direct investment includes an upward valuation adjustment of existing investments. According to
the United Nation’s World Investment Report, global foreign direct investment flows increased by 38%
in 2006, 29% in 2005, and 27% in 2004, after three years of declining flows.

The United States is unique in that it is the largest foreign direct investor in the
world and also the largest recipient of foreign direct investment.

New spending by U.S. firms on businesses and real estate abroad, or U.S. direct investment abroad,
rose sharply in 2006 to $235 billion up from the $8 billion net in 2005. New investments in 2007 likely
exceeded $330 billion, according to balance of payments data published by the Department of

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