Page 138 - DMGT545_INTERNATIONAL_BUSINESS

Unit 7: Foreign Direct Investment

An annual FDI inflow indicates that FDI went up from around negligible amounts in 1991–92 notes
to around US $ 9 billion in 2006–07. It then hiked to around US $ 22 billion in 2007–08, rising to
around US $ 37 billion by 2009–10.

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Caselet take a stand
any multinational companies are now following a very similar strategy of
moving their manufacturing facilities out of large, industrialized countries like
Mthe United States, Germany, and the United Kingdom, and relocating them to
countries in which labour is much cheaper, such as mainland China. This is, however, very
controversial given slow economic growth and growing unemployment in the industrial
countries.

According to most theories of international trade, once the technology of an industry has
matured and countries have deregulated their economies sufficiently to allow capital
to flow across borders relatively freely, companies in industries that can use lower-cost
labour – assuming that sufficient skills are available – should move their manufacturing
to those lower-labour-cost countries. The competitive strategy argument is that if one
company does not, and another does, the first will be unable to compete in the future.
for Discussion
Multinationals should not continue to move their manufacturing out of industrial countries.
They are contributing to rising unemployment, undermining the economies of countries
like the United States and Germany, and are simply serv ing as devices to exploit cheap
labour in developing countries.
Multinationals must continue to take whatever actions are necessary, including moving
manufacturing to lower-cost countries, to remain competitive. The people, the workers,
and the economies of countries like the United States and Germany cannot artificially
protect their economies from global competition; it would only serve to create countries of
lesser and lesser competitiveness in the coming years.

Source: Michael R. Czinkota, Ilkka A. Ronkainen, Michael H. Moffett, “International Business”, Cengage Learning, p.206-207.
Even if we examine quarterly figures, we find that FDI flows that rose from US$6.9 billion in the
second quarter of 2009 to a peak of US$8.2 billion in the third quarter of that year, have since
stayed in the 5–6 billion range for all but one quarter, namely January-March 2011. In fact, if we
consider the 16 quarters ending Jan-March 2011, there have been only two in which FDI inflows
stood at between US$6–7 billion and four when it exceeded US$7 billion.
It is now clear that FDI was related to the recessionary conditions in the western economies. The
recent flattening of monthly FDI flows is a sign more of recovery in the western economies than
any loss of long term interest in the Indian economy. The monthly figure only shows that the
incremental FDI is going back to the pre-recession years rather than indicating decline of FDI
into India.

Did u know? In India, there are only some fields in which FDI is allowed.
In fact when foreign direct investment into India had “tumbled 32 per cent to just US$3.4 billion”,
as mentioned in financial times during January to March 2011 that it emerged that net FDI flows
in the month of April alone amounted to US$3.1 billion.

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