Running Head: Question B4

Topic: Critically review relevant theory and research and hence identify the most significant

reasons for emerging market multinationals to make a direct investment (FDI) in other

economies. You may illustrate your arguments using empirical case studies.

Subject:

Student Name:

University:

Date: 6th May 2022

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Introduction

Foreign direct investment is a foreign investment that allows an investor of a different to

invest in the home county and can have ownership in a foreign country. The organizations that

invest in FDI are called multinational companies (MNCs). A multinational corporation can

invest directly in foreign investment by setting up a new enterprise in a foreign country. This

may be called a greenfield investment or the acquisition of a foreign company (Rienda, 2018,

p.47). FDIs often take place in an open economy. Before investing the investor generally make

sure that there is a skilled workplace and there is a scope of prospective growth. FDI is not just a

capital investment but more than it. It may include provisions of management or technology as

well. The main features of FDI are, It helps in setting an effective control or at least it put a

significant impact on the business and helps in decision making in a foreign enterprise.

Case Study: The Bureau of Economic Analysis (BEA) helps in tracking the expenses in

US enterprises by foreign direct investors. According to BEA a total Foreign Direct Investment

into U.S. businesses of US$373.4 billion in 2016, showing a 15% decrease from the previous

year. But the acquisition made a drastic majority of new FDis into the US totaling us$365.7

billion (Dinh et al. 2019, p. 176). On the other hand, greenfield investment helps the businesses

to expand or set a new business by lighting the investment to $7.7 billion.

Foreign direct investments(FDIs) can take place in many ways such as establishing a new

subsidiary company or an associate company in a foreign country to expand the business through

the acquisition of a freight company or by investing in a foreign company or creating a joint

venture or merger with a foreign enterprise. The entry into an FDI creates a controlling right

according to the regulation and guidelines set up by the Organization of Economic Co-operation

and Development (OECD). Controlling right can be a minimum of 10% ownership in a foreign-
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based company through foreign direct expense. However, this is not limited, there are some

exception cases where controlling interest can be created by owning less than a 10% stake in a

company.

Foreign Direct Investment can be categorized as vertical or conglomerate or horizont al.

horizontal Direct Investment refers to the investor setting up a similar kind of enterprise in a

foreign country as it runs a business in the host country. For example, a car manufacturer and

distributor company that originated in the United Stand ates established its subsidiary in China.

Meanwhile, a vertical investment is that where a company wants to open a different subsidiary

company in a foreign country but related to its existing business in its home country such as an

automobile company showing interest in a foreign country company that is dealing with the

mobile manufacturing raw materials like parts. A conglomerate company is a type of direct

investment where a company invests or acquires a foreign company that is different from its

existing company in its home country. As in this type of investment, a company from a different

industry that has no experience in the said industry takes the form of a joint venture (Cuervo-

Cazurra, 2018, p.138).

The forces of economic globalization are inevitable. Without foreign direct investment

(FDI) the effect the globalization is nothing by the Multinational Corporations (MNCs). Over the

last ten years, Foreign direct investment (FDI) has become a crucial form of international capital

transfer around the globe. But the Concept of FDI is much broader in Developing countries,

emerging economies, and countries in transition. The governments of such counties always try to

make strategies and policies si that they can create a favorable environment for FDIs which will

come from multinational companies. However, apart from the government policies, some other

factors impact the performance of the MNCs in the developing countries such as capital,
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management, business culture, etc. FDI in developing countries should not be opposed the

‘corporate imperialism’ (Jiang & Martek, 2021, p.27). The reasons are FDI helps in providing

capital to the business and also helps in strengthening the management and technologies which

may not be available in the host country. The above resources are the main resources of any

economy and they can affect economic growth in developing countries. As far as capital is

concerned Foreign Direct Investment helps in allocating the capital in a large sum amount that

leads to creating a good revenue and making the company more profitable. Hense capital plays a

vital role ie ececonomicevelopme s it helps in achieving the highest possible return. Another

important point is most of the MNCs are huge and have a financial string. This helps the

companies to allocate funds from different institutions as they have good fame in the host

country. These funds can be sourced either from the home country or an international bank. This

means that they have much to spend in the company.

