Page 134 - DMGT545_INTERNATIONAL_BUSINESS

Unit 7: Foreign Direct Investment

and R&D, in order to gain competitive advantage over their rivals. All these tend to result, notes
in the long run, in increased productivity, innovations and greater economic growth.
5. To take benefit of locational advantage: Too often, locational advantages attract FDI. The
location-specific advantages, in particular, include natural resources such as oil and other
minerals, which are, by nature, specific to certain locations. A firm must undertake FDI to
exploit such endowments. This explains the FDI undertaken by many of the world’s oil
companies, which had to invest where oil was located. Another example is the valuable
human resource, such as low-cost highly skilled labour force. The cost and skill of
labour varies from country to country. One major benefit of locating plants in Mexico is
the availability of highly skilled labour force that can be hired at fairly low wage rates.
Additionally, manufacturing firms located in Mexico report high productivity growth
rates and quality performance. France has been the target of much MNC activity. Daimler-
Chrysler has recently built a new factory in France because of its faith in the workers’
productivity and work ethics. Additionally, France’s recent economic growth has impressed
many MNCs.

Example: Hyundai, the automobile giant from South Korea, has chosen Chennai in
India for its new car manufacturing plant. Skilled labour at low wages, location of auto parts
manufacturers (such as Wheels India, Brakes India, Sundaram Fasteners, Sundaram Brakes,
Bimetal Bearings, Tafe, and India Pistons in and around Chennai), guaranteed power supply,
cheap land and proximity to sea port have attracted the plant to the capital city of Tamil Nadu. The
argument that location-specific advantages attract FDI is propounded by the British economist
John Dunning. Dunning believes that market imperfections make licensing and exporting difficult
and thereby render FDI an obvious choice for globalization.
6. To reduce security risks: FDI often depends on a country’s political attempts to reduce
security risks. For example, Chinese state -owned petroleum companies have been investing
abroad so as to minimize dependence on foreign companies for oil supplies. The move
may also help China hold down prices on the petroleum it receives. There is one more
political motive behind FDI. During the early 1980s, the US government instituted various
incentives to increase the profitability of US investments in Caribbean countries that were
unfriendly to Cuba’s Castro regime. The US wanted to strengthen the economies of those
friendly nations through the growth of the FDI and make it difficult for unfriendly leftist
governments to gain control. But with the end of the Civil war, the US ended investment
incentives in the Caribbean region, and much investment was diverted to Mexico because
of NAFTA.
7. For economic growth in developing countries: Aid from international institutions and rich
countries can be a temporary measure for poverty alleviation. Economic growth ushered
in by increased investment can be a permanent solution. Jeffrey Sachs, Special Adviser
to the then Secretary General, Kofi Annan, on the Millennium Development Goals, told
a press briefing on Sept 22, 2004, “Many of the poorest countries are simply being bypassed
by globalization, and the promises of the rich countries are not being fulfilled. We need more
globalization that reaches poor countries, and more successful globalization, not less. The kind of
globalization that the poorest countries are feeling is brain drain. They are not seeing the inflow of
foreign investment.” Sachs added that FDI would be the strongest engine of growth in the
developing world.
Given the limitations of domestic savings, many developing countries will have to rely on foreign
investment to accelerate economic growth. It may be noted that china has been able to maintain a
high GDP growth rate for a long time because of a high savings rate and huge inflow of FDI.

Notes FDI often depends on a country’s political attempts to reduce security risks.

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