ASSIGNMENT 1

JANUARY 2017 SEMESTER

SUBJECT CODE : MIB603

SUBJECT TITLE : INTERNATIONAL BUSINESS

LEVEL : MASTER'S DEGREE

STUDENTS NAME : Seinab Bashir Mohamud

MATRIC NO. : M60101170046

PROGRAMME : MBA

ACADEMIC FACILITATOR : Mr. Ismail Omar Mohamed

LEARNING CENTRE : Mogadishu University

INSTRUCTIONS TO STUDENTS

1) This assignment consists of five (5) questions. Answer ALL questions.

2) Plagiarism in all forms is forbidden. Students who submit plagiarised assignment will be
penalised.

3) References MUST be included and taken from reliables sources. Please use the APA
Referencing Style and cite your work appropriately.

4) This assignment carries a 30% weightage toward final grade.

5) The submission date for this assignment is BEFORE or ON 1th May 2017. Please submit your
assignment answer via pgraduate@mu.edu.so.

THERE IS 1 PAGE OF QUESTION, EXCLUDING THIS PAGE.

DECLARATION BY STUDENT
I certify that this assignment is my own work and is in my own words. All sources have been acknowledged
and the content has not been previously submitted for assessment to Asia e University or elsewhere. I also
confirm that I have kept a copy of this assignment.

Signed: _____________________________
INSTRUCTION: Answer ALL questions given.

QUESTION 1

Your company has developed a new product that has universal appeal across countries and
cultures. In fact, it is expected to achieve high penetration rates in all the countries where its
introduced regardless of the average income of the local populace. Considering the costs of
product launch, the management team has decided to initially introduce the product only in
countries that have a sizeable population base and reasonable growth rate. You are required to
prepare the preliminary report with the top 10 countries in terms of population and growth rate in
Africa and Asia.
ANSWER 1
Africa is the second-most-populous in the world. More then 1.1 billion live in this continent; that
is around 15% percent of the world population. The population density is 30.51 per square
kilometer .African`s population is the youngest among all the continent. Huff of all Africans are
19 years or younger .the population of the African continent grew by 30 million. By the year
2050, annual increases will exceed 42 million people per year and total population will have
doubled to 2.4 billion, according to the UN. This comes to 3.5 million more people per month, or
80 additional people per minute. At that point, African population growth would be able to re-fill
an empty London five times a year. 54 countries make up the continent of Africa, and while
population growth is relatively low in some areas, countries such as Nigeria and Ethiopia are
increasing at an advanced rate. In most countries in the continent, the population growth is in
excess of 2% every year. (worldpopulationreview, 2016)
The top 10 most populous countries and their growth rate in Africa are:

No Country Population Growth Population

Rank
rate
1 Nigeria 191,667,504 2.53% 7
2 Ethiopia 104,256,131 2.38% 12
3 Egypt 95,154,844 1.86% 15
4 Democratic Republic of the 82,150,483 3.09% 16
Congo
5 South Africa 55,414,316 0.77% 25
6 Tanzania 56,820,439 3.05% 24
7 Kenya 48,424,226 2.5% 29

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8 Sudan 42,132,729 2.41% 33
9 Algeria 41,040,323 1.61% 35
10 Uganda 41,608,651 3.23% 34

Asia is the largest and most populous of earth's continents and its located in both the northern and
eastern hemispheres. Asia comprises a full 30% of the world's land area with 60% of the world's
current population. It also has the highest growth rate today, and its population almost quadrupled
during the 20th century. The estimated population for Asia in 2016 is 4.4 billion.

Asia's growth rate is very high, quadrupling in the last century. Given its wealth of resources and
ecological and biological variety, it's in the perfect position to support this growth as well.
Unfortunately, Asia's rapid growth and fast economic development is threatening its limited
resources through quick expansion, destruction of natural habits and urbanization.
(worldpopulationreview, 2016)

The top 10 most populous countries and their growth rate in Asia are:

No Country Population Growth Rate Population

Rank
1- China 1,388,074,095 0.39% 1
2- India 1,342,003,846 1.16% 2
3- Indonesia 263,425,138 1.07% 4
4- Pakistan 196,624,190 1.97% 6
5- Bangladesh 164,805,542 1.15% 8
6 Japan 126,048,709 -0.24% 11
7 Philippine 103,758,420 1.48% 13
8 Vietnam 95,385,930 0.98% 14
9 Iran 80,917,932 1.06% 17
10 Turkey 80,404,686 0.83% 19

QUESTION 2
Some of the major ethical issues in international business involved employment practices, human
rights, environmental management, corruption and the moral obligations of MNCs.
Use China as a case study; discuss the complexity of these issues from the perspective of an
MNC Manager.

