Trends and Determinants of Fdi Flows in Developed and Developing NATIONS 1990-94 TO 2011
Trends and Determinants of Fdi Flows in Developed and Developing NATIONS 1990-94 TO 2011
Trends and Determinants of Fdi Flows in Developed and Developing NATIONS 1990-94 TO 2011
Web Site: www.ijaiem.org Email: editor@ijaiem.org, editorijaiem@gmail.com Volume 2, Issue 12, December 2013 ISSN 2319 - 4847
TRENDS AND DETERMINANTS OF FDI FLOWS IN DEVELOPED AND DEVELOPING NATIONS 1990-94 TO 2011
1
Dr. S.S.Jeyaraj
Business Studies Lecturer, Department of Commerce and Accounting, International Universal (Junior College), Jakarta, Indonesia.
Abstract
Traditionally, foreign direct investment has been mostly the exclusive preserve of the developed countries. However, the past few decades saw the emergence of foreign direct investment from the ranks of developing countries. Foreign direct investment brings to host countries capital, productive facilities, technology transfers, gross domestic product as well as new jobs and management expertise. Foreign direct investment inflows of developing countries trends lead to impact of some common determinants like market seeking, resource seeking and efficiency seeking factors. This paper explores growth and principal sources of investment, trends, patterns, and implications of the new phenomenon. Major findings of this study is that while there has been a perceptible rise in developing country foreign direct investment abroad, the field is still dominated by a few developed countries, although their dominance is on the decline. Due to the global economic and financial crisis has had a strongly negative impact on transnational corporations, international investment faced a significant decline in foreign direct investment during 2005 and 2009. The Statistical data from 1990-94 to 2011 shows that developing countries with high and growing inward foreign direct investment because of Market characteristics, Costs, Natural resources, Infrastructure, Policy framework, Business support and promotion. Thus, the prospects for the rest of the developing countries are both gloomy and buoyant.
Key Words: Efficiency Seeking, Asian Countries, Exports, Foreign Direct Investment, GDP, and Market Seeking, [JEL classification: E22, F21, F23, O16]
INTRODUCTION
Obviously flows from the more industrialized to the less-industrialized countries or from capital-rich countries to capitalscarce poor nations. One of the primary motivations for developing countries to attract foreign direct investment (FDI) is to obtain advanced technology from developed countries and then base on this to establish domestic innovation capability. It usually involves participation in management, joint-venture, transfer of technology and expertise. Foreign Direct Investment plays an important role in the growth and development of the world economy, particularly in developed and developing nations. It helps in the economic development of a country where the investment is being made. This is especially applicable for the economically developing countries and done basically in the way of provision of capital inputs. In recent decades, however, a new phenomenon appeared in the world stage a reverse flow of FDI from developing to the developed as well as other developing countries. As a result of logical continuation of the process of globalization that has been going reverse rend since the second half of the 19th century. As is well recognized in the literature, there are several important channels through which inward FDI can benefit innovation activity of domestic firms in the host country. [1] It also assists in the promotion of the competition within the local input market of a country. Foreign Direct Investment helps to overtake the problem of low capital, low growth rate, untapped natural and human resources, high rate of inflation, unemployment, balance of payment and other structural and administrative rigidities. But only a few of the developing countries have been successful in attracting significant FDI flows. This paper reviews the recent substantiation on the level of FDI to developed and developing nations, in particular selected developing countries over the periods of 1994-95 to 2011.
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OBJECTIVES
Present study focuses the following areas. 1) To analyses the origin and growth of foreign direct investment in developed and developing countries from 94-95 to 2011. 2) To identify the suitable reasons for inflow of foreign direct investment in selected developing countries.
