INB 20012 Asian Regionalism & Global Business

Political Economy of Trade and Investment

CRICOS 00111D
TOID 3069
 What is trade?

–The exchange of goods and services between

countries, encompassing both imports (goods brought
into a country) and exports (goods sold to another
country).

–This exchange is a significant driver and indicator of

globalization.
 What is free trade?

–Free trade refers to a situation where a government

does not attempt to restrict what its citizens can buy
from another country or what they can sell to another
country.
–Although many nations are committed to free trade,
they tend to intervene in international trade to protect
the interests of politically important groups.
 Protectionism

▪ Government intervention in international trade to

protect or advance the interests of certain sections
economy or the nation as a whole.
 What is foreign direct investment? (Action)

• Foreign direct investment (FDI) occurs when a firm

invests directly in new facilities to produce or market
in a foreign country

• A firm engaged in FDI is a multinational enterprise

 Foreign Direct Investment (Strategy)

An investment strategy where an individual or business

from one country invests directly in production or business
operations in another country,

entitling the investor to a significant degree of control,

typically defined as owning certain percentage of the
company.
 Forms of FDI
1) Greenfield investment - the establishment of a wholly new
operation in a foreign country

2) Acquisition or merging - with an existing firm in the foreign

country

3) Joint Ventures: a collaborative partnership where two or more

businesses share resources and risks to create a separate
enterprise, benefiting from local market knowledge and distribution
networks while splitting responsibilities and returns.
Multinational enterprises
Why invest in foreign countries?
 Motivations for FDI- Why invest?

1. Market Seeking: to access new customer bases, diversify sales, and

mitigate risks associated with economic downturns at home, often seeking
emerging markets with growth potential.
2. Resource Seeking: To acquire strategic resources such as minerals, rare
raw materials, labor, or technological knowledge that may not be available
or as cost-effective in the home country.
3. Efficiency Seeking: Efficiency-seeking FDI aims to optimize production
costs by relocating operations to regions with lower labor or raw material
costs or more conducive regulatory and operational environments,
enhancing productivity and profitability.
2 ways to look at FDI:

The flow of FDI - the amount of FDI undertaken over a given

time period
• Outflows of FDI are the flows of FDI out of a country
• Inflows of FDI are the flows of FDI into a country
 Flow of FDI

1. The flow of FDI - the amount of FDI undertaken over

a given time period

Example:

In 2024, Toyota invested $500 million to build a new

manufacturing plant in the United States.

This $500 million is part of the FDI flow from Japan to the
U.S. for the year 2024.
 Stock of FDI
1. The stock of FDI - the total accumulated value of
foreign-owned assets at a given time

Example:
As of 2024, the total value of all Japanese investments
in the US— including factories, equipment, and other
business assets — amounts to $30 billion.
It is the FDI stock from Japan in the U.S. at the end of
2024.
 Stock of FDI
• As of the end of 2023, Japan's foreign direct investment (FDI) stock in the
United States was approximately $783.3 billion, making Japan the
largest foreign investor in the U.S. .

• This figure represents the total accumulated value of Japanese-owned

assets in the U.S., including investments in sectors such as
manufacturing, finance, automotive and electronics

• Japan continued to be a leading investor in the U.S., with annual FDI

flows of about $40 billion, alongside the United Kingdom and Canada
What are the Trends in FDI
in the era of Globalization?
 Trends in FDI
• Both the flow and stock of FDI in the world economy
have increased over the last 35 years
• FDI has grown more rapidly than world trade and world
output because:
• Firms still fear protectionist policies
• The shift toward democratic political institutions and
free market economies encourages FDI
• Globalization is prompting firms to ensure they have
a significant presence in many regions of the world
 Protectionist policies
Protectionist policies are government measures designed to
limit international trade to benefit domestic industries.
These policies aim to shield local businesses from foreign
competition, often by implementing measures like
• tariffs (taxes on imports),
• quotas (limits on imported quantities), or
• subsidies for domestic producers.
Trends in FDI