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ANSWER 2
EMPLOYMENT PRACTICES and HUMAN RIGHTS
Ethical issues may be associated with employment practices in other nations. When work
conditions in a host nation are clearly inferior to those in a multinationals home nation, what
standards should be applied? Those of the home nation, those of the host nation, or something in
between While few would suggest that pay and work conditions should be the same across
nations, how much divergence is acceptable? For example, while 12-hour workdays, extremely
low pay, and a failure to protect workers against toxic chemicals may be common in some
developing nations, does this mean that it is okay for a multinational to tolerate such working
conditions in its subsidiaries there, or to condone it by using local subcontractors?, establishing
minimal acceptable standards that safeguard the basic rights and dignity of employees, auditing
foreign subsidiaries and subcontractors on a regular basis to make sure those standards are met,
and taking corrective action if they are not is a good way to guard against ethical abuses.
Beyond employment issues, questions of human rights can arise in international business. Basic
human rights still are not respected in many nations. Rights that we take for granted in
developed nations, such as freedom of association, freedom of speech, freedom of assembly,
freedom of movement, freedom from political repression, and so on, are by no means universally
accepted .(Google, 2008)
Human right remains a controversial topic in China with a focus on issues such as labour
standards in the supply chain, child labour, human trafficking, civil and political rights. High
profile scandals have included the spate of suicides in the Foxconn factory in the Shenzhen
province over poor factory working conditions in 2010-2012, 37 child labour among Nike
suppliers in the 1990s and the arrest of human rights activists. Recent research by China Labour
Watch found that working conditions were deplorable" across Apples Chinese suppliers; the
key issues being excessive working hours, low wages, overcrowded/dirty dormitories, hazardous
working conditions, inadequate trade unions, excessive use of agency labour, poor food and
routine cheating of overtime pay.
however, ratified the International Covenant on Civil and Political Rights (ICCPR) or the ILO
Convention on Freedom of Association and the Right to Collective Bargaining and there has been
a great deal of focus on the lack of freedom of speech with censorship across the media rife, and
the inability to organize and to join trade unions in China is a persistent problem. (Elisa Giuliani
& Chiara Macchi, 2013)

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ENVIRONMENTAL POLLUTION Ethical issues arise when environmental regulations in
host nations are far inferior to those in the home nation. Many developed nations have substantial
regulations governing the emission of pollutants, the dumping of toxic chemicals, the use of toxic
materials in the workplace, and so on. Developing nations often lack those regulations, and
according to critics, the result can be higher levels of pollution from the operations of
multinationals than would be allowed at home. (mercosurteam.wordpress.com, 2013)
Chinas cities have grown so quickly that the Country now has more urban centres than most
Western nations. It is predicted that by 2020, China will have 400 cities with at least 250,000
middle-class inhabitants and 50 of those cities will have more than 1 million middle-class
inhabitants (George & David, 2011).
Chinas environmental crisis is one of the most pressing challenges to emerge from the countrys
rapid industrialization. China is the worlds largest source of carbon emissions, and the air
quality of many of its major cities fails to meet international health standards.
Environmental degradation threatens to undermine the countrys growth and exhausts public
patience with the pace of reform (Eleanor, 2016).
CORRUPTION, corruption has been a problem in almost every society in history, and it
continues to be one today. There always have been and always will be corrupt government
officials. . It is widely believed that inward FDI has been one of the major engines of Chinas
economic miracle. a high-ranking official in the Ministry of Commerce (MOC) was arrested for
corruption of approving foreign investment. This case involved several high-ranking officials in
government agencies in charge of regulating FDI, including the MOC, State Administration for
Industry and Commerce (SAIC) and State Administration of Foreign Exchange. In and of itself,
the case is not unique. In China, MNCs have been known to bribe officials through a variety of
ways including offering government officials direct cash payments, occupational trainings,
foreign trips, overseas education opportunities for officials children, and so on (South China
Morning Post, October 8, 2007). Anecdotal evidence aside, there is no systematic empirical study
yet on how FDI inflows and MNC activities may affect corruption in China. As discussed above,
in developing countries FDI inflows and MNC activities may cause an increase 9 in corruption:
entry of MNCs can contribute to rent creation by entering into new markets with high entry
barriers and pursuing monopolistic or oligopolistic positions and by driving local firms out of the
market and decreasing competition; higher rents enable firms to internalize the cost of corruption
and increase the value of bureaucrats control rights and thus their incentive to extract bribes. It
should be acknowledged that, in a large and diversified economy like China MNCs may cause
rents in some industries and regions while diminish them in others. Thus both the positive and

