Countries find themselves having to intervene in FDI (foreign direct investment) through a multitude means, often doing so to protect the nation’s cultural customs, the eventuality of creating more jobs, as well to protect domestic companies. Nations sometimes enact laws, develop new regulations, and at time will create administrative delays for companies dealing out of foreign countries attempting to expand their business opportunities into the nation in question. Important to note that international FDI has been decreasing globally, and is now a sought out source from many nations, attempting to attract the likes of multinational firm investment. This is increasing tensions between competing countries who are vigorously attempting to bring in new sources of development capital. This result in national competition for investment which has lead to the government needing to intervene, by enacting policies that will encourage or thwart foreign direct investment.
What is a balance of payments? A balance of payments is an accounting system that takes account of all the outflow payments made by a given country, (Canada to the U.S) to organizations in other nations; and all inflow payments coming into the country (U.S to Canada).
Reasons why a government in a host country will intervene
The two main reasons why host nations will make decisions in regards to deterring international companies FDI, is balance-of-payments, and to obtain resources and benefits.
Balance of Payments
Intervening is sometimes the only way to keep their balance of payments under control, and maintained at a favourable level. This is so because, FDI inflows are recorded as an inclusion to the balance of payments, as a country often gets a balance of payments increase when more initial FDI inflows. Further, nations often impose local content requirements on foreign investors coming into the country in question for the purpose of producing a good or service. This enables more local businesses to supply the market; this thus decreases imports and thereby improves the nation’s balance-of-payments. By reducing foreign suppliers in the host country, this increases the likelihood that local suppliers will begin exporting, which by doing so will as well have a positive effect on the host countries balance of payments.
Obtains Resources and Benefits
Governments may intervene in FDI flows as a way to obtain more resources and national benefits, such as (1) increased access to technology, and (2) new management skills and employment.
+ Access to technology: By investing in technology, whether a new improvement in products, which can inadvertently increase national productivity, and competiveness of the host country in international markets. Singapore for example, has been successful at attracting other nations FDI. The German company, Siemens, had chosen Singapore as their Asian site, to develop microelectronics designs.
+ Management skills and employment: Many ex-communist countries, have been encouraging FDI, as these nations are seeking outside management leaders, to come into their countries and develop their workforce in terms of making more host business activities more competitive at the international leadership level.
Reasons for Intervention by the Home Country
The home nations, (those countries in which international companies launch their FDI into other countries) at sometimes may seek to welcome or impede outflows of FDI for the following reasons:
Impeding FDI outflows
-Investing in other nations sends domestic resources abroad: This leads to fewer resources within the home country to use to develop and explore new opportunities at home.
-Outgoing Foreign Direct Investment, may damage a nations balance of payments by taking the place of its exporting potentiality
-Jobs often that result from outgoing investments, may replace those jobs created at first in the home country.
Promoting FDI outflows
-FDI outflows can increase a nation’s long-term competiveness within the global market
-Nations sometimes foster FDI as a way to increase their control over industries that are outdated and use obsolete technology, and or employ workers who work for lower wages. These kinds of industries are known as ‘Sunset Industries’. This can prove useful to a home country because, this allows some of these jobs to go international, thus being subject to innovations in training, which would result in a higher-paid workforce, thus increasing their “economies towards sunrise industries”. [1]
Source
[1] Wild, John J. (2004) International Business: The Challenges of Globalization. Third Edition. Pearson Prentice Hall. Pg.219