METHODOLOGY
The methodology followed in this present study has been mainly a literature study. The present study is based on econdary data. A wide range of secondary data has been collected from world economic outlook, books, relevant journals,
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Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics) Table-1 depicts that the global FDI trend and the share of developed, developing nations and transition economies. The share of FDI flows in developed and developing nations during the year 1990-94 is 68.7 and 30.6 per cent. In developing countries, FDI grows to a peak of 39.9 per cent in the year 2005 and declines to 33.5 per cent in 2006. In developed countries, FDI grows to a steady growth of 56.0 per cent and 63.4 per cent in 2005 and 2006. As a result of Asian Crisis, it has a small decline of 29.0 per cent to developing nations and grows to a peak of 69.8 per cent to developed nations during the year 1995-99. After 2001 the foreign direct investment flow slops into increasing trends to the developing nations and decreasing to developed nations. Despite the continuing effects of the global financial and economic crisis of 20082009 and the ongoing sovereign debt crises, surpassing the 20052007, pre crisis level for the first time, FDI flow slopes into declining trends until 2009. FDI flow in 2009 grows to 36.3 per cent than the previous year 29.1 per cent. In absolutely terms developing countries gamered FDI worth a mere $ 519.2 million in 2009 compared to whooping $606.million by developed countries. More than a quarter of total FDI inflows in 2006 went to the developing countries, which means that almost three-fourth of the worlds FDI inflows still went to the developed countries. This increase occurred against a background of higher profits of Transnational Corporations (TNCs) and relatively high economic growth in developing countries during the year.
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Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics) It could be understood from table-2 that share of FDI inflows by developed nations like Europe, North America and Other developed nations. During the year 1990-94, the share of Europe and its group of nations are 62.7 per cent and small decline to 59.1 in 1995-99. It grows to a peak of 77.3 per cent in 2004 and it declines to 53.2% in 2005 due to crisis. North America and Other developed nations share of FDI inflows has virtually changed every year. Other developed nations share of FDI inflows has negative trends (-2.4) per cent in 2006. FDI flows to developed nations in 2006 rose by 57%, well over the levels of the previous two years, and reached US$988.7 billion. The United States recovered its position as the largest single host country for Foreign Direct Investment in the world, overtaking the United Kingdom, the top FDI recipient in 2005. The European Union (EU) as a whole continued to be the largest host region, accounting for 25.7% of total foreign direct investment inflows in 2006.
FOREIGN DIRECT INVESTMENT AND DEVELOPING WORLD FOR THE PERIOD 199094 TO 2011
Foreign Direct Investment can be a significant driver of development in poor nations. It provides an inflow of foreign capital and funds, in addition to an increase in the transfer of skills, technology and job opportunities. Many of the East Asian tigers such as China, South Korea, Malaysia, Mexico, Argentina and Singapore benefited from investment abroad. The Commitment to Development Index ranks the "development-friendliness" of rich country investment policies. Table-3 FDI Inflows by host regions (Developing Nations) (US $ Millions 000s)
Region /Economy Developing Countries 1)Africa 9094 308.5 95-99 00 01 02 03 04 05 06 07 08 09 10 11
Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics) It could be inferred from table that developing countries inflow of FDI were increasing trends during same period, with FDI inflows increasing from $308.5 million in 1990-94 to $684.4 million in 2011. FDI inflows in 2006 exceeded 4.2 per cent their previous record level of 2005. High prices and buoyant global demand for commodities were once again a key factor, particularly in the oil industry, which attracted investment not only from developed countries but also from some developing nations. Africa, Cross-border M&As in the extraction and related service industries of Africa tripled in the first half of 2006, as compared to the same period in 2005. However, the FDI inflows in Africa began increasing slowly since 2000 with $9.8 billion and reached $57.8 billion in 2008. The regional foreign direct investment picture is not uniformly bright across
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FDI INFLOWS INTO SELECTED DEVELOPING COUNTRIES FOR THE PERIOD 1990-94 TO 2011
Table-4 shows that the share of FDI inflows into selected developing countries. It reveals that a substantial quantum of FDI flows into countries such as China, China Hong-Kong, Brazil, Argentina, Singapore, Malaysia and others. It is interesting to observe that China ranks first in the share of developing country for all the years and except in 2009. significant quantum of foreign direct investment flows into nations such as china, China (Hong Kong), Singapore, India, Brazil, Malaysia, Mexico, Chile and followed by others. Lumping together the share of the developing countries flows, conceals the highly unequal shares among the developing countries in FDI inflows. Disaggregation the data shows that only a small group of countries located in a few contiguous regions account for a large share of total FDI inflows. These are East Asia, Southeast Asia and South Asia, in particular India. It is interesting to observe that china ranks first in the share of developing nations and followed by China (Hong Kong) Singapore, Brazil and others. Table-4 FDI Inflows into Selected Developing Nations (US $ Millions 000s) (Share of Developing Nations Total)
Region /Economy Developing Nations Argentina Brazil Chile Mexico China China (Hong Kong) Korea (Republic) India Indonesia Malaysia Singapore 90- 94 308.5 (100) 15.1 (4.9) 7.6 (2.0) 6.0 (1.9) 27.1 (8.8) 80.1 (25.9) 22.9 (7.4) 3.8 (1.2) 2.1 (.7) 8.6 (2.7) 22.1 (7.1) 25.9 (8.4) 95-99 872.9 (100) 52.9 (6.1) 91.6 (10.5) 26.4 (3.2) 57.9 (6.6) 210.3 (24.1) 67.4 (7.7) 19.9 (2.3) 13.1 (1.5) 13.3 (1.5) 26.0 (2.9) 58.9 (6.7) 00 256.5 (100) 10.5 (4.1) 32.8 (12.8) 4.9 (1.9) 18.1 (7.1) 40.7 (15.9) 61.9 (24.2) 9.0 (3.5) 3.6 (1.4) -4.5 (-1.8) 3.8 (1.5) 16.5 (6.4) 01 214.7 (100) 2.2 (.1) 22.5 (10.5) 4.2 (1.9) 29.8 (13.9) 46.9 (21.8) 23.8 (11.1) 4.1 (1.9) 5.5 (2.6) -2.9 (-1.4) .6 (.3) 15.1 (7.3) 02 176.1 (100) 2.2 (1.2) 16.6 (9.4) 2.6 (1.4) 23.6 (13.4) 52.7 (29.9) 9.7 (5.5) 3.4 (1.9) 5.6 (3.2) .2 (.1) 3.2 (1.8) 6.4 (3.6) 03 183.9 (100) 1.7 (.9) 10.1 (5.5) 4.3 (2.3) 16.6 (9.0) 53.5 (29.1) 13.7 (7.4) 4.4 (2.4) 4.3 (2.3) -.5 (-.3) 2.5 (1.3) 11.9 (6.5) 04 291.9 (100) 4.1 (1.4) 18.1 (6.2) 7.2 (2.5) 23.8 (8.2) 60.6 (20.8) 34.0 (11.7) 8.9 (3.1) 5.8 (1.9) 1.9 (.6) 4.6 (1.6) 21.0 (7.2) 05 330.2 (100) 5.3 (1.6) 15.1 (4.6) 6.9 (2.1) 22.4 (6.8) 72.4 (21.9) 33.6 (10.2) 7.1 (2.1) 7.6 (2.3) 8.3 (2.5) 4.1 (1.2) 15.5 (4.7) 06 434.4 (100) 5.5 (1.3) 18.8 (4.3) 7.3 (1.7) 19.9 (4.6) 72.7 (16.7) 45.1 (10.4) 4.9 (1.1) 20.3 (4.7) 4.9 (1.1) 6.1 (1.4) 29.1 (6.7) 07 564.9 (100) 6.5 (1.1) 34.6 (6.1) 12.5 (2.2) 27.4 (4.9) 83.5 (14.8) 54.3 (9.6) 2.6 (.5) 25.0 (4.4) 6.9 (1.2) 8.5 (1.5) 35.8 (6.3) 08 630.0 (100) 9.7 (1.5) 45.1 (7.2) 15.2 (2.4) 23.7 (3.8) 108.3 (17.2) 59.6 (9.5) 8.4 (1.3) 40.4 (6.4) 9.3 (1.5) 7.3 (1.2) 10.9 (1.7) 09 478.3 (100) 4.9 (1.0) 25.9 (5.4) 12.7 (2.7) 12.5 (2.6) 95.0 (19.9) 48.4 (10.1) 5.8 (1.2) 34.6 (7.2) 4.9 (1.0) 1.4 (0.3) 16.8 (3.5) 10 616.7 (100) 7.1 (1.1) 48.5 (7.9) 15.4 (2.5) 20.7 (3.0) 115.0 (18.6) 71.1 (11.5) 8.5 (1.4) 24.2 (3.9) 13.8 (2.2) 9.1 (1.5) 48.6 (7.9) 11 684.4 (100) 7.2 (1.6) 66.7 (9.7) 17.4 (2.5) 19.6 (2.9) 123.9 (18.1) 83.2 (12.2) 4.7 (0.7) 32.6 (4.6) 18.9 (2.8) 1.2 (1.7) 64.0 (9.4)