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negative effect of MNC activities on corruption could be at play. The empirical question is then
which effect prevails. In Transparency Internationals (TI) Corruption Perception Index 2014 ,
China is ranked 75th out of 185 countries. This has been a consistent score since 2008. Exploring
this more deeply, the TI Global Corruption Barometer 2010/2015 found that 46% of the 1,000
Chinese respondents felt that the level of corruption in the Country had increased and just over a
third considered the Governments actions ineffective in combating corruption. When
respondents were asked To what extent do you perceive the following institutions in this country
to be affected by corruption? business was seen as the most corrupt institution, closely followed
by political bodies and public officials (see Table).
Transparency International Global Corruption Barometer 2010/2011, China

Whilst bribery is highly prevalent in all sectors in China, it is particularly common in sectors such
as construction. (IRWIN, Doing Business in China: An overview of ethical aspects, 2012)
MORAL OBLIGATIONS Multinational corporations have power that comes from their control
over resources and their ability to move production from country to country. Although that power
is constrained not only by laws and regulations, but also by the discipline of the market and the
competitive process, it is nevertheless substantial. Some moral philosophers argue that with
power comes the social responsibility for multinationals to give something back to the societies
that enable them to prosper and grow. The concept of social responsibility refers to the idea that
business people should consider the social consequences of economic actions when making
business decisions, and that there should be a presumption in favor of decisions that have both
good economic and social consequences (Charles W.).
Chinese business ethics are built on the basis of "guanxi," a fundamental principle and practice
underlying the whole of the Chinese social fabric. Guanxi places relationships and the moral

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obligations flowing from those relationships above other considerations, including written law. It
not only is accepted in China, it is regarded as a moral obligation that people who have known
each other for an extended period of time and have collaborated and helped each other are
obligated to continue this relationship. Guanxi defines both how business is done in China at all
levels and how the Chinese view ethics. The idea that taking a job with a company, particularly a
non-Chinese company, abrogates and supersedes obligations toward people with whom a person
has long-term relationships and to whom he or she owes much guanxi is seen not only as alien
but also as the essence of immoral behavior.
Western company standards, and the codes of conduct in which these standards are codified, hold
that the interests of the company come first. When a person becomes an employee of a company,
he accepts an ethical obligation to put the companys interests first. Because of this, an employee
who uses his position to have his company purchase goods from the employees friend that are
slightly higher in price or inferior in quality would be regarded as unethical, even blatantly
corrupt. Though such things do indeed happen in the West, few would regard this type of action
as ethical. When such incidents are discovered, the offenders often are dealt with quickly and
harshly by the company hierarchy, and they frequently are even reported to the legal system.
(Fred Burton & Scott Stewart, 2008)
QUESTION 3
Using COMESA as case study, examine the pros and cons to its members and to non-
member nations.
ANSWER 3
Common Market for Eastern and Southern African Countries (COMESA) The largest regional
grouping in Africa, COMESA includes 20 countries of North, Central, and Southern Africa. It
was established in 1994, replacing the Preferential Trade Area created in 1981.About half the
member countries eliminated tariffs on intraregional trade in 2000, subject to rules of origin that
have never been fully agreed upon. Goals for 2004 are full trade liberalization and establishment
of a common external tariff. COMESAs progress in eliminating tariffs has been more rapid and
complete than most other developing country groupings. Nevertheless, COMESA does not have
an effective conflict resolution mechanism, and individual members have been able to treat
imports from other members arbitrarily. Uncertainty about such matters and about political
stability in some countries has meant that few businesses have been willing to invest based on
access to a COMESA-wide market. (Fox, 2004)

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Economic integration is the process by which different countries agree to remove trade barriers
between them. Trade barriers can be tariffs (taxes imposed on imports to a country), quotas (a
limit to the amount of a product that can be imported) and border restrictions.

