Name: Ki Ki Leung (Gi Gi)

Plymouth Student No.: 10276856

HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)

Project Lecturers: Dr. Brian Lai/ Ms. Pamela Whisker

International Trade and Finance – Assignment 1

Topic

To what extent is there a conflict of interest between host countries and

multinational enterprises involved in foreign direct investment?

Contents
Introduction P. 3-5

P.1 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)
Infant industries protection P. 6-7
Without FDI can protect manufacturing? P. 8-9
Technologies competitive will spillovers because of P. 10-11

FDI?
Trade and balance of payments effects P.12-16
Other effects P.17
Conclusion P.18-19
Reference P.20-21

Introduction

Foreign Direct Investment (FDI) is one of the major ways for growing of nationalized

economies rapidly by investing and mostly will target host countries. Normally FDI use joint

venture, cooperation, investment of existing industries in these countries or create wholly-

own organization or even acquisition to get into these countries. FDI will inflow capital,

technology, skills, knowledge and specialists in order to get into the markets. FDI also will

P.2 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)
outflow same resources at their right time such as the markets become mature with many

competitors or even decline industries. Theoretically, FDI can increase the total GDP as table

1, high wage of labor, government gain more tax income and overall that is benefit to the host

countries.

In particular, many developing countries have grown while encouraging and attracting FDI to

inflow as it is a good way to integrated into the intensive globalize economic and face

different challenges in the international competition but successfully survived (IOBE, 2007).

In table 2 shown 15 countries are the most attracted FDI & most of them are still under

developing. FDI selected these countries because of less competitive, lower production cost

& valuable resources to help the organization moving forward. Although FDI has different

benefits to the domestic economic grow effectiveness, there still have different sustainable

basis, conflict of interest and trade barriers affected FDI get into multinational corporations

(MNCs) in the host countries so that is not really “Open Door” policy. In this article will

bring out more information about host countries unwelcome FDI.

Table 1:

P.3 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)

(Source : http://www.rba.gov.au/speeches/2007/images/sp-ag-280907-graph1.gif)

Table 2:

P.4 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)

(Source: http://www.usainbounddeals.com/tags/mergers-acquisitions-1/)

Infant industries protection

P.5 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)
Comparing with developed countries, the less developed countries or developing countries

would have more constructively resources like for helping organizations to meet the optimum

goals. However, when these countries have infant industries in local that just started, they

might not have well knowledge or take time to learn and improve. If FDI get into that

business which will be a strong competitor in these host countries. It might make the local

infant industries cannot be survived by losing the competitive advantage if allowed FDI get

involved. Hence, these countries will strongly against FDI get into and the Governments

would even willing to provide subsidies to these local infant industries in order to protect

them and maintain adequate supply to local market rather than selling same products to the

populations by FDI.

There has three-quarters of the farmers to grow rice for living and self-sufficiency in South

Korea. Rice cultivation to maintain the agricultural income is indispensable. If for imported

rice and make rice cultivation disappeared, is living a critical blow to farmers. South Korean

farmers understand that, once fully open the rice market, opportunities to maintain traditional

peasant way of life will disappear. Hence, the local farmers are strongly

against increasing rice import to domestic markets.

(Source: http://www.inmediahk.net/node/55900)

P.6 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)

Without FDI can protect manufacturing?

India is one of popular host countries for FDI because of very low salary labors and less

restriction. Recently, India Government banned on FDI in cigarette manufacturing by

P.7 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)
decision from the Union Cabinet on 8 April 2010. FDI is prohibited for the list of sectors that

“Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or tobacco

substitutes”. The Government's long-term drive is against smoking by enhancing the

accountability of the public proliferation of anti-smoking regime in India. It is not only can

help the people smoke less and become more healthy, also can help India to build up the

image. Because of prohibiting FDI that mean’s manufactures in this sector will decrease

rapidly, that might cause the unemployment rate increased and the total GDP will decrease.

On the other point of view, that can avoid more manufactures hired children or low skilled

labors for working which will damage their life by working long hours at poor condition

environment. If children labors focus on working and ignore they supposed to study and learn

knowledge which will be harmful the countries welfare eventually.

Meanwhile, India may also wants to protect Indian manufactures in order to get more market

share in this segment.

For the environment in India maybe only slightly improve because there still have local

manufactures keep damages the environment by producing products, although without FDI in

this cigarette segment. The other sectors still have sufficient FDI inflow for taking advantage

in India as well as polluting the environment even more by daily manufacturing.

P.8 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)
(Source: http://www.business-standard.com/india/news/govt-notifies-fdi-ban-in-cigarette-

manufacturing/93828/on)

Technologies competitive will spillovers because of FDI?

FDI encourage the commercial and IT technologies diffusion and transfer rapidly which can

create more job opportunities available that enhance the labor and living standards in host

countries. However, most of commercial or IT technologies are extremely expensive and

normally owned by MNCs. They would rather non-disclose these benefits than spill over and

become less competitive. Some of host countries might not able to afford comprehensive

R&D programs on their own then it might be occurred the copying effect which can be the

P.9 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)
faster way to improve the local business linkages. Besides, the local companies are forced to

work harder because of the competition driven by FDI and some forced collapses.

For instance, Mexico is one of the popular for FDI on IT industry. It was rapidly bringing

new skills and technologies which were driving the local firms and labor forces to intensively

knowledge of complex producing and design. However, in Guadalajara's IT Ector continue to

operate almost entirely foreign enclave has several connections to the domestic economy as

long-term, FDI IT firms become oligopoly or monopoly to dominate this industry in Mexico.

