FOREIGN DIRECT INVESTMENT

Definition of FDI

Foreign direct investment (FDI) is defined as an investment involving a long-term

relationship and reflecting a lasting interest and control by a resident entity in one
economy (foreign direct investor or parent enterprise) in an enterprise resident in an
economy other than that of the foreign direct investor (FDI enterprise or affiliate
enterprise or foreign affiliate). FDI implies that the investor exerts a significant degree
of influence on the management of the enterprise resident in the other economy. Such
investment involves both the initial transaction between the two entities and all
subsequent transactions between them and among foreign affiliates, both incorporated
and unincorporated. FDI may be undertaken by individuals as well as business entities.
Flows of FDI comprise capital provided (either directly or through other related
enterprises) by a foreign direct investor to an enterprise, or capital received from an
investing enterprise by a foreign direct investor. FDI has three components: equity
capital, reinvested earnings and intra-company loans. Equity capital is the foreign
direct investors purchase of shares of an enterprise in a country other than its own.

Reinvested earnings comprise the direct investor’s share (in proportion to direct
equity participation) of earnings not distributed as dividends by affiliates, or earnings
not remitted to the direct investor. Such retained profits by affiliates are reinvested.
Intra-company loans or intra-company debt transactions refer to short- or long-term
borrowing and lending of funds between direct investors (parent enterprises) and
affiliate enterprises. FDI stock is the value of the share of their capital and reserves
(including retained profits) attributable to the parent enterprise, plus the net
indebtedness of affiliates to the parent enterprise. FDI flow and stock data used in
WIR are not always defined as above, because these definitions are often not
applicable to disaggregated FDI data. For example, in analysing geographical and
industrial trends and patterns of FDI, data based on approvals of FDI may also be
used because they allow a disaggregation at the country or industry level. Such cases
are denoted accordingly. Flows of FDI comprise capital provided (either directly or
through other related enterprises) by a foreign direct investor to an enterprise, or
capital received from an investing enterprise by a foreign direct investor. FDI has
three components which is equity capital, reinvested earnings and intra-company
loans. • Equity capital is the foreign direct investor’s purchase of shares of an
enterprise in a country other than its own.Moreover Reinvested earnings comprise the
direct investor’s share (in proportion to direct equity participation) of earnings not
distributed as dividends by affiliates, or earnings not remitted to the direct investor.
Such retained profits by affiliates are reinvested.

Why Having FDI

There are some of the benefits that bring by the FDI to the country, so it had
encourage some of the country to having FDI in their country. Some of the
advantages is which it allows developed countries to start improving opportunities in
emerging markets. Developing countries can see improvements in wealth and
opportunities, while developed countries can benefit from increased profits,
developing relationships and greater level of market influence. One of the advantages
for the FDI which it provides local economic benefits in multiple locations.The
companies or individuals who participate in FDI can stimulate community economic
growth at the local level for their headquarters or home.Profits are often reinvested
into employees or increase organizational opportunities, which can create new
jobs,which then create new FDI opportunities.Investments are also similar to home
markets for foreign organization. Besides that, it makes international trade easier to
complete the country has its own import tariffs, and this is one of the reasons why
trade with it is quite difficult. There are also industries that usually require their
presence in the international market to ensure their sales and goals are met. With FDI,
all this will be easier due to these tariffs can be restricted or eliminated through
foreign direct investment because the minimum equity of a foreign organization
occurs. This allows local companies to better control the market while maintaining
price competition.Furthermore, increment in income of the target country. With more
job opportunities and higher wages, national income usually increases. As a result,
economic growth has been stimulated and larger companies typically offer higher pay
levels than the target country, which may result in increased revenue. Development of
Human Capital Resources, businesses are successful because humans have expertise.
In underdeveloped and developing countries, human skills are limited to basic labor,
agricultural work and other primary skills. Foreign direct investment creates
educational opportunities that enable people to improve their personal skills
base.which help to Achieve higher levels of productivity. Companies benefit as much
as individuals and gradually penetrate into every community.It provides a foreign
company with needed experience They can also bring their personal experiences to
specific industries. For foreign companies, such investments can immediately
stimulate productivity. If the investor's contact is allowed in the relationship, the
investment can also provide better facilities for foreign organizations, better
equipment assets and improved supplier access .Tax Incentives, Parent enterprises
will also provide foreign direct investment to acquire additional expertise, technology
and products. As a foreign investor, they can receive tax incentives that will be very
useful in the business field you choose. Lastly, the Foreign direct investment will
allow resource transfers and other knowledge exchanges to enable countries to
acquire new technologies and skills.