Acourding to the (Caribbean Elections, 2017) There are four main types of regional economic
integration.

1. Free trade area. This is the most basic form of economic cooperation. Member countries
remove all barriers to trade between themselves but are free to independently determine
trade policies with nonmember nations. For example, Canada, Mexico and the United
States have formed the North American Free Trade Agreement (NAFTA), which reduces
trade barriers between the three countries. On the integration scale NAFTA, would be at
about 2 since Canada, the U.S. and Mexico are still free to set their own trade barriers on
goods from other countries.
2. Customs union. This type provides for economic cooperation as in a free-trade zone.
Barriers to trade are removed between member countries. The primary difference from the
free trade area is that members agree to treat trade with nonmember countries in a similar
manner. The Gulf Cooperation Council (GCC) is an example.
3. The single market is the midpoint of the integration scale between political and economic
integration. It is the point at which the economies of the co-operating states become so
integrated that all barriers to the movements of labour, goods and capital are removed.
Like customs unions, there is a common trade policy for trade with nonmember nations.
The primary advantage to workers is that they no longer need a visa or work permit to
work in another member country of a common market. An example is the Common
Market for Eastern and Southern Africa (COMESA).
4. Economic union. This type is created when countries enter into an economic agreement
to remove barriers to trade and adopt common economic policies. A further step in the
process of economic integration might be adoption of a common currency, with monetary
policy regulated by a single central bank.An example is the European Union (EU).

According to the (Caribbean Elections, 2017) The COMESA have Pros & Cons and its include
the following:

Pros of the COMESA

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Trade creation. These agreements create more opportunities for countries to trade with one
another by removing the barriers to trade and investment. Due to a reduction or removal of
tariffs, cooperation results in cheaper prices for consumers in the bloc countries. Studies indicate
that regional economic integration significantly contributes to the relatively high growth rates in
the less-developed countries.

Employment opportunities. By removing restrictions on labor movement, economic integration

can help expand job opportunities.

Consensus and cooperation. Member nations may find it easier to agree with smaller numbers
of countries. Regional understanding and similarities may also facilitate closer political
cooperation.

Cons of the COMESA

Trade diversion. The flip side to trade creation is trade diversion. Member countries may trade
more with each other than with non-member nations. This may mean increased trade with a less
efficient or more expensive producer because it is in a member country. In this sense, weaker
companies can be protected inadvertently with the bloc agreement acting as a trade barrier. In
essence, regional agreements have formed new trade barriers with countries outside of the trading
bloc.

Employment shifts and reductions. Countries may move production to cheaper labour markets
in member countries. Similarly, workers may move to gain access to better jobs and wages.
Sudden shifts in employment can tax the resources of member countries.

Loss of national sovereignty. With each new round of discussions and agreements within a
regional bloc, nations may find that they have to give up more of their political and economic
rights. In the opening case study, you learned how the economic crisis in Greece is threatening
not only the EU in general but also the rights of Greece and other member nations to determine
their own domestic economic policies.

The non-member countries of the COMESA are Vice Verse of the Members of the
COMESA according to this advantages and disadvantages.