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Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics) It could be inferred from the above table, in general FDI inflows increased in all major economic groups developed, developing and transition economies. In particular, developing countries accounted for 45 per cent of global foreign direct investment inflows in 2011. The increase was driven by East and South- East Asia and Latin America. In the midst of uncertainties over the global economy, global foreign direct investment flows rose by 16 per cent in 2011 to $1,524 million, up from $1,309 million in 2010. While the increase in developing and transition economies was driven mainly by robust green field investments, the growth in developed countries was due largely to cross-border M&As. East and South-East Asia still accounted for almost half of foreign direct investment in developing economies. Registering a 14 per cent increase, total foreign direct investment inflows to East and South- East Asia amounted to $336 million in 2011.China Consistently occupies the first position in FDI inflows among developing countries from 1990-94 to 2011 with billion $ 80.1and billion $123.9. It has second position with $40.7 billion in 2000 followed by China Hong Kong. The second largest recipient in the sub region, Hong Kong, China, saw its inflows increase to $83 billion a historic high as well. The country china Hong Kong came to the second position with from the year 1990-94 to 2011 with billion $ 22.9 to billion $ 83.2 followed by China. It has a small declined in the year 2002 and 2008 due to crisis. Association of Southeast Asian Nations (ASEAN), Singapore, Malaysia, Indonesia, Brunei and Darussalam saw a considerable rise in their foreign direct investment inflows. Major recipient economies in the Association of South-East Asian Nations (ASEAN) sub regions including Singapore, Malaysia and Indonesia also experienced a rise in inflows. Foreign direct investment inflows to developing Asia continued to grow, while South-East Asia and South Asia experienced faster foreign direct investment growth than East Asia. In Southeast Asia, the five ASEAN member-countries Singapore, Malaysia, Indonesia, Thailand and Vietnam accounted for more than 90% of the total FDI inflows and outflows in 2006, while the rest, which was less than 10 per cent was shared among the Philippines and four other ASEAN member-countries (Brunei, Laos, Cambodia and Myanmar). Among five countries earlier mentioned, Singapore occupies the first position, getting the lions share. Singapore came to the second and third position with billion $48.6 in 2010 and $35.8 in 2007, $ 16.5 in 95-99, $ 48.6 in 2010 respectively. It came to the fourth and fifth position during the year 2011, 90-94 and 2000, 2009. In 2008, Singapore has tremendous changes in FDI due to crisis. Low-income countries namely Cambodia, the Lao Peoples Democratic Republic and Myanmar were generally good as well, though Vietnam declined slightly. The country Vietnam came to the last position with selected developing countries. It has the declined the growth rate of FDI in 90-94, 94-99, 2000 and 2001. It has a steady growth rate from 2002 onwards until 2011 except 2009 and 2010. Although natural disaster in Thailand disrupted production by foreign affiliates in the country, particularly in the automobile and electronic industries, and exposed a weakness of the current supply-chain management systems, foreign direct investment inflows to the country remained at a high level of nearly $10 million, only marginally lower than that of 2010. Inflows to the Republic of Korea and Taiwan Province of China declined to $4.7 million and -$2 million in 2011 respectively. West Asia witnessed a 16 per cent decline in FDI flows in 2011 despite the strong rise of foreign direct investment in Turkey. The country Turkey has a steady growth rate in FDI among developing countries from 2002 onward until 2007 with billion $3.4 (.6%) and $15.9 (3.9%) and it had declined in 2008, 2009 and 2010.0. FDI in China - Foreign direct investment in China, also known as RFDI (renminbi foreign direct investment), has increased considerably in the last decade, reaching $59.1 billion in the first six months of 2012, making China the largest recipient of foreign direct investment and topping the United States which had $57.4 billion of foreign direct investment.