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Module 1
Theme 3
DETERMINANTS OF FDI
Part I. Host country determinants of FDI
Part II. Firm level determinants of FDI
Zbigniew Zimny
UNCTAD consultant
Part I
HOST COUNTRY DETERMINANTS OF
FDI
Why some countries receive more FDI than
others? Why a host countrys FDI inflows may
drastically fluctuate over time?
What determines how much FDI does a host
country receive?
Case 1. Brazils FDI inflows from 1970 to 2007
Questions: Why Brazils inflows were lower during 1983-1994 than in 1983? Why
they started recovering only after 1995? Why did they peak during 1997-2000 and
then fell again?
Case 2. India vs. China (with Brazil as a
reference) since 1980
QUESTION: Since China has emerged as a host country, it has always received much
larger FDI inflows than India. Why?
Case 3. Investors perspective: what TNCs
consider important when choosing a location?
Sorting out host country FDI determinants
Natural resource
-seeking Market-seeking
TNCs
Efficiency-seeking Strategic-asset
seeking
Divide and specialize production
primarily through M&As
in line with the comparative advantages
of different locations vertical FDI
export-oriented FDI
Each type of FDI has a different set of
economic requirements
Three groups of host country FDI determinants
Economic attractions are very important but they are
only one group of host country determinants
The two other groups are:
Policy determinants divided into two sub-groups:
1. FDI policy proper including policy
measures affecting only or mainly foreign
investors
2. Policies affecting all investors. Some of
them may be more and some less important
for foreign investors
Business facilitation, including investment
promotion
Policy as FDI determinant: core FDI policies
Rules and regulations governing the entry and establishment of foreign
investors in a host country
-- e.g., prohibition of entry, restrictions on ownership (joint venture
requirement) or liberalization of entry
Treatment of foreign investors concerning entry, establishment and
operations
-- non-discrimination in the treatment of foreign and domestic firms
(national treatment) and among foreign firms (most-favoured nation
treatment)
-- preferential treatment of foreign or domestic firms (e.g., incentives only
to FDI)
-- distinguish treatment before and after entry
Protection of foreign investors
-- expropriation and nationalization; fund transfers; and dispute settlement
are key issues in protection
-- protection against regulatory takings is a new issue
Key general policies that affect FDI
Brazils privatization
programme was among the
biggest in the world, valued
at $105 bln from 1991 to
2002
Largest sales, $65 bln, took
place in 1997-1998,
With big privatizations of
utilities completed,
unprecedented FDI inflows
proved to be unsustainable
until 2007 due to large FDI
in metal mining
China vs. India
Market size and growth
The size of population is not much different but China has much
higher income per capita, more than two times larger market
and has grown much faster than India
Type of investment
CHINA INDIA
Both market-seeking Mainly market-
and export-oriented seeking with the
FDI mainly into exception of IT
manufacturing services (call
The share of FDI in centres, back-office
exports: 1989 9% > services, R&D)
2002 50% (91% in The share of FDI in
technologically quite exports: 3% in the
advanced products) 1990s > 10 % now
Strategies and policies
CHINA INDIA
Opened to FDI in 1979 Permitted FDI long before
and liberalized China did but started
progressively liberalizing seriously since
In spite of restrictions and 1991
requirements it favoured India pursued for a long
FDI over domestic firms time import-substitution
Privileges to foreign firms strategy relying on
led to FDI round-tripping domestic resources and
estimated at 25% of FDI firms
Trying to encourage FDI
only in high-tech
Less red tape in China?
China has higher literacy and education rates and
better physical infrastructure in coastal areas
Procedures are easier, decisions taken more
rapidly, business laws more flexible, labour
climate better and entry and exit of firms easier
India has (a narrow) advantage in skilled IT
manpower and language skills
Overseas Chinese in Asia invest much more in
China than overseas Indians do in India
Shallow
ShallowIntegration Deep
Integration DeepIntegration
Integration