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QUESTION 4
Explain the role of the IMF and World Bank in the Somali economy.
ANSWER 4
The IMF Intervention in the Early 1980s
Somalia was a pastoral economy based on "exchange" between nomadic herdsmen and small
agriculturalists. Nomadic pastoralists accounted for 50 percent of the population. In the 1970s,
resettlement programs led to the development of a sizeable sector of commercial pastoralism.
Livestock contributed to 80 percent of export earnings until 1983. Despite recurrent droughts,
Somalia remained virtually self-sufficient in food until the 1970s.
The IMF-World Bank intervention in the early 1980s contributed to exacerbating the crisis of
Somali agriculture. The economic reforms undermined the fragile exchange relationship between
the "nomadic economy" and the "sedentary economy" - i.e. between pastoralists and small
farmers characterized by money transactions as well as traditional barter.
Towards the Destruction of Food Agriculture
The structural adjustment program reinforced Somalia's dependency on imported grain. From the
mid-1970s to the mid-1980s, food aid increased fifteen-fold, at the rate of 31 percent per annum.'
Combined with increased commercial imports, this influx of cheap surplus wheat and rice sold in
the domestic market led to the displacement of local producers, as well as to a major shift in food
consumption patterns to the detriment of traditional crops (maize and sorghum). The devaluation
of the Somali shilling, imposed by the IMF in June 1981, was followed by periodic devaluations,
leading to hikes in the prices of fuel, fertilizer and farm inputs. The impact on agricultural
producers was immediate particularly in rain-fed agriculture, as well as in the areas of irrigated
farming. Urban purchasing power declined dramatically, government extension programs were
curtailed, infrastructure collapsed, the deregulation of the grain market and the influx of "food
aid" led to the impoverishment of farming communities.'
Also, during this period, much of the best agricultural land was appropriated by bureaucrats,
army officers and merchants with connections to the government.' Rather than promoting food
production for the domestic market, the donors were encouraging the development of so-called
"high value-added" fruits, vegetables, oilseeds and cotton for export on the best irrigated
farmland.
Collapse of the Livestock Economy
As of the early 1980s, prices for imported livestock drugs increased as a result of the depreciation
of the currency. The World Bank encouraged the exaction of user fees for veterinarian services to
the nomadic herdsmen, including the vaccination of animals. A private market for veterinary

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drugs was promoted. The functions performed by the Ministry of Livestock were phased out,
with the Veterinary Laboratory Services of the ministry to be fully financed on a cost-recovery
basis. According to the World Bank:
Veterinarian services are essential for livestock development in all areas, and they can be
provided mainly by the private sector. The privatization of animal health was combined with the
absence of emergency animal feed during periods of drought, the commercialization of water and
the neglect of water and rangeland conservation. The results were predictable: the herds were
decimated and so were the pastoralists, who represent 50 percent of the country's population. The
"hidden objective" of this program was to eliminate the nomadic herdsmen involved in the
traditional exchange economy. According to the World Bank, "adjustments" in the size of the
herds are, in any event, beneficial because nomadic pastoralists in sub-Saharan Africa are
narrowly viewed as a cause of environmental degradation."
The collapse in veterinarian services also indirectly served the interests of the rich countries: in
1984, Somalian cattle exports to Saudi Arabia and the Gulf countries plummeted as Saudi beef
imports were redirected to suppliers from Australia and the European Community. The ban on
Somali livestock imposed by Saudi Arabia was not, however, removed once the rinderpest
disease epidemic had been eliminated.
Destroying the State
The restructuring of government expenditure under the supervision of the Bretton Woods
institutions also played a crucial role in destroying food agriculture. Agricultural infrastructure
collapsed and recurrent expenditure in agriculture declined by about 85 percent in relation to the
mid-1970s." The Somali government was prevented by the IMF from mobilizing domestic
resources. Tight targets for the budget deficit were set. Moreover, the donors increasingly
provided "aid", not in the form of imports of capital and equipment, but in the form of "food aid".
The latter would in turn be sold by the government on the local market and the proceeds of these
sales (i.e. the so-called "counterpart funds") would be used to cover the domestic costs of
development projects. As of the early 1980s, "the sale of food aid" became the principal source of
revenue for the state, thereby enabling donors to take control of the entire budgetary process."
The economic reforms were marked by the disintegration of health and educational programs.
By 1989, expenditure on health had declined by 78 percent in relation to its 1975 level.
According to World Bank figures, the level of recurrent expenditure on education in 1989 was
about $ 4 Per annum per primary school student down from about $ 82 in 1982. From 1981 to
1989, school enrolment declined by 41 percent (despite a sizeable increase in the population of
school age), textbooks and school materials disappeared from the class-rooms, school buildings

