If the multinational internalises then it may realise valuable cost savings and Giddy (1976) says that such economies might arise through bypassing: imperfect markets for the firm’s resources, outputs and government barriers to entry. Internalizing markets through FDI does have its drawbacks as it imposes costs on the firm through additional communication costs, the cost of operating in an unfamiliar environment, the cost of overcoming political and social preferences and the administrative costs of managing an internal market.
The work by Buckley and Casson deepens the market imperfections analysis by focusing upon intermediate product markets rather than on the final product markets. Furthermore, like Multinational Companies, Governments might have different motives or objectives toward FDI. Tayeb (2000) argues that governments’ principal responsibility is the welfare and protection of their nations. For example, Chinese Government aims at steadily improving people’s standard of life, both in material and cultural respects. Governments are interested in a wide range of social goals, which involve economic and non-economic objectives.
As Dunning (1993) suggests, economic objectives include economic growth, reasonably full employment or reduction in unemployment, currency stability, etc. Governments enact policies that will be consistent with their economic strategic plans for growth and development. Non-economic objectives, may be affected by economic policy, include a right distribution of income and wealth, sovereignty over decision taking, political and cultural identity. Government goals are dynamic. On one hand, the goals changes over time; on the other hand, there are trade-offs among the objectives.
To the end, governments formulate and enact policies to fulfil these objectives. With the growing liberalization of the world macroeconomic environment and the movement towards closer economic interdependent between nations, a competitive perspective is becoming increasingly common in governmental policy-making. Governments enact policies to upgrade the competitiveness of their domestic resources and capabilities and to evolve a pattern of development which is consistent with their long-term dynamic comparative advantage (Dunning, 1972).
In terms of the objectives, the typical motivations of host government towards FDI may be categorized into economic growth, including technological transfer, managerial skills, and capital formation, employment, the balance of payment and trade, market structure and competition, social and cultural issues, sovereignty, and national security. The openness of economies- freer flow of capital between nations expectedly influences positively the amount of FDI i. e.
, absence of capital controls allows an organisation to fund unrestricted overseas ventures according to Kyrkilis and Pantelidis (2003), allowing firms to enter markets that they would otherwise be unable to. The exchange rate can also be a favourable (or unfavourable) facilitator for firms from wealthier countries entering other nations, where the rate may mean that the entering nation has a larger(or smaller) amount of capital for their FDI – creating economies of scale. FDI requires significant amounts of capital and can also result in increased capital abundance through low interest rates in the host country.
Countries such as China and India are becoming an increasingly more attractive market due to their stable political environment, favourable macroeconomic polices and availability of labour which can increase employment in that particular region, according to McDonald, Tuselmann and Heise (2003), as well as their close locations to large export markets according to a study by AtKearney (2004); China leading America as the most attractive candidate for FDI in all sectors, showing the current trends in FDI.
There is an importance of host country institutions in equity ownership decisions (Asiedu and Esfahani, 2001), that allow the movements of FDI to take place. It can often benefit the host country and their institutions, such as government, educational institutions and legal systems, through increasing funds. If the government has local content requirements in place, “may stimulate the local domestic economy by creating demand for local intermediate and primary products” (Lahiri and Ono, 1998), hence proving to be more of an advantage to the development of the economy of FDI recipients.
One of the main advantages of FDI is that it is said to have decreased the severity of the 1990’s Asian economic crisis according to Athukorala (2003), through the diversification of investment within the region, allowing Asia to decrease the impact of the financial collapse on six of the major regions in Asia, and has allowed them to free up their economies and become more liberalised in attracting FDI into their boarders.
FDI provides a way that the firm can overcome impediments to trade such as tariff barriers to overcome exporting blockages through setting up within a customs union and reaching their desired markets, as well as gaining technological knowledge transfer, location specific advantages, intangible resources according to Kyrkilis and Pantelidis (2003), and perhaps comparative advantages.
Gross domestic profit allows a country to measure the outputs, and hence the effects that FDI is having upon the nation – if the unit increases, this means that the country is reaping more financial benefit from the facilitation of investments into the country, according to Morgan and Katsikeas (1997), and the advantage of FDI is evident. The prominence of FDI clearly shows that it is successful, and that the capital flows between nations and willingness to locate subsidiaries overseas have amplified since the 1980’s as a result of its achievements.
An other reason that the governments encourage FDI is the technological and management skills that the Multinational Companies can bring to the country. For example, by technological transfer, China has made a significant leap forward and become the biggest manufacturing country in TV set, washing machine, and telephone. Now China is becoming increasingly important in the manufacturing industry of semi-conductor chips with the investment from Taiwan manufacturers.
The degree of technological spill over depends on the nature of the investment. Firstly, the spill over will be typically greater if the foreign firm invests through a joint venture or a licensing arrangement. China has been favouring joint venture, especially in high-tech fields. Secondly, the spill over will be greater if the affiliate works with local suppliers of key components or inputs. For example, foreign auto plants in China have been required localization of components.
Moreover, the spill over will be greater if the affiliate hire local people for key positions in the firm, and if the firm conducts R;D in the location. However, on one hand, Behrman (1970) argued that FDI might result in technological dependence because of the control of multinational companies over the new technology advanced. On the other hand, Hood and Young (1979) pointed out that the technology obtained might be inappropriate to the host country and such that led to unemployment and destruction of innovation, and the technology received might be too expensive.
They argued that technological dependence was not particularly important, rather, the appropriateness of the technology obtained, and the costs of the technology received, were more relevant because these factors would determine whether or not the recognized association between technology and economic growth was actually translated into net benefits at the host country level. Because FDI involves ownership and control of the affiliate operation, FDI may bring advanced managerial skills and entrepreneurial ability to host countries on a continuing basis.
Firstly, these skills and ability may improve the balance of local economy. Secondly, as Hood and Young (1979) state, local personnel who are trained to occupy managerial, financial and technical posts in the affiliate may later leave the firm and help to stimulate indigenous entrepreneurship. On the other hand, local firms, especially smaller enterprises, might be choked off by the competition of the affiliates.
Furthermore, for developing countries, the managerial skills may not give rise to positive contribution if they are little relevance to local normal ways of business operation. For example, in China, doing business relies heavily on personal relationship. As a conclusion, there are many reason for a company to undertake Foreign Direct Investment but there are also many reasons for a Government to do whatever they can to attract the companies to their country because it will benefit them and their citizens.