FOREIGN

INVESTMENT and
FOREIGN TRADE

PREPARED BY:
FLORE MAE LASMARIAS
 What is Foreign Investment?
 Is the rate and extent of
effective utilization of
foreign capital inflow

 It flows the capital from

one nation to another in
exchange for significant
ownership stakes in
domestic companies or
other domestic assets
 What is Foreign Trade?

 It is trading goods and

services that are destined
for a country other than
their country of origin
 Significance of Foreign Investment
 There are two important reasons:

 Recognition concering the role of foreign investments in promoting

trade relations among countries

It offers a palliative remedy to the perplexing problem of dollar shortage

and the introduction of modern technology in the recipient countries
The Pattern of Foreign Investment

 The rate and extent of effective utilization

of foreign capital inflow or what is commonly
termed as foreign investment are closely
related to foreign investment, that is, its
form and field of activity
 TWO FORMS OF FOREIGN INVESTMENT

 Direct Investment
 Portfolio Investment or
Indirect Investment
 Direct Investment

 Refer to investment made

by a private individuals or
private corporations
abroad
 FDI are the physical
investment and purchases
made by a company in a
foreign country
 Direct type of Investments represents:
 Firms controlled by its own nationals but established to
operate only abroad;
 Foreign subsidiaries, branches and other foreign property
owned and controlled by its enterprise at home;
 Holdings by individuals or groups of individuals of
important equity interests in certain corporations abroad;
 Real property owned by the nationals of one country
located in another country
EXAMPLE
 Portfolio or Indirect Investment
 Consist of foreign stocks and
bonds purchased by individual
investors, insurance
companies, investment trusts,
financial institutions and
others.
 FII involve corporations,
financial institutions and
private investors buying
stakes or position in foreign
companies that trade on a
foreign stock exchange.
STOCKS BONDS
• Dividend payments • Interest payment
• Holder owns a part of a • Ownership of bond rights
company only
• Possible voting rights • No voting rights
• Open-ended holding • Specific holding period
period
EXAMPLE

Chinese Businessman US CORPORATION

 Dividend Payments
Shareholder
Decision
Sell the Stock
 Fundamental Principles

 The business enterprise to be established should fill in a

particular need and, at the same time, the business
should be able to offer bright prospects of rewards in the
form of dividends and profits
 To achieve the primordial objective of the capitalist, the
management of the enterprise should be in the hands of
competent and honest men.
 References
• Retrieved from:
 Globalization 101
(https://www.globalization101.org/what-are-the-different-kinds-of-foreign-
investment/)
 Global Policy Forum
(https://www.globalpolicy.org/component/content/article/213/45615.html?
fbclid=IwAR3qn0gzVwMAwLCFTNsFJtwoJPM1SUU7KSQ2kV4mPJ2Ed3dxgHy
POCsBi7o)
 Globalization 101.org
 Direct versus Portfolio
Investments

Prepared by: Kassandra Reyes

• Foreign direct investment (FDI) and foreign
portfolio investment (FPI) are two of the most
common routes for investors to invest in an
overseas economy.

• FDI implies investment by foreign investors directly

in the productive assets of another nation.
 Advantages that is in favor direct
foreign investments:
• Direct investment tends to enter directly into capital
formation.

• It brings into the country the attendant benefit and

spread of modern technology , scientific practices in
industrial management.

• it does not involve any amortization payment .

• it helps relieve to a considerable extent the
pressure on its international reserves through the
production of import substitutes.

• Social and cultural benefits also result from the

entry of direct foreign investment
Investment of
Multinational
Corporations
 part of a broader class of
investments activity known
as direct investment.
Multinational Corporations
and Trade Flows.
 MNC's
• control both import and export trade of the developing
countries.

• control marketing and distribution channels.

• breaks down local monopolies

• exposes local producers to rigorous competition .

Generally,
• posesses inside information about:

 market potentials

 large financial and manegerial resources

 control shipping and other transportation

 control a large segment of the marketing and duatribution networks.

 The bulk of manufactured goods
imported by developing countries
originate with multinational
corporations in developed countries.
REFERENCE:
https://l.facebook.com/l.php?u=https%3A%2F%2Fwww.investopedia.com
%2Farticles%2Finvesting%2F012914%2Fforeign-investment-routes-fdi-and-
fpi.asp%3Ffbclid
%3DIwAR0kt2YVYvLjZKJYA6eYIf5aq4vxWl6ipvfqOzvuIxeviBqipZU1nU-
te6A&h=AT0jnqDLzfjMkbAtV0jhzmLmw3j3vEQLDwSYpA6WVy9uskXazkeK8W
5dKycLBSeUlg8RC_mqYItrspbvhJISKJwf-
EwUnoVibdD2XPbhlEsRUPTvYTP7gzqCAHr5xXW1FZVw
FACTORS INFLUENCING FOREIGN
INVESTMENT
 TAX CONCESSIONS
• It is a complete or partial
exemption from taxes
enjoyed by legal and
physical persons

• Tax-havens or the absence

of income taxation
 Income Tax Defferal and Exemption
• The philippines for its part enacted a number of laws
conferring tax exemption benefits or priveleges to
investors, both local and foreign. Among such laws
are: Republic Act No. 35, as amended by Republic
Act No. 901 which granted exemption from the
payment of taxes and duties to new and necessary
industries for a specified number of years; the Basic
Industries Law as well as other laws affecting specific
industries; and then, the Investment Incentives Act.
 Investment Incentives Act
(RA No. 5186)
Seeks to accelerate the sound development of the
national economy in consonance with the principles
and objectives of economic nationalism