According to Thomas and Jenkins, FDI not only helps in economic growth and

development by foreign capital in the home country but also helps to create local investment

through knowledge and skills transfer to local enterprises. With the help of local traders,

Multinational companies also raise the already existing stock knowledge in the host country.

These gained knowledge and skills from foreign countries not help the host country but are also

helpful to the local enterprises. FDI can put an impact on the exports of a country directly and

indirectly. The direct impact of FDI on export can be experienced when an mnc establishes a

company in its home country and distribute its product or service in a different country (Latief &

Lefen, 2018, p.55). For example, Apple was oginnariginally having manufacturing companies in

different countries like China, Korea, and many other countries to expand its market across the

globe. The indirect impact can be foreign companies that show interest in the home countries
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bringing their expertise and skills along with them that empowering the human resources and

making skillful.

Thus these impacts improve the productivity of the country as well as the company by promoting

exports. FDI put an effect on the competitive market. MNCs take advantage of FDI by

influencing busineopportunities and by improving product quality. Hense competition increase in

the home country due to an increase in new business opportunity and productivity. Therefore

influencing the lower price to grab the advantage of competition resource by allocation method.

Meanwhile, it can also affect the absorption in the market affecting negatively. Thus, the home

country is supposed to make sure that it helps in offering an avenue for a standardized

concentration my multi multinational corporations. It can be achieved by providing quality

humaresourcesce or advanced technology (Contractor et al. 2021, p.27).

Conclusion:

Foreign Direct Investment(FDI) contributed to a better economy across the globe. By

transferring the high-quality skills and knowledge FDI helps in creating many opportunities in

the home country. That can ve GDP growth, employment, human resource empowerment,

training and transferring skills to the local business and increasing the living standards. Apart

from this FDI also plays an importarolrole in transferring the educational sector to developing

countries. it helps in achieving the highest possible return. Another important point is most of the

MNCs are huge and have a financial string. This helps the companies to allocate funds from

different organizations as they have fame in the home country (Peres, Ameer & Xu, 2018, p.33).

This finance can be allocated either from the host country or an international bank. This means

that they have much to spend in the company. It is important for both developing and developed
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countries. FDI helps in restructuring the entire industry including different opportunities for new

jobs. It also increases in income of the individual and so as the purchasing power of individuals.

Reference List:
Contractor, F. J., Nuruzzaman, N., Dangol, R., & Raghunath, S. (2021). How FDI inflows to

emerging markets are influenced by country regulatory factors: An exploratory

study. Journal of International Management, 27(1), 100834.

Cuervo-Cazurra, A. (2018). Thanks but no thanks: State-owned multinationals from emerging

markets and host-country policies. Journal of International Business Policy, 1(3), 128-

156.

Dinh, T. T. H., Vo, D. H., The Vo, A., & Nguyen, T. C. (2019). Foreign direct investment and

economic growth in the short run and long run: Empirical evidence from developing

countries. Journal of Risk and Financial Management, 12(4), 176.

Jiang, W., & Martek, I. (2021). Political risk analysis of foreign direct investment into the energy

sector of developing countries. Journal of Cleaner Production, 302, 127023.

Latief, R., & Lefen, L. (2018). The effect of exchange rate volatility on international trade and

foreign direct investment (FDI) in developing countries along “one belt and one

road”. International Journal of Financial Studies, 6(4), 86.

Peres, M., Ameer, W., & Xu, H. (2018). The impact of institutional quality on foreign direct

investment inflows: evidence for developed and developing countries. Economic

research-Ekonomska istraživanja, 31(1), 626-644.

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Rienda, L., Claver-Cortes, E., Quer, D., & Andreu, R. (2018). Greenfield investments or

acquisitions? The influence of distance on emerging-market multinationals. Management

Decision.