FDI Outflows
 The Direction of FDI

• Historically, most FDI has been directed at the developed nations

(Why?)
• US is a favorite target as is the European Union
• More recently, developing nations have been the recipients of FDI
(Why?)
• South, East, and Southeast Asia, and particularly China have
received significant inflows
• Latin America is also emerging as an important region for FDI
FDI in the automobile industry
FDI inflows from Japan to US
 Investment Amount
Company Year(s) U.S. Local Sales (Est.)
Description (USD)
Motorcycle plant in
Honda 1979 ~$0.1 billion ~1 million vehicles/year by 1999
Marysville, Ohio
First U.S. auto plant –
1982 Accord production ~$0.3 billion $15–20 billion/year (late 1990s)
begins
NUMMI JV with GM in
Toyota 1984 ~$1.0 billion ~300K vehicles/year from NUMMI
California
Georgetown, Kentucky –
1986–1988 ~$0.8 billion $15 billion/year by late 1990s
Camry plant
Smyrna, Tennessee
~500K vehicles/year by late
Nissan 1980–1983 auto manufacturing ~$0.6 billion
1990s
plant
Diamond-Star Motors JV
Mitsubishi 1985 ~$0.5 billion ~200K vehicles/year at its peak
with Chrysler in Illinois
Mitsubishi takes full
1991 - $2–4 billion/year (1990s)
control of Illinois plant
 E&E
Investment Amount
Company Year(s) U.S. Local Sales (Est.)
Description (USD)
R&D centers, Sony
~$1.5 billion
Sony 1990s Pictures, electronics $10+ billion/year (by late 1990s)
(est.)
manufacturing
Toshiba,
Semiconductor
NEC, ~$2.0 billion
1980s factories and R&D ~$5–7 billion/year combined
Hitachi, total (est.)
centers in U.S.
Fujitsu
 CKD- Completely Knocked Down
CKD Assembly in Malaysia:

Completely Knocked Down (CKD):

• This refers to a manufacturing process where vehicle components are shipped in parts
and then assembled at a local factory.

Cost and Taxes:

• While CKD assembly helps to lower import costs and taxes compared to Completely
Built Units (CBU), there are still substantial excise duties on foreign-made cars in
Malaysia, making them more expensive than in other countries.
 CBU -Completely Built-Up

• CBU stands for Completely Built-Up, referring to vehicles

that are fully assembled and imported as complete
units.
 Why do firms prefer FDI to either:
1. Exporting - producing goods at home and then shipping them to the
receiving country for sale

2. Licensing - granting a foreign entity (company) the right to produce

and sell the firm’s product in return for a royalty fee on every unit
that the foreign entity sells

Answer:
To answer this question, we need to look at the limitations of exporting
and licensing, and the advantages of FDI
Break
 Limitations & Advantages

1) Export

2) Licensing

3) FDI
 1. Limitations of Exporting

- An exporting strategy can be limited by transportation

costs and trade barriers
• When transportation costs are high, exporting can be
unprofitable
• FDI may be a response to actual or threatened trade
barriers such as import tariffs or quotas
 2. Limitations of Licensing

- internalization theory (also known as market imperfections)

1. Licensing could result in a firm’s giving away valuable
technological know-how to a potential foreign competitor
2. Licensing does not give a firm the tight control over
manufacturing, marketing, and strategy in a foreign
country that may be required to maximize its profitability
 3. Advantages of Foreign Direct Investment –

• FDI will be favored over exporting when:

• Transportation costs are high
• Trade barriers are high
• FDI will be favored over licensing when:
• The firm wants control over its technological know-how
• The firm wants control over its operations and business strategy
• The firm’s capabilities are not amenable to licensing
 Shifting Ideology

• In recent years, there has been a strong shift toward the free
market stance creating:
• A surge in the volume of FDI worldwide
• An increase in the volume of FDI directed at countries
that have recently liberalized their regimes
• But, some countries are becoming more hostile to FDI
 Question: What are the benefits and costs of FDI?

Answer:
The benefits and costs of FDI must be explored from the
perspective of both -
• Host (receiving) country and
• Home (source) country
Host Country Benefits
 Host Country Benefits

1. Resource Transfer Effects

• FDI can bring capital, technology, and management resources

that would otherwise not be available

2. Employment Effects

• FDI can bring jobs that would otherwise not be created there
 Host Country Benefits
3. Balance-of-Payments Effects

• The balance-of-payments account records a country’s

payments to and receipts from other countries

• The current account records a country’s export and import of

goods and services
• A surplus is usually favored over a deficit
 Host Country Benefits
4. Effect on Competition and Economic Growth
• FDI in the form of greenfield investment:
• Increases the level of competition in a market (Why?)
• Drives down prices (Why?)