The local firms are still less competitive and even more acquisition happened. Mexico

Government also sacrificed the environmental even know more IT manufactures will have

wide range of highly toxic chemical damaging the environments.

P.10 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)

Trade and balance of payments effects

Many host countries welcome inflow FDI with least restrictions as they can because they have

highly expectations that can upgrade domestic firms and become one of competitive

developed countries. It that a good sign rely too much on FDI will help the economies in host

countries? The actual consequences cut down far short of the optimistic prospect. When FDI

become the main supplier as take over domestic firms at the same location then high risk of

trade diversion will be occurred at the moment that means higher cost suppliers. In the short-

term, inflow FDI can help to improve the position of balance of payment but that will increase

the repatriation of profits in long-term.

For instance, China is one of the countries extremely welcome FDI inflow by setting regularly

relax restrictions for holding domestic enterprises except concerning national security which

occur non-unified tax rate. In this case, FDI firms are already taking advantage in China by

P.11 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)
enjoying various and significant tax break. As a result, FDI can benefit from effective

corporate tax rate of 11% instead of 33% and earn more than domestic firms. However,

China removed geographic and business restrictions on FDI bank industries in 2006 even set a

new regulation that unified tax rate 25% and will kick in if lower the threshold. “Foreign

banks can provide RMB banking services to Chinese citizens” as long run that may create

import dependence. Also the new rule does not affect foreign ownership in existing PRC

banks. Hence, foreign investors are not only taking control step by step in domestic market,

also earn profits from huge domestic market although facing slightly limitation. China

government should rethink if FDI really can bring diversify and contribute the country or that

is just taking advantages from China because the profits earned by FDI which will repatriate

out of China eventually. China government should consider imposing higher taxes rate on

repatriated profits or Balance of payments constraint is a "self-destruction" strategy of long-

term view of the right to free transfer of funds is essential, especially in the high current

account deficit.

P.12 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)

Figure 1

China's outward foreign direct investment (FDI) accelerated in recent years

(Source: http://www.frbsf.org/publications/economics/letter/2010/el2010-09.html)

P.13 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)

Figure 2

Geographical composition of China's outward FDI

(share of total real value)

(Source: http://www.frbsf.org/publications/economics/letter/2010/el2010-09.html)

P.14 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)

Figure 3

Industrial composition of China's outward FDI

(share of total real value)

(Source: http://www.frbsf.org/publications/economics/letter/2010/el2010-09.html)

P.15 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)

Other effects

FDI might change the original culture, improper patterns of utilization, misleading host

countries rely on foreign capital too much or damage the environment when encourage

intensive FDI flow in. These effects will not reflect immediately but that will progressively

influent the countries. Also FDI will move out the countries when the industries are matures

or decline or even very bad economy in the countries which will make the GDP goes even

worse and the unemployment rate will be increased dramatically. The consequences can be

extraordinarily bad. On the other hands, as investors who need to analysis all regulations and

risks might be facing before entering into strange foreign countries. Also might be struggling

with dishonest situation or need to build up trusting from the domestic population before

enjoying economies of scale effect and make profits.

P.16 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)
Conclusion

In order to determine whether FDI is appropriate or not, the standard economic analysis and

cost-effectiveness of measures are required. If FDI is trying to take advantages and interfere

or dominance other countries domestic markets where always have different level of conflicts

happened.

Host countries and investors should consider and look for win-win situation instead of trying

to beat down one of others as long run that will not be benefit to anyone.

On the other hand, it should not disrespect the country risk factors, such as political,

legitimate, trade and industry, corruption and confiscation as that can lead to dislike of FDI.

Finally, the following diagram outlined the positive and negative aspects of the host countries

and investors are in a typical foreign direct investment to be considering before making or

accepting foreign direct investment. Also should consider the weight of the national welfares

and sacrifices potential outcomes.

P.17 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)

Reference
P.18 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)
1) IOBE (2007) The impact of Greek subsidiaries on the domestic Economy, IOBE: Athens,

Greece (in Greek)

2) http://www.usainbounddeals.com/tags/mergers-acquisitions-1/

3) http://www.inmediahk.net/node/55900

4) Govt notifies FDI ban in cigarette manufacturing http://www.business-

standard.com/india/news/govt-notifies-fdi-ban-in-cigarette-manufacturing/93828/on

5) http://en.wikipedia.org/wiki/Electricity_sector_in_Mexico

6) http://www.ase.tufts.edu/gdae/Pubs/rp/MEXICOFDIREPORT11-03.pdf

7) http://www.fdi.net/

8) Outward FDI in China, http://www.frbsf.org/publications/economics/letter/2010/el2010-

09.html

9) Positive & Negatives of FDI http://www.dinarstandard.com/current/OIC_FDI040907.htm

P.19 of 20
Name: Ki Ki Leung (Gi Gi)
Plymouth Student No.: 10276856
HKU SPACE Student No.10468918
Module: MS 05-810-02 (92)
10) Political instability discourages FDI http://www.thefinancialexpress-

bd.com/2010/03/30/96303.html

11) International Investment Agreement

http://en.wikipedia.org/wiki/International_Investment_Agreement

12) Indian Economy: http://www.indembkwt.org/economy.htm

13) http://www.international-alert.org/pdf/practice_note3_march2010.pdf

14) http://www.forum4finance.com/wp-content/uploads/2009/11/FDI-logo21.png

P.20 of 20