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deteriorated and nearly a quarter of the primary schools closed down. Teachers' salaries declined
to abysmally low levels.
The IMF-World Bank program has led the Somali economy into a vicious circle: the decimation
of the herds pushed the nomadic pastoralists into starvation which in turn backlashes on grain
producers who sold or bartered their grain for cattle. The entire social fabric of the pastoralist
economy was undone. The collapse in foreign exchange earnings from declining cattle exports
and remittances (from Somali workers in the Gulf countries) backlashed on the balance of
payments and the state's public finances leading to the breakdown of the government's economic
and social programs.
Small farmers were displaced as a result of the dumping of subsidized US grain on the domestic
market combined with the hike in the price of farm inputs. The impoverishment of the urban
population also led to a contraction of food consumption. In turn, state support in the irrigated
areas was frozen and production in the state farms declined. The latter were slated to be closed
down or privatized under World Bank supervision.
According to World Bank estimates, real public-sector wages in 1989 had declined by 90 percent
in relation to the mid-1970s. Average wages in the public sector had fallen to $ 3 a month,
leading to the inevitable disintegration of the civil administration." A program to rehabilitate civil
service wages was proposed by the World Bank (in the context of a reform of the civil service),
but this objective was to be achieved within the same budgetary envelope by dismissing some 40
percent of public-sector employees and eliminating salary supplements." Under this plan, the
civil service would have been reduced to a mere 25,000 employees by 1995 (in a country of six
million people). Several donors indicated keen interest in funding the cost associated with the
retrenchment of civil servants."
In the face of impending disaster, no attempt was made by the international donor community to
rehabilitate the country's economic and social infrastructure, to restore levels of purchasing power
and to rebuild the civil service: the macro-economic adjustment measures proposed by the
creditors in the year prior to the collapse of the government of General Siyad Barre in January
1991 (at the height of the civil war) called for a further tightening over public spending, the
restructuring of the Central Bank, the liberalization of credit and the liquidation and divestiture
of most of the state enterprises.
In 1989, debt-servicing obligations represented 194.6 percent of export earnings. The IMF's loan
was cancelled because of Somalia's outstanding arrears. The World Bank had approved a
structural adjustment loan for US$ 70 million in June 1989 which was frozen a few months later
due to Somalia's poor macro-economic performance. Arrears with creditors had to be settled

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before the granting of new loans and the negotiation of debt rescheduling. Somalia was tangled in
the straightjacket of debt servicing and structural adjustment (The Real Couses of Famine in
somalia, 2013)

QUESTION 5

Discuss foreign direct investment (FDI). List the factors that induce Companies to invest
Somalia?

ANSWER 5
Definition of Foreign Direct Investment Foreign direct investment (FDI) is an investment in a
business by an investor from another country for which the foreign investor has control over the
company purchased. The Organization of Economic Cooperation and Development (OECD)
define control as owning 10% or more of the business. Businesses that make foreign direct
investments are often called multinational corporations (MNCs) or multinational enterprises
(MNEs). An MNE may make a direct investment by creating a new foreign enterprise, which is
called a green field investment, or by the acquisition of a foreign firm, either called an acquisition
or brown field investment (Grimsley, 2017).
FDI takes on two main forms. The first is a green field investment, which involves the
establishment of a new operation in a foreign country. The second involves acquiring or merging
with an existing firm in the foreign country When discussing foreign direct investment, it is
important to distinguish between the flow of FDI and the stock of FDI (Charles, 2013)
Advantages of FDI
An FDI may provide some great advantages for the MNE but not for the foreign country where
the investment is made. On the other hand, sometimes the deal can work out better for the foreign
country depending upon how the investment pans out. Ideally, there should be numerous
advantages for both the MNE and the foreign country, which is often a developing country. We'll
examine the advantages and disadvantages from both perspectives, starting with the advantages
for multinational enterprises (MNEs).

