Polytechnic University of the Philippines

Foreign Direct
Investment
(Article: China January Foreign Direct
Investment Rises in Sign of Confidence)

Submitted by: Karina B.

Hernandez

Contents
I. Intoduction........
II. Statement of the Problem.....
III. Causes of the Problem............................................................
IV. Decision, Criteria and Alternative Solution...........................
V. Conclusion....................................................................................
Reference

I. Introduction
Foreign direct investment is important to global economic
growth. This is especially important for developing and emerging
market countries. FDI from investors in developed areas like the
European Union (EU) and the United States provide funding and
expertise to help smaller companies in these emerging markets to
expand and increase international sales. In 2013, they received
more than half (54 per cent) of total global FDI. Developing Asia
attracts more foreign investment (FDI) than either the EU or the
U.S. Like for example the country of China wherein even though
as growth cools their FDI still drew $10.76 billion in January, up
16.1 percent from a year earlier that shows a sign that confidence
in the world's second-largest economy remains firm.
What exactly is foreign direct investment or FDI?
The International Monetary Fund defines FDI as when one
individual or business owns 10% or more of a foreign company's
capital. Every financial transaction afterwards is considered by the
IMF as an additional direct investment. If an investor owns less
than 10%, it is considered as nothing more than an addition to
his/her stock portfolio. In here with only a 10% ownership, the
investor may or may not have the controlling interest in the foreign

business. However, even with just 10%, the investor usually has
significant influence on the company's management, operations
and policies. For this reason, most governmental agencies want to
keep tabs on who is investing in their country's businesses. Foreign
direct investment has many advantages for both the investor and
the recipient. One of the primary benefits is that it allows money to
freely go to whatever business has the best prospects for growth
anywhere in the world. That's because investors aggressively seek
the best return for their money with the least risk. This motive is
color-blind, doesn't care about religion or form of government.

II. Statement of the Problem

In theory there are contradictory views about the growth
effects of FDI. The main rationale behind the special incentives to
attract FDI is the belief that they produce externalities in the form
of technology transfers and spill overs. Some theories state that
foreign investments will damage resource allocation and slow the
economic growth due to trade, price, financial and other distortions
found in less developed countries.
Short-term Problems (SP):

 The chance of monopoly power over the market.

Leaving lower-quality workers at the domestic firms.
Environmental issues.
Long-term Problems (LP)
It may kill the local firms making the market left with
FDIs and the country may experience inflation.
It will make our goods quality lower and it may not be
accepted by the international market.
May leave the country filthy

III. Causes of the Problem

SP#1 FDIs with lower marginal costs increases production
relative to its domestic competitor, when imperfectly competitive
firms of the host country face fixed costs of production. In this
environment, foreign firms that produce for the domestic market
draw demand from local firms, causing them to reduce the
production. The productivity of local firms falls as their fixed costs
are spread over a smaller market which forces them to back up

their average cost curves. When the productivity decrease from this
demand effect is large enough, total domestic productivity can
diminish even if the FDI transfers technology or its firm-specific
asset to local firms.
SP#2 Because of high wages offered by the FDIs workers from
the domestic market that cant go with the flow may transfer to
foreign companies making the domestic market left out with man
power that are not that skilled and not well experienced. In the end
domestic markets will no longer exist because there will be no
demand for their service because of the low quality given, making
the FDI, left in the market with all the demand and profit.
SP#3 FDIs are attracted to countries that offer low regulatory
regimes. Because countries that strictly implement laws may just
increase the cost that the FDIs are having.
LP#1 Because the FDI is now in control of the market, the
control of prices will also be in his hands and as we all know FDIs
are investing their money in different country to reach one goal
only and that is to maximize profit and to do that it has to, first,
eliminate competition and after that control the entire market
making it control the price prevailing in the market.

LP#2 This is like what is happening in the Philippines wherein

Filipininos are more attracted to companies that offer big salaries
and this companies are commonly owned by foreign companies
that has their mother company to other country. And because our
local industry cannot follow the salary set by these companies,
foreign companies have the chance in choosing good employees.
LP#3 Environmental problems is one of the problems that is very
much difficult to address. Effects of this problem may cause so
much damage in the future not only in the market itself but also to
the citizens of the country.

IV. Decision, Criteria and Alternative Solution

Short-term Problem
Solution #1 The government should regulate the wages that local
firms give to their employees also employers should give higher
incentives to attract good employees in the future. Local firms
must also implement company policies that are employee friendly
and at the same time can benefit the company because as we all
know if the employees are happy productivity rate may increase.

Cons Firms are made to maximize profit to the least cost and this
is the reason why solution number 1 is I think will not be an option
in solving such problem because it will give the firm larger cost
that cannot be surpassed by the productivity rate.
Pros Higher incentives can provide the company higher
productivity rate that can cause the company to rise and improve.
Solution #2 The government should limit the ownership that a
foreign company should have like for example the Philippines
wherein there is a certain present only the foreign company can
own and the rest will be managed by its own people. Also the
government should impose higher tax or tariffs to foreign
companies to protect the local firms.
Pros Local firms are assured that the government is doing their
best to protect them ad not to allow foreign companies to kill local
businesses.
Cons One of the reasons why FDIs are investing to countries is
because it can incur them lower cost and by offering or giving
higher tariffs it can make the FDIs driven away.
Solution #3 There is no other solution than this except by just
implementing strict laws and giving punishments to those who are

not following the rules. To lessen the costs of FDIs government

can help for example offering a place to firms where they can
dispose their garbage properly without ruining the environment.
Pros The government can prevent the ruining of the environment
and also can prevent the damage that can happen in the future.
Cons Additional cost

Conclusion
Although there are contradictory thoughts about the impact
of FDI on the economic growth, it is broadly believed that
investments positively contribute to the economic development of
host countries. However, countries do not benefit from the
investments at the same level. Foreign investments are not
advantageous

or

disadvantageous

by

themselves.

Their

contribution depends on the policy and behaviour of host country

governments.
The same foreign investment may bring lots of benefits to one
country, while it might be quite harmful for the other. Therefore, it
does not mean that if you get more FDI, your economy will boost.
For example, Chinas economy grew significantly due to foreign

investments, but if the government does not diversify the economy

and take measures against the negative effects of FDI, its economy
will be worsened in long term.

REFERECE:
Silk, Richard. (May 16, 2013). Investment Into China Flattens. The
WallStreetJournal.
http://online.wsj.com/news/articles/SB10001424127887324
767004578486181643410080
Malinao, Alito L. (July 06, 2013) Philippines Lags Behind Other
ASEAN Economies in FDI Inflows in 2012:UN. English
People Daily.
http://english.peopledaily.com.cn/90778/8314070.html
Anonymous.

(February 18,

2014).

China

Foreign

Direct

Investment Rises in Sign of Confidence. Reuters: The

Latest in Business, Finance and technology News:
http://www.reuters.com/article/2014/02/18/us-chinaeconomy-fdi-idUSBREA1H02W20140218