[33] During the global financial crisis FDI fell by over one-third in 2009 but rebounded in 2010.[34] Overall, as East Asian countries, particularly China, have continued to experience rising wages and production costs, the relative competitiveness of ASEAN in manufacturing has been enhanced. Foreign direct investment flows to China reached a historically high level of $124 million in 2011. Accordingly, some foreign affiliates in Chinas coastal regions are relocating to South-East Asia, while others are moving their production facilities to inland China. The two large emerging economies, China and India, saw inflows rise by nearly 8 per cent and by 31 per cent, respectively. FDI in India - Foreign investment was introduced in 1991 as Foreign Exchange Management Act (FEMA), driven by Minister Manmohan Singh. As Singh subsequently became a prime minister, this has been one of his top political problems, even in the current (2012) election.[35][36] India disallowed overseas corporate bodies (OCB) to invest in India.[37] Starting from a baseline of less than $1 billion in 1990, a recent UNCTAD survey projected India as the second most important foreign direct investment destination (after China) for transnational corporations during 20102012. As per the data, the sectors that attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, US and UK were among the leading sources of foreign direct
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Table 5 shows the largest selected developing countries recipients of FDI for the period 1990-94 to 2011. The best performers are the Eastern Asian Countries China consistently ranks the first position in FDI inflows from 1990-94 to 2011 except 2000 and followed by Hong Kong special Administrative Region of China. In the year 2000 China Hong Kong ranked no.1 position with 24.2%. This is the first time that this country achieved the first position it was in the year 2000. China Hong Kong dominate second largest position of FDI in the developing countries during the year 2004 onwards until 2011 with 7.7% in 95-99, 11.1% in 2001 and 7.4% in 2003 occupies third position and in the year 90-94 with 7.4%and 2002 with 5.5% in. The country India came to the third position in the year 2009 with 7.2% and fourth largest recipient of FDI inflow during the year 2006 and 2008 with 4.7% and 6.4% respectively. In the year 2010 and 2011, India occupies fifth position with 3.9% and 4.6% of the total inflow of FDI. Mexico and Brazil, in that order, remained the largest recipient nations with inflows remaining virtually at the same level in Mexico and increasing by 6% in Brazil, in spite of a fall in cross-border M&As. The country Mexico came to the second position with 8.8% in 90-94, 13.9% in 2000, 13.9% in 2001, 13.4% in 2002 and 9.0% in 2003. In the year 2004, 2005 with 8.2%, 6.8% and in 2000 with 7.1% and in 95-99, 2007and 2008 with 6.6%, 4.9%, 3.8% occupies third, fourth and fifth position respectively. The country Brazil came to the second position with 10.5% in 95-99, 12.8% in 2000, 9.4% in 2002, 7.2% in 2008, 7.2% in 2010 and 9.7% in 2011 occupies third position and in the year 2001, 2007 and 2009 occupies in forth position respectively. For these countries this was the first time to achieve the target. Association of South-East Asian Nations (ASEAN) sub regions including Indonesia, Malaysia and Singapore also experienced a rise in inflows. Singapore came to the third position during the year 90-94 with 8.4% and 6.7% in 2006, 6.3% in 2007 respectively. In 95-99 with 6.7%, 6.5% in 2003, 7.2% in 2004, 4.7% in 2005, 7.9% in 2010 and 9.4% in 2011 occupies consecutive third rank of FDI inflows among the developing countries. The country Argentina occupies sixth position during 4.9% in 90-94, 6.1% in 95-99 and 6.1%in 2001 respectively. Chile came to the seventh, eighth, ninth and tenth position during t95-99, 2008, 2010 and 2000, 2001, 2003 & 2011and 2009.
