The Global Pattern of Foreign Direct Investment: 2000-2011 - Essay Example

? The Global Pattern of Foreign Direct Investment: 2000 Introduction Increasing world globalization has created an environment wherein inflows and outflows of foreign direct investment (FDI) have become an essential source of the modern economy. FDI has been understood as a net inflow of investment to acquire a lasting interest in a foreign equity (Moran, 2011). While there are a variety of competing perspectives regarding the impact of foreign direct investment, a number of overarching perspectives view attracting FDI as a large contributor to economic development and prosperity. Within this context of understanding countries have mobilized in a process of development where one of the primary strategic approaches has been the procurement of foreign direct investment (FDI). Still, there are varying perspectives both on the most efficient approach to attracting this mode of investment, as well as to the qualitative benefit of such investments for the host country. Indeed, in the early parts of the 20th century many emerging regions resisted FDI on the grounds that it was a form of neo-colonialism (Moran, 2011). Ultimately, patterns of foreign direct investment reveal not only the expanding nature of economic development, but also political and regulatory elements of these regions. This essay examines patterns of foreign direct investment throughout the 2000-2011 period in terms of a variety of conceptual frameworks. Analysis One of the overarching considerations in terms of patterns of foreign direct investment over the last decade has been the political and regulatory environment of the country receiving the inflow of investment. This understanding of FDI distinguishes itself from foreign direct investment as government aid to the developing. Indeed, it’s recognized that in the highest tier of FDI are African regions including the Democratic Republic of the Congo and Angola (Moran, 2011). Rather, patterns of foreign direct investment are considered in terms of conceptual frameworks of attraction. An overarching qualitative examination of such foreign direct investment patterns between 2000 and 2011 demonstrates that broad scale political elements are greatly linked to foreign direct investment. One considers that to a large degree prominent outflows of FDI emerge from democratic host countries. It follows that the last decade of FDI is largely linked to political structures. Consider that for the decade under investigation Cuba didn’t receive positive FDI until as late as 2004 ("Foreign investment," 2011). Since this period the region has witnessed gradual increases in FDI as trade restrictions have been eased. Another prominent example is that of Russia. Long a communist country, for the early part of the 2000’s the region experienced extremely limited FDI; this trend changed dramatically in the middle part of the decade as Russia received some of the greatest world increases of FDI, before a sharp decline in 2009 ("Foreign investment," 2011). Afghanistan is another startling example as this country had received close to no FDI prior to United States military intervention; indeed, this is true of many of the turbulent Middle Eastern countries. While these are dramatic examples they present a comprehensive portrait of foreign direct investment as intimately coupled with political risks. It should come as no surprise that in large part global patterns of foreign direct investment between 2000-2011 are greatly influenced by democratic political structures. Theoretical perspectives have consistently linked foreign direct investment to government policy. The pervading logic behind these investments is not a matter of great complexity. In these regards, investors have been understood to remain more apt to invest long-term companies and corporate interests based on the host country’s ability to create policy measures that are most conducive to such investment. The complexity emerges as theorists attempt to determine the appropriate government climate for such investments. Currently the United States receives the most foreign direct investments, leading economists to prominently link FDI to the democratic governmental structure (‘greyhill’). Within the confines of the democratic political structure there are a number of specific policy considerations that have been established. One of the most prominent theoretical perspectives on this matter is that foreign direct investment is directly responsive to changing economic situations. Jensen notes, “Elected politicians can no longer manipulate monetary policy, but monetary policy does remain responsive to changing economic conditions” (Jensen, p. 2). In this context of understanding, the nature of the democratic election process itself does not necessarily benefit foreign direct investment, but creates a governmental structure that is highly conducive to developing policies that aid FDI. This has been exemplified in much of the limited foreign direct investment into many of the unstable Middle Eastern states. The main notion is that the encouragement of foreign direct investment must be accomplished in a dynamic context and that the democratic governmental structure is most conducive to this dynamism. In addition to the importance of a dynamic government policy to foreign direct investment, there has been a number of other of patterns positively linking democracy to FDI in terms of stability. In these regards, pervasive notions of democratic governments having more stability are one of the primary contributors