Characteristics of FDI

One of the characteristics in FDI which is in all such transactions there is a basic
intention to participate in the management of the target company.Second in most
cases it involves a long term commitment, that is, there is no intention to seek quick
capital gains. By convention an investment is considered as FDI when it involves
acquisition of a minimum of 10% of the paid up equity of the target
company.Generally all such investments are accompanied by technology transfers and
access to newer markets therefore the partnership involves access to raw materials for
the foreign entity and access to technology for the target company. Such investments
involve creation of physical assets which generally increase the productive capacity of
the target company. This generates employment and consequently economic growth
in the host country. Investment by the foreign entity may involve fresh issue of capital
or sale of shares held by promoters in the target company. Therefore such transactions
are essentially primary market operations. In most cases there would be an effect on
the balance sheet of the company. Furthermore, political stability also important in
affect the FDI, Political stability effects business operations of international
companies. An aggressive takeover overthrowing the government could lead to a
disordered environment, disrupting business operations. For example, Sri Lanka’s
civil war and Egypt and Syria disturbances were overwhelming for businesses
operating there. The economic stability also one of the characteristics for FDI which
have a huge impact on international business companies. The economic environment
includes factors that influence a country's attractiveness to international business
companies.The infrastructure aspects of the investment environment affect the
attractiveness of the host country as an investment location and there are many
components in infrastructure, especially the availability and efficiency of physical and
human resources.

Criteria Of FDI
The criteria of foreign investment which is the decisions to enter or expand in any
particular country are often influenced by business factors such as market size,
infrastructure, labor, integration with neighboring countries or proximity to corporate
headquarters.But policy considerations also play an important role. Regulatory
barriers may include foreign equity restrictions, screening or approval mechanisms,
employment restrictions, opaque regulations, corruption, weak enforcement,
inadequate intellectual property (IP) protection, localization requirements and capital
repatriation, land ownership and other operational matters. Other policy-related
factors may help attract overseas investment, including political stability, investment
incentives, resource access and manageable business registration procedures.
According to a report by the Organisation for Economic Co-operation and
Development (OECD), some governments are trying to protect national industry and
employment more aggressively, and “investment protectionism” may exacerbate
regulatory issues. “Investment protectionism can take many forms: new rules or
stricter enforcement of existing rules; greater conditions attached to regulatory
approval mechanisms; or broader strategic industry concepts, national interests and
national security.
Why host country against FDI