Access to markets: FDI can be an effective way for you to enter into a foreign market.
Some countries may extremely limit foreign company access to their domestic markets.
Acquiring or starting a business in the market is a means for you to gain access.
Access to resources: FDI is also an effective way for you to acquire important natural
resources, such as precious metals and fossil fuels. Oil companies, for example, often
make tremendous FDIs to develop oil fields.
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 Reduces cost of production: FDI is a means for you to reduce your cost of production if
the labor market is cheaper and the regulations are less restrictive in the target foreign
market. For example, it's a well-known fact that the shoe and clothing industries have
been able to drastically reduce their costs of production by moving operations to
developing countries.

FDI also offers some advantages for foreign countries. For starters, FDI offers a source of
external capital and increased revenue. It can be a tremendous source of external capital for a
developing country, which can lead to economic development.
For example, if a large factory is constructed in a small developing country, the country will
typically have to utilize at least some local labour, equipment, and materials to construct it. This
will result in new jobs and foreign money being pumped into the economy. Once the factory is
constructed, the factory will have to hire local employees and will probably utilize at least some
local materials and services. This will create further jobs and maybe even some new businesses.
Additionally, tax revenue is generated from the products and activities of the factory, taxes
imposed on factory employee income and purchases, and taxes on the income and purchases now
possible because of the added economic activity created by the factory. Developing governments
can use this capital infusion and revenue from economic growth to create and improve its
physical and economic infrastructure such as building roads, communication systems,
educational institutions, and subsidizing the creation of new domestic industries.
Finally, learning is an indirect advantage for foreign countries. FDI exposes national and local
governments, local businesses, and citizens to new business practices, management techniques,
economic concepts, and technology that will help them develop local businesses and industries.
List of Disadvantages of Foreign Direct Investment

1. Hindrance to Domestic Investment.

As it focuses its resources elsewhere other than the investors home country, foreign direct
investment can sometimes hinder domestic investment.

2. Risk from Political Changes.

Because political issues in other countries can instantly change, foreign direct investment is very
risky. Plus, most of the risk factors that you are going to experience are extremely high.

3. Negative Influence on Exchange Rates.

Foreign direct investments can occasionally affect exchange rates to the advantage of one country
and the detriment of another.

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4. Higher Costs.
If you invest in some foreign countries, you might notice that it is more expensive than when you
export goods. So, it is very imperative to prepare sufficient money to set up your operations.

5. Economic Non-Viability.
Considering that foreign direct investments may be capital-intensive from the point of view of the
investor, it can sometimes be very risky or economically non-viable.

6. Expropriation.
Remember that political changes can also lead to expropriation, which is a scenario where the
government will have control over your property and assets.

7. Negative Impact on the Countrys Investment.

The rules that govern foreign exchange rates and direct investments might negatively have an
impact on the investing country. Investment may be banned in some foreign markets, which
means that it is impossible to pursue an inviting opportunity.

8. Modern-Day Economic Colonialism.

Many third-world countries, or at least those with history of colonialism, worry that foreign direct
investment would result in some kind of modern day economic colonialism, which exposes host
countries and leave them vulnerable to foreign companies exploitations.

Factors affecting foreign direct investment

1. Wage rates

A major incentive for a multinational to invest abroad is to outsource labour intensive production
to countries with lower wages. If average wages in the US are $15 an hour, but $1 an hour in the
Indian sub-continent, costs can be reduced by outsourcing production. This is why many Western
firms have invested in clothing factories in the Indian sub-continent.

However, wage rates alone do not determine FDI, countries with high wage rates can still attract
higher tech investment. A firm may be reluctant to invest in Sub-Saharan Africa because low
wages are outweighed by other costs.

2. Labour skills

Some industries require higher skilled labour, for example pharmaceuticals and electronics.
Therefore, multinationals will invest in those countries with a combination of low wages, but
high labour productivity and skills. For example, India has attracted much investment in call

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centres, because a high percentage of the population speak English, but wages are low. This
makes it an attractive place for outsourcing and therefore attracts investment.

3. Tax rates

Big multinationals, such as Apple, Google and Microsoft have sought to invest in countries with
lower corporation tax rates. For example, Ireland has been successful in attracting investment
from Google and Microsoft. In fact, it has been controversial because Google has tried to funnel
all profits through Ireland, despite having operations in all European countries.