• Increased competition can lead to:

• Increased productivity growth
• Product and process innovation
• Greater economic growth
 Host Country Cost

1. Adverse Effects on Competition

• The subsidiaries of foreign MNEs may have greater economic
power than local competitors because they are larger
• The MNE could draw on funds generated elsewhere to
subsidize costs in the local market
• Doing so could allow the MNE to drive local competitors
out of the market and create a monopoly position
 Host Country Cost

3. National Sovereignty and Autonomy

• FDI can mean some loss of economic independence

• Key decisions that can affect the host country’s economy will
be made by a foreign parent that has no real commitment to
the host country, and over which the host country’s
government has no real control
 Host Country Benefits
4. Effect on Competition and Economic Growth
• FDI in the form of greenfield investment:
• Increases the level of competition in a market (Why?)
• Drives down prices (Why?)

• Increased competition can lead to:

• Increased productivity growth
• Product and process innovation
• Greater economic growth
Home Country Benefits
 Home Country Benefits

1. The effect on the capital account of the home country’s

balance of payments from the inward flow of foreign earnings
2. The employment effects that arise from outward FDI
3. The gains from learning valuable skills from foreign markets
that can subsequently be transferred back to the home
country
Home Country Costs
 Home Country Costs

• The balance-of-payments
• The balance of payments suffers from the initial capital
outflow required to finance the FDI
• The current account is negatively affected if the purpose
of the FDI is to serve the home market from a low-cost
production location
• Employment effects of outward FDI
• If the home country is suffering from unemployment,
there may be concern about the export of jobs
imperialist domination

• Imperialist domination refers to the political and economic control

one nation exerts over another, often involving territorial acquisition
and exploitation.
 Challenges and Risks of FDI

Navigating Investment Hurdles

Political Risks
Investors confront political risks stemming from unstable governments, regulatory changes, or civil
unrest that could jeopardize their investments, necessitating robust risk management and
contingency planning.
Economic Risks
Economic instability in host countries can manifest through fluctuating exchange rates, inflation, and
overall market volatility, potentially undermining the profitability and viability of foreign investments.
Cultural Differences
• Cultural disparities can pose significant challenges related to management practices, consumer
behavior, and local business etiquette, impacting operational success and integration in the foreign
environment.
Case Studies of Successful FDI

Real-world Examples and Insights

• Examples from Different Regions: Examining varied global case
studies illustrates the diverse strategies and outcomes of FDI across
different regions, showcasing adaptable approaches to local
markets and conditions.
• Lessons Learned: Analyzing successful FDI initiatives reveals critical
lessons regarding market entry strategies, risk management
practices, and the importance of local partnerships in navigating the
complexities of foreign environments.
• Best Practices: Identifying best practices from successful FDI can
guide prospective investors in creating comprehensive strategies
that minimize risk while maximizing local engagement and benefits.
• Conclusion: The Future of FDILooking Ahead
• Emerging Trends: As global markets evolve, emerging trends in FDI include digital transformation, increased focus on sustainability, and shifts
toward localizing supply chains to mitigate risks, making investments more resilient.

• Sustainability in FDI: With a rising emphasis on sustainability, investors are increasingly evaluating not just the profitability but also the
environmental and social impacts of their investments, indicating a shift toward responsible investment.

• Strategic Recommendations: To navigate future FDI landscapes, businesses should emphasize flexibility, cultural competency, and the
integration of sustainable practices within their investment strategies to thrive in changing environments.

• Photo by Hu Chen on Unsplash

• 8
• In summary, the future of Foreign Direct Investment is continually evolving, impacted by emerging trends that, above all, denote a shift towards
sustainability and technological advancement. As investors reassess their strategic frameworks to adapt to these changes, we can expect to
witness a recalibration of how investment decisions are made—where socio-environmental considerations are put on par with traditional
financial metrics. Ultimately, embracing these shifts will not only yield long-term profitability but also foster a more sustainable global
investment ecosystem.
A Decision Framework
 Key Takeaways: Protectionism
• Protectionism is a government-imposed trade policy by which
countries attempt to protect their industries and workers from
foreign competition.
• It is implemented by tariffs, quotas on import and exports,
product standard
• While it may be of temporary benefit in developing countries,
total protectionism typically harms the country’s economy,
industries, workers, and consumers.