By having FDI the home country can gain some benefits, but there are also the reason
why the government against over FDI. Firstly, the Negative wage spillovers the FDI
salary opportunity is considered the most positive because MNE employees can leave
their place of work and become future entrepreneurs, which will enhance the
competitiveness of domestic companies. However, it can cause negative effects as
well, especially if MNE hires the best workers because of their high wages and hence
leaving low-quality workers at domestic firms. In response, domestic companies can
artificially increase or replicate the wages of multinational companies to prevent
high-quality employees from changing their workplaces and instead support foreign
companies.But because multinational companies have a productivity advantage over
domestic companies, this action may lead to a decline in competitiveness.One
possible reason for the negative outcomes of some developing countries is that the
gap between multinational companies and domestic companies is very large and one
party may affect the other. In addition, the labor market in some developing
economies is too fragmented because one’s wages affect the other.Besides
that,repatriation of profits. The main goal of multinational companies invest abroad is
to maximize profits. Some of the favorable features of these countries, such as
cheap labor, abundant natural resources or high-quality expertise, enable
multinational companies to improve their economic performance.Besides that,
regularly transfer their investment profits from dividends or royalties to shareholders
and from simple accruals. It also helps them avoid increasing taxes by using transfer
prices.This repatriation of profits has led to huge capital outflows from the host
country to the country and has a negative impact on the balance of payments of the
former. Furthermore,Environmental issues also one of the important factor that the
host country against FDI,due to the larger amount of FDI are more focusing in the
natural resources or other sector of developing and less developed countries. Due to
the regulatory systems in these county are less strict and Sometimes countries
deliberately try to exempt or relax their regulatory requirements to attract foreign
direct investment.Thus this will lead to negative impact of FDI on host ecosystems
and the environment can lead to long-term disasters. Last but not least, it will also
lead to balance of payment effect because of the increased in foreign direct
investment inflows from the country will result in an increase in the host country’s
imports from the country. This may be because multinational companies have
purchased inputs from their traditional suppliers or have increased the rate of
accelerated inflation of foreign capital in their countries. As more and more
investments flow in, the host economy is increasingly dependent on the production
technology of multinational companies. The host country will have to import more
inputs and intermediates from the home country of the multinational company, which
may limit the development of the domestic industry. If these investments are not
export-oriented, the host country may suffer a trade deficit. One of the example for
the country that discourage FDI is India, the negative is that it affects the local
community, when larger projects come in. It also means being affected Domestic
companies may cause harm to foreign competition Domestic company, this is not
necessarily due to Domestic companies are powerless. Foreign company may Have
technology that India has not yet acquired. in On the other hand, foreign direct
investment brings these technologies to India.The negative impact to India which is
allowing foreign direct investment in the retail industry in India is not long because
lack of infrastructure and foreign income and market share giant. Furthermore,FDI
also had destroy small entrepreneurs because they can't afford the fierce competition
of big entrepreneurs, because these entrepreneurs will provide all goods to consumers
at a lower price. The work also will be reduce in India due to the entry of large
foreign-owned chain stores such as Wal-Mart and Carrefour will not create any actual
employment opportunities in India. The most jobs will be transferred from the
unorganized sector to the organized sector, and the number will remain the same or
lower, but not more.Lastly there are no practical benefit to farmers because it will
make Indian farmers slaves to these large chains, and farmers will be completely pity.
Therefore, foreign direct investment will only worsen the already tragic situation of
Indian farmers.

Why host country encourage FDI

Some of the country encouraged FDI because it will increase the capital for the host
country .The multinational corporations (MNEs) spend money and invest in long-term,
and only when projects make money after After free capital transfers from
cross-border rules, capital holders may obtain the highest returns. It has led to
countries that need funding to try to attract multinational corporations to invest. Many
multinational companies rely on their large scale and financial strength to obtain
financial tools and opportunities that may not be available to the country of the owner.
These funds may be available for use by multinational companies. This is due to the
popularity of multinational companies, and large multinational companies are more
likely to raise funds from the capital market than the host companies. This situation
helps multinational companies invest their money in the host country and achieve
higher returns with the help of multinational companies, and the host country receives
investment. Secondly, it also help the grow of technology Technology can create
movement and mobility in the economy, which can promote economic improvement
and industrialization. there are too many nations which do not have enough
technology and innovation, they also have to have their own research and
improvement for their economic growth. If a country has enough technology, they can
transfer technology directly to different countries and earn huge amounts of money.
Because technology is an expensive resource. Lastly, through FDI it also help in
management aspect, the multinational companies can train citizens of the host country
to understand their careers and this way is considered cheaper. Besides that, the
multinational companies also can bring its own employees from the country where the
company is located, and by doing so, the investment company's brunch may have
trained employees to manage the business of the owner's company. Example of India,
one of the reason the government encourage FDI due to it help to increase in
government revenue Government revenues are certainly going to increase a lot
because of FDI. Government revenues will increase by 25 to 30 billion dollars which
is a really big amount. This government revenue can help a lot in the development of
Indian economy.