Bring about a planned, economically feasible and

encourage competition and discourage monopolies
It also seeks increase national income
Increase exports
Bring greater economic stability
Provide more opportunities
Raise the living standards of people
Provide equitable distribution of wealth
 Two Areas of Investment
PIONEER PREFERRED AREAS OF
INVESTMENTS INVESTMENTS
 It is engaged in the exportation of
 Which will produce
finished products with 70% of peso
commodities not value of total raw material content
made in the being of local origin
Philippines or which  Exporting more than 50% of its
will utilize new production
technology  Does not enjoy any preferential
treatment arising from any
agreement between Philippine
government and importing country
 Investment Incentives Act recognizes
the following:
Repatriation of investment
Remittance of earnings
Foreign loans and contracts
Freedom from expropriation
Pioneer Enterprise shall be exempt from all taxes
under National Internal Revenue Code and may enjoy
the following incentives:
1.Tax allowance for investment
2.Exemptions from capital tax gains

Pioneer Industry shall be entitled to tariff protection

not exceeding 50% of dutiable value of imported
goods unless higher rate is in force under Tariff Code
or pertinent laws.
 Registered Enterprise
shall entitled the following benefits:
a. Deduction of organizational and pre-operating expenses
b. Accelerated depreciation with respect to fixed assets
c. Carry-over of net operating losses incurred within 10 years
d. Conditionally, a seven-year exemption of capital goods imports
from tariff duties and compensating tax
e. Tax credit for capital goods purchased from domestic sources
f. Tax credit for taxes withheld on interest payments on foreign loans
g. Deduction from taxable income of reinvested funds.
 Non-tax Incentives

1. Temporary banning by the President of the

Philippines of competitive foreign imports

2. Prohibition of privileged governmental

importation of competitive goods
 Employment of Aliens
Permitting the entry of foreign investors

In RA No. 1571, it says an alien is entitled to

enter Philippines in pursuance of the provisions of
a treaty of commerce and navigation:
1.Solely to carry on substantial trade principally
2.Solely to develop and direct the operations of an
enterprise
 Equal Treatment

• Few countries have

guaranteed equal treatment to
both foreign and domestic
capital
 Transfer of Earnings
 Foreigners in approved
business enterprises are
authorized to transfer a
part of their earnings to
their home country ate
the prevailing official
rate of exchange in
accordance with the
contract of employment.
 Exemption from Appropriation or Requisition

 Investors are assured that their assets and property are

free from risks and appropriation
 In Greece, assets of any enterprise established with the
aid of foreign capital are exempt from any for of
expropriation
 Ownership of Real Estate
 “Parity Rights” amendment to the Philippine Constitution
to vest upon American citizen equal rights with the
citizens of this country in the matter of ownership,
development, and exploitation of natural resources
Economic Development and Future Possibilities

 Foreign investors are attracted to the countries where

markets are largest, and in many cases, growing most
rapidly
 Size of Market
 The size of the market could act as a deterrent to the
entry of foreign investment
 Adam Smith’s famous dictum “the division of labour is
militated by the extent of the market”
 Export of Savings
 Linked inseparably with investment is the act of saving
 The creation of goods or capital is the resultant effect of
saving
Capital can originate in etheir or both two ways:
First, when the people have the ability and the desire to
divert a part of their current income to the acquisition of
producer goods as opposed to consumer goods
Second, by the creation of bank deposit
 Transfer of savings is due to exportations not
directly connected with a particular investment
transaction
 It becomes very evident that when a country’s
importation of goods and services increases while
its exportation of the same items practically remain
stationary, if it does not decrease, that country’s
foreign obligation correspondingly increase
 Vicious Cycle of Poverty
 A common characteristics of underdeveloped countries is that
they are caught in a vicious cycle of poverty
 A "vicious cycle of poverty" is quite difficult to describe in as
much as it has no starting point.
 Income in underdeveloped countries is low in a per capital
sense owing to the tremendous pressure exerted by increasing
population growth and on account of dearth of needed
resources, such as capital, skilled manpower and leadership.
 Low investment makes for low productivity
 Absence of Social Overhead
 The absence of social overhead in the form of
transportation and communication
facilities,waterwoks,power stations,repair and
maintenance services and marketing arrangements, etc.,
i.e, services which are utilized in common by all the
industries engaged in directly productive projects,hinders
foreign firect investment in an economy lacking these
overhead facilities.
 Lack of Sound
 Administration and Planning According to John Kenneth
Galbraith, a former American Ambassador to India and an
eminent economist :
 capital and technical knowledge are the missing
elements.But in many of the newer African states national
governments is still in its beginning stages, and in parts of
Latin America, it has never been brought to a minimal level of
efficiency.
 Political Instability
 Loans given to a country with an unstable government are
accompanied by greater risks than those with a politically
stable government.
 Other Obstacles
 a trend toward a wide display of nationalism,some of
which borders on the extreme.
 Laws on the surface have the appearance of promoting
economic development of the country,in reality and in
effect,they serve as deterrents to the entry of foreign
investments and retard its development.
 Nationalistic and discriminatory legislations in some
countries discourage foreign investors from risking theit
savings in thos countries.