國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
2. Theories of Foreign Direct Investment
2.1 Terminology and Distinction
The common understanding of the term Foreign Direct Investment is that of a capital investment (i.e. acquisition of a substantial share of a company) with the aim of exerting influence on the management. (Duce 2003, 2) Often several aims prevail, yet control is central to the definition of direct investment. (Haas, Neumair & Schlesinger 2009, 80) FDI can either take the form of equity capital investment, reinvestment of profits, investment of real assets as well as financial- and business loans. The direct investment is only termed “foreign”, if giver and receiver do not reside in the same country and a monetary flow across borders is created. In Foreign Direct Investment, capital is transferred from one actor to another. This capital can take many forms, including not only money, but also goods, trademarks, knowledge or technology.
The term FDI needs to be distinguished from that of Portfolio Investment. Portfolio Investment only aims to reap profit and diversify risks, yet has no interest in creating actual managerial control on the side of the investor. Portfolio Investments are furthermore capital based, i.e. they do not entail the transfer of intangible assets.
(Neumair 2006, 41-60)
Admittedly, the ambiguity of the term Foreign Direct Investment may not be realized at first sight. In managerial practice, it is difficult to establish any clear notion of the term “influence / control” that is central to FDI. Following a definition by the International Monetary Fund, a direct investment requires at least 10 per cent shareholding from abroad to be termed Foreign Direct Investment. Other sources suggest a number of around 25 per cent with regards to a credible influence to be exerted. The German Central Bank has long followed this approach, but has returned to the 10 per cent threshold in 1999. (IMF 2004) This paper will therefore proceed in accordance to the established term of understanding of 10 per cent.
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
2.2 Categories of FDI
Foreign Direct Investment takes several distinct forms. First a line needs to be drawn between fully controlled enterprises and those where only partial ownership is held.
Fully controlled enterprises are usually termed Greenfield Investments, since they are either the product of a company foundation (be it a subsidiary or representative office) or result from the acquisition of an already existing company. If a plant previously employed for another industrial purpose is remodeled in the investment process, this is termed Brownfield Investment. It entails a significant change in the means of
production and personnel. (Lukas 2004, 83)
The second form of FDI is the partial holding (below 100 per cent) by a foreign investor. This can either be the case in the foundation of a cooperative venture
between two or more companies, usually termed Joint-Venture or a partial acquisition as well as partial consolidation. Today, acquisition and consolidation are most often termed Mergers & Acquisitions.
Furthermore, OFDI can be separated into horizontal and vertical investments.
Horizontal investment refers to investments within the same or similar part of the value chain of a parent company. Vertical investments refer to either a position in the value chain that lies before or after the position of the parent company. This means that vertical investment would either engage in raw materials or in sales, both located before and after the actual production activity of the parent company.
2.3 Motivations behind Foreign Direct Investment
Foreign Direct Investment can furthermore be categorized according to its motivation.
Overall, several motivations at the same time may apply for a single case.
The first category of objectives is market-seeking. In this case, FDI has the aim of developing or maintaining economic activity with a foreign market. This investment can on the one hand be done with the aim of furthering export activity (export-oriented market seeking) or on the other with the domestic market in mind (internal
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
market seeking) if the investment primarily furthers activity in this internal market.
Suppliers often internationalize with this objective in mind. If their customers outsource abroad they are forced to undertake market-seeking investment in order to ensure their competitive positioning in the outsourcing market of their customers and on the domestic market alike. For suppliers in such constellations, this investment may further be encouraged through custom duties, import quotas and additional taxes if they keep production domestic yet need to supply at competitive prices to their customers abroad.
Secondly FDI may be efficiency-seeking. This type of investment aims to improve cost- and profit structures through the remodeling of the value chain. The effective balance between different markets and locations helps a company to remain
profitable. This type of investment is largely known under the term “Outsourcing”- i.e. the relocation of production facilities into countries with lower labor cost. This has particularly been the case for companies from developed countries that move their labor-intensive manufacturing or services abroad in order to cut costs.
Third, FDI may be resource-seeking. The motivation behind such investment aims to ensure the supply with resources needed for production purposes. These may include natural resources like oil and gas or pre-processed parts for further production. This type of direct investment has gained increasing prominence with regards to mineral products, so called “rare earths”. Most countries not only control the export quota for their domestic production of this resource, but also place large investments in
extracting companies in Australia, to name just one example.
Fourth, FDI may be asset-seeking. This type of investment aims to secure man-made assets, such as knowledge or technology. As these are man-made products, they come in forms like patents or brands that contain their own market value, but can also come in the form of management know-how or technological expertise.
Fifth, FDI may be encouraged by various other aspects. Countries acknowledge the importance of foreign direct investment in developing their economy. Most countries therefore vie for investors through monetary or regulatory incentives. Monetary
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
incentives can either come in the form of subsidies or tax reductions and regulatory incentives mostly in the form of particularly soft legal regulatory frameworks (for example in environmental standards or company foundation procedures) for foreign investors. Many countries are furthermore actively promoting themselves through national investment agencies and even cities try to attract investors through regional marketing.
Not only the host country plays a prominent role in shaping an investment decision, but also the OFDI framework of the sending country. The investment may be
politically encouraged through governmental agencies, consultancy, financial aid and preferable access to capital or simply be ordered as in the case of many State-Owned Enterprises (SOE).
‧
國立 政 治 大 學