4. Transport and infrastructure

A key factor in the desirability of investment are the transport costs and levels of infrastructure. A
country may have low labour costs, but if there is then high transport costs to get the goods onto
the world market, this is a drawback. Countries with access to the sea are at an advantage to
landlocked countries, who will have higher costs to ship goods.

5. Size of economy / potential for growth.

Foreign direct investment is often targeted to selling goods directly to the country involved in
attracting the investment. Therefore, the size of the population and scope for economic growth
will be important for attracting investment. For example, Eastern European countries, with a
large population, e.g. Poland offer scope for new markets. This may attract foreign car firms, e.g.
Volkswagen, Fiat to invest and build factories in Poland to sell to the growing consumer class.
Small countries may be at a disadvantage because it is not worth investing for a small population.
China will be a target for foreign investment as the new emerging Chinese middle class could
have very strong demand for the goods and services of multinationals.

6. Political stability / property rights

Foreign direct investment has an element of risk. Countries with an uncertain political situation,
will be a major disincentive. Also, economic crisis can discourage investment. For example, the
recent Russian economic crisis, combined with economic sanctions, will be a major factor to
discourage foreign investment. This is one reason why former Communist countries in the East
are keen to join the European Union. The EU is seen as a signal of political and economic
stability, which encourages foreign investment.

Related to political stability is the level of corruption and trust in institutions, especially judiciary
and the extent of law and order.

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7. Commodities

One reason for foreign investment is the existence of commodities. This has been a major reason
for the growth in FDI within Africa often by Chinese firms looking for a secure supply of
commodities.

8. Exchange rate

A weak exchange rate in the host country can attract more FDI because it will be cheaper for the
multinational to purchase assets. However, exchange rate volatility could discourage investment.

9. Clustering effects

Foreign firms often are attracted to invest in similar areas to existing FDI. The reason is that they
can benefit from external economies of scale growth of service industries and transport links.
Also, there will be greater confidence to invest in areas with a good track record. Therefore, some
countries can create a virtuous cycle of attracting investment and then these initial investments
attracting more. It is also sometimes known as an agglomeration effect.

10. Access to free trade areas.

A significant factor for firms investing in Europe is access to EU Single market, which is a free
trade area, but also has very low non-tariff barriers because of harmonisation of rules, regulations
and free movement of people. For example, UK post Brexit, is likely to be less attractive to FDI,
if it is outside the Single Market.

Evaluation

There are many different factors that determine foreign direct investment (FDI) and it is hard to
isolate individual factors, given there are many different variables. It also depends on the type of
industry. For example, with manufacturing FDI, low wage costs tend to be the most important, as
they are labour intensive industry. For service sector FDI, macro-economic stability and political
openness tend to be more important.

Also, it depends on the source of FDI, American firms may value political openness more than
Chinese firms. Or American firms may have a preference for countries where English is spoken
more (Pettinger, Economics help, 2017).

Recent reliable estimates of foreign investment inflows into Somalia are currently unavailable,
but FDI inflows averaged USD 100 million per year during 2007-2013.

On one hand, the strong instability of the country remains a major concern,

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 While on the other hand, Al-Shabab's losses and current weak position are positive signals
for investors. The capital Mogadishu is currently experiencing a construction boom,
mostly fuelled by Turkish investment, signalling a certain optimism that Somalia is
improving.

Somalia has a substantial potential in natural resources: agriculture, livestock, fishing and
hydrocarbons.

If the stabilisation of the country takes place, this wealth as well as the
telecommunications sector could attract many investors.

The sector that attracts most FDI is food processing (bananas and fish) and, more
recently, the telecommunications sector.

The main investing countries are the United Arab Emirates, Yemen and Oman.
Overall, the situation in Somalia is still alarming. The conflict between the Kenyan troops against
the Somali Shabaabs has joined a long list of conflicts that the country has suffered for the past
twenty years. The Al-Shabaabs began a guerrilla warfare strategy in 2011 and have multiplied
their attacks. This situation, as well as the lack of a central government, the corruption and the
absence of a skilled workforce are the significant factors that limit foreign investment in the
country.

In August 2013, the British company Soma Oil and Gas, signed an agreement to start exploring
the hydrocarbon deposits. Other companies have exploration licenses that were granted before the
civil war (Suddefrance-Development, 2017).

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