How Toyota apply FDI in China

Since the rapid development of global integration, the automotive industry has
become one of the most important economic sectors in the world. Toyota is one of the
representative multinational companies in the world. It was founded in 1937 by
Toyota Saki, and today Toyota is currently marketing domestically and globally with
52 overseas manufacturing companies in 27 countries. The Toyota Market sells
approximately 7 million vehicles in more than 170 countries each year, with 320.808
employees worldwide . As a market leader, Toyota has a 15% market share among all
other car brands. Toyota's key success factor is to design, design and manufacture cars
for each target market area. For this reason, Toyota faces a huge impact on
globalization; it can be both negative and positive, and because of new markets,
cheaper investment locations, multiple raw materials and service providers, and lower
Labor costs and other factors vary. However, it can also carry negative parts. First of
all, the world auto market is a changing environment and a highly competitive
environment that affects Toyota's economic conditions. Second, the market is volatile.
Finally, the global auto crisis has severely hit Toyota's market profits.From here we
can see that Toyota having FDI in China,China overtake United States become to new
fdi destination by 2004. This is due to the China adoption reform and opening up
policy in the late 1970. Toyota believes that China’s market is potentially as large as
the U.S. Market. Toyota aims consistently increase investment in China to grow
production capacity and add to product lineup along with begin to produce Camry at
Guangzhou Toyota Motor Co., Ltd. Besides that, Toyota intend to invest about $700
million in its first fully-fledged research and Development base (R&D) in China.
Because, Toyota wants to increase the production in China. Besides that, there are
some reason why Toyota having FDI in China. Political is one of the factor that attract
Toyota FDI in China, due to the political at China is indeed beneficial to
foreign-invested companies. According to the government policy,the Chinese
government levies low taxes on foreign-invested enterprises, and provides preferential
tax policies to the departments and regions where the state encourages investment.
The low tax policy is reflected in three aspects: income tax, circulation tax and
value-added tax at the import stage. At the same time, the Chinese government has
announced several preferential policies to encourage car consumption, including those
living in rural areas can enjoy 10% of the original car price subsidies. Second, the tax
rate for purchasing small-displacement vehicles has dropped from 10% to 5% . These
preferential policies have greatly stimulated automobile consumption and attracted
more foreign auto companies to invest in China. Secondly, as we know that China is
the second largest and faster economy growing in the world . The average annual
economic growth rate in the past three years is close to 9%. China's role in the world
is "world factory" because China provides cheap labor costs and a low-cost
export-oriented production base. So the Toyota main advantage in economic aspect
which is its strong cash position.However, when compared to GM, Toyota still has a
weak credit rating, increased healthcare and pension costs, and losses in its
automotive parts. Toyota expects through the use of a strong cash position to grow
around the world increasing its commitment to R & D. Moreover, the population in
China is most populous country in the world. Family size: 3.1, the total number of
Chinese households is 351,233,698 and the Toyota are mainly focusing on family and
also the pricing are affordable.

For my opinion by FDI that foreign direct investment in Toyota can bring benefits
in many way. Firstly it help China’s economic growth and foreign Capital has two
positive effects; it improves the liquidity of the Chinese economy and thus promotes
the economy. Other investments (for example, providing more business opportunities
for local entrepreneurs and supporting businesses, etc.) As a legal work, accounting,
construction, transportation, hospitality, etc.). Second, it creates employment, Central
and local government revenue and tax revenue. These earnings have been feedback
Enter the economy, improve the living standards of all Chinese people, further
promote economic development, and promote economic development A virtuous
cycle of prosperity for more than two decades. The main sustainable benefit of foreign
direct investment is that it can bring technical knowledge to developing countries.
country. If this is not the case, foreign direct investment may only use the cheap labor
or natural resources of another person country. The Chinese government has played a
flexible role in attracting foreign direct investment into China and the country. The
host country of the largest foreign direct investment in developing countries supports
the success of its policies. However.Furthermore, Foreign direct investment has the
potential to create jobs and employment, often followed by higher wages to the host
country and it also provides the benefits of cost reduction by achieving economies of
scale and coordination advantages, especially for integrated supply chains. From a
strategic control perspective, preference is given to direct investment rather than
licensing and franchising, where management allows for the retention of technical
knowledge and intellectual property.