to an increase in FDI (Jensen). While such perspectives on the democratic political structure have been proven erroneous in specific contexts -- one considers the current economic fallout in Greece as a primary example -- it is oftentimes the perception that drives the reality. Another predominant link between democracy and FDI in terms of stability that has been thematic of the 2000-2011 periods is the democratic process of checks and balances. Jensen notes, “The institutional checks and balances associated with democratic systems decrease the likelihood of policy reversal, providing multinationals with a de facto commitment to policy stability” (Jensen, pg. 4). With the stability afforded by these checks and balances, corporations are able to more accurately forecast future returns. Ultimately, it is this stability that greatly mitigates risk and has in-part defined patterns of FDI in the past decade. While there are considerable arguments for the linkage of democracy to foreign direct investment patterns, counter-arguments exist to this proposition. The main notion is that the nature of governmental policy and foreign direct investment is not as multi-varied as some would contest. This perspective contends that the overwhelming link between foreign investments in a host country is the level of taxation. Jensen notes, “Conventional wisdom holds that nations woo multinationals by lowering taxation levels. This act, in turn, results in invidious fiscal competition—the race to the bottom (RTB) thesis” (Jensen, pg. 2). Indeed, what Jensen refers to as the race to the bottom is the theoretical understanding of fiscal policy competition wherein the host country that is able to offer the bottom level tax rate is the country that will receive the most FDI. Individuals such as Godspeed (2010, p. 10) have indicated that, “Tax exemption or tax holidays for FDI are used by 55% of developing countries but only 20% of OECD countries.” In this context of understanding, developing countries in the past decade sought to gain foreign direct investment through lower taxation, seemingly as a means of off-setting political risks. Ultimately, while the RTB theoretical perspective clearly holds some validity, in is undeniable that there are many elements of the democratic political structure that greatly contributed to foreign direct investment. Although political structures have a pronounced benefit to foreign direct investment a counter-perspective holds that such political risks can largely be mitigated by economic and regulatory benefits. One considers the extremely strong inflows of foreign direct investment into Communist China as a primary example of these trends. Between 2000 and 2011 China’s inflow of foreign direct investment increased from $38 billion to $185 billion, rivaling that of the United States ("Foreign investment," 2011). While investing in China still carries with its risks of corruption, the oftentimes-lax regulatory environment has also been leveraged by organizations in economically efficient ways. In considering patterns of foreign direct investment in China one considers that it fits directly into prominent theoretical models on FDI. The OLI paradigm, particularly locational advantages, is particularly apt in terms of these FDI patterns ("The oli paradigm," 2011). China’s economic structure and lax workplace regulations are such that it makes it provides Western based multinational corporations a competitive advantage to transfer manufacturing to the region. For instance, seminal United States computer and technology organization Apple, Inc. has outsourced much of its product manufacturing to China where cheap labor is so efficient that workers have to sign a pledge promising not to commit suicide ("You are not," 2011). In this context of understanding, China becomes a primary product cycle component for Western corporations needing product assembly. When considered from the Chinese perspective Western investment in manufacturing has been one of the great contributing factors to the rapid economic growth that occurred after opening to the West. To an extent these patterns of foreign direct investment can be understood in terms of the Heckscher–Ohlin model. Influenced by economist David Ricardo’s theory of comparative advantage, the model examines foreign direct occurring as countries focus on what they are most efficient (Moran, 2011). Within the spectrum of China and indeed many of the Asian countries, comparative advantage occurs as manufacturing production is implemented in these areas, while outflows of FDI are directed at high technology regions. Another prominent case consideration for foreign direct investment is India. While India’s population rivals China’s the country has received substantially less foreign direct investment over the past decade than China. Consider that China’s lowest level of foreign direct investment occurred in 2000 with $38 billion was still larger India highest annual figure of $36 billion in 2008 ("Foreign investment," 2011). There are a variety of explanations for these divergent patterns of FDI. One considers that to a great extent India’s development throughout the 20th century has been more uniform than that of China as British imperialism in the 19th century greatly contributed to modernization at a time when China remained largely shut-off from the West. Still, these divergent patterns of development do not go far enough in explicating the staggering disparity of inflows of foreign direct investment in the past decade. To a large extent it appears that despite concerns