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CONCLUSION
Over the last decades (five years) except 2005 and 2009, Foreign Direct Investment in developed and developing nations has been highly concentrated in china, China (Hong Kong), Singapore, India, Brazil and Argentina. Political solidity, cheaper labor cost, high quality of infrastructure facilities, low tax rate and large market size, are amongst the major determinants in the decision to invest in these nations. High FDI-Gross Domestic Product ratio also leads the investors to invest in those countries. For the vast majority of developing nations and other developed nations in European Unions, Foreign Direct Investment is low. The structural weaknesses of these economies, inefficiencies of their small markets, their skill shortages and weak technological capabilities are all characteristics that depress the prospective profitability of investment. Growing fiscal shortage, the slowdown of economic reforms, inflexible labor laws, and high rate of inflation has further slow down the progress. The developing and some developed nations must tackle Market characteristics (local and regional), Costs (including labor, transport and other inputs), Natural resources (availability and quality), Infrastructure, Policy framework, Business support and promotion all the above mentioned problems within a short whilst with strapping economic policies. Until the constraints on possible investment are addressed, the FDI flow will not grow in the developing nations.
REFERENCES
BOOKS [1] Buckley, P.J., and Casson, M. (1976). The Future of the Multinational Enterprise (1st edition). London: Macmillan, (Chapter 2). [2] Kindleberger, C. P. (1969). American Business Abroad: Six Lectures on Foreign Direct Investment. New Haven, CT: Yale University Press. [3] Lipsey, R.E. (1998). Changing patterns of international investments in and by the United States, in Martin Feldstein, edition, The United States in the World Economy, Chicago, University of Chicago Press. [4] Foreign Direct Investment and Development Geneva and New York, United Nations Conference on Trade and Development 1999 p.1925. WORKING PAPERS [1] [1] Lipsey, Robert E. (2001) Foreign Direct Investors in Three Financial Crises, NBER Working Paper No. 8084.
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__________________________________________________________________________________________________ FDI GDP MNEs WPC TNCs EU M&As ASEAN HSBC GCC RFDI FEMA OCB UNCTAD IIAS SWFS - Foreign Direct Investment - Gross Domestic Product - Multi-National Enterprises - World Pensions Council - Transnational Corporations - European Union - Merger and Acquisitions - Association of Southeast Asian Nations - Hong Kong and Shanghai Banking Corporation - Gulf Co-operation Council - Renminbi Foreign Direct Investment - Foreign Exchange Management Act - Overseas Corporate Bodies - United Nations Conference on Trade and Development - International Institute of Asian Studies - Sovereign Wealth Funds
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Dr.S.S Jeyaraj have received my M.com degree from Madurai Kamaraj University, Madurai in 1996. I have been awarded my Ph.D degree on the title of Occupational stress among the teachers of the higher secondary schools in Madurai district, Tamil Nadu, by Madurai Kamaraj University, Madurai in the year 2011. Also I earned my M.Phil degree from Madurai Kamaraj University, Madurai, in 2001, thesis on the title of Job satisfaction of workers. A study with reference to Sri Meenakshi Spinning Mills Ltd, Madurai. I have published research articles both in national and international journals and also attended various workshops and seminars. Currently, I have been working for International Junior College as a lecturer in business studies at Jakarta, Indonesia.
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