with corruption China has been more successful in promoting a more attractive business environment. One considers that the World Bank noted that on the Ease of Doing Business Index India ranked 133rd compared to China’s 89th ranking ("Ranking of economies," 2011). It’s also notable that India ranks higher on the Index of Economic Freedom than China ("Country rankings," 2011). In these regards, democratic structure cannot be viewed as a primary determinant of FDI. India is a unique case where democracy can actually be argued to have negatively impacted inflows of foreign direct investment. A recent Economist article notes that such stagnation is partially attributable to “the gumming up of the bureaucracy due to a wave of graft allegations. But it is also because no big reforms have taken place for years; and such is the dire state of India’s politics that it is hard to imagine any being imminent” ("The case for," 2011). One further considers that the nature of the global economy is such that the recent Western economic recession also impacted India more detrimentally than China. The comprehensive understanding of the patterns of foreign direct investment in India and China throughout the last decade reveals the increasing importance of creating an area that is attractive for investment rather than necessarily aligning one’s political allegiances with primary outflow contributors. In further understanding patterns of foreign direct investment in the 2000-2011 period one recognizes that in addition to the already overarching concerns, a large degree of FDI is industry drive. There are a variety of theoretical perspectives that have examined these patterns of economic development. Perhaps the most prominent such perspectives is Michael Porter’s diamond model. This approach considers that competitive advantage is both nationally and multi-nationally contingent on developing industry clusters, as the collaborative benefits of these clusters are essential to growth and innovation (Porter, 1998). Nobel Prize winner Paul Krugman through his investigations has also explored such perspectives into ‘new economic geography’ (Krugman, 2001). In terms of global patterns of foreign direct investment one recognizes that the most prominent examples of this conceptual framework are in the United States where high-technology clusters in areas such as Silicon Valley and Austin, Texas have provided the country with a competitive advantage in innovation and high technology. The nature of hi-technology itself is a major element of foreign direct investment as patents that create unique competitive advantages through barrier of entry oftentimes accompany such innovation. Again one considers the example of American technology firms such as Apple, Microsoft, or Intel where technological innovation has resulted in patents that drive equity evaluations and attract foreign investors. While such instances are perhaps the most readily apparent industry specific patterns of foreign direct investment are thematic in the past decade. One considers such instances in Russia where recent strategic measures in addressing the 2009 fall of in foreign direct investment have focused on industry specific measures. Aris (2010) notes that in recognizing the importance of attracting hi-technology investment Russia has set out to privatize many infrastructure projects. Such government approved industry projects in area such as transport, shipping, and port construction potentially create unique environments for foreign investors who would otherwise view Russia as an unattractive investment option. These are unique locational advantages that motivate many flows of FDI. One considers that although government intervention can create such industry specific means of FDI, many investment inflows remain simply a product of the invisible hand of the market directing funds to the most attractive areas of investment. One considers specific instances in regions such as African and India where telecommunications companies such as Nokia have invested extensively in product designs that implement SMS text messaging as a means of aiding farmers that had otherwise been exploited by corrupt business practices ("Nokia life tools," 2010). Ultimately, such patterns of foreign direct investment have not only occurred within the context of unstable and corrupt governments, but have actually been motivated by these very practices. Conclusion In conclusion, this essay has examined global patterns of foreign direct investment between the 2000 and 2011 period. In this context of understanding a number of broad ranging conceptual frameworks have been advanced that function as a means of articulating inflows of FDI. Democratic political structures have been demonstrated to be a major component of attracting foreign direct investment as such structures are more apt to stability and transparency. Still, countries such as China demonstrate that oftentimes ease of business can be a major contributing factor. Theoretical models including the OLI model and the product life cycle have demonstrated how regions such as China can outpace democratic regions such as India. Additionally, Porter’s diamond model of clustering has been implemented as a means of explaining specific industry movements of FDI. Ultimately, there is no single thorough-put determining foreign direct investment, but a cumulative array of competing motivations. References Aris, B. (2010). Kremlin targeting foreign direct investment (fdi) in drive to modernise russia's economy. 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