Theories of Foreign Direct Investment
A Company’s interest in investing in foreign markets is guided by many forces. There are several theories that explain the justification of FDI in the countries of interest. Among them is the theory of imperfect markets (oligopolies and business advantage) (Chiang, 1995).This theory is majorly cantered on the fact that companies operate on an area of market advantage. A research carried in Stephen Hymer in 1959 at MIT showed that this type of investment was common in markets where oligopoly was the order of the day (Gwarney& Somida, 2000). Companies which were losing their domestic markets due to dominance of other companies were quick to look for new ventures elsewhere. This was done with increased production of the same products in the foreign countries, while trying to maintain their market. There was expansion of market. The understanding of the markets, economies of scale and proprietary technologies would therefore lead to improved marketability and enhancement in the profit margins of the country in question.
Another theory is the model of industrial organization. This one is majorly pegged on the understanding of barriers in the market and interdependence among companies (Gwarney& Somida, 2000). The understanding of obstacles of operation in the home country, the economies of scale, the magnitude of installation of a business, and generally market advantages will oversee a company decide to venture out to a more liberal space to edge out a profit-tuned business. This is contrary to the subjectivity often to which it is put through by already established companies. Companies which have already won the trust of consumers may prove hard to competitively edge out or allow a profit oriented transaction for the other competitors (Sklair & Leslie, 2011). It therefore follows that they will be bound to look for advantageous positions, hence FDI.
Thirdly, is the theory of product life cycle that is based on a research conducted in Harvard. The theory’s basic understanding is based on the three stages of product life cycle. These are; the introduction to the market, standardization and maturation stage. In the introduction stage, the product has not yet been implemented and there is no definitive production, which improves in the proceeding stage. In the standardization stage, demands, design and production have improved tremendously (Shorris, 2006). In the maturation stage, the company would have grasped the market and established itself. Exports to home country and other countries are therefore stable. The production of the company may be challenged by other new entrants who try to produce the same products, where in this case the company ventures to a new foreign market. This is basically the overriding point of this theory.
Finally the other theory is the model of technological innovation. Here the proposition is that trade flows from a developed country to an underdeveloped country (Gwarney& Somida, 2000). The way in which it is used is referred to as appropriate technology. Its transfer is an integral part in international trade; hence capital transfer is a manifestation of this development in technology and the competitive advantage it poses as far as market advantages are concerned.
Discussion of three articles
In the articles sourced from the www.fdiintelligence.com, the article ‘Manufacturing FDI looks beyond China towards rest of Asia-Pacific’ by Mark Thompson is placed under discussion. In this article China is seen to be experiencing a downward trend in the number of FDI projects being initiated in the country. Another likely scenario that has been replicated is the dwindling in the number of jobs available to the average citizen n in China (Mark, 2012).This must have an economic effect in the country’s GDP and global investment pattern. With increased presence of FDI projects in the Indonesia, Vietnam, Taiwan and other Asian countries, China may have to bear the blunt of the aversion.
However, China has experienced a steady increase in the foreign investment. This has increased it marketability, particularly to Africa where most of its entrance to the market has been warmly welcomed. Statistics in 2011 reveal that Japan is the leading in terms of Asia pacific FDI investment followed by the US (Mark, 2012). Perhaps the reconsideration and inquiry into the cause of the downward trend in the market would lead to a restitution of the market thus amounting to attraction of more investors into the country.
The second article by Courtney Fingar looks into Asia-Pacific Cities of the Future in the category of 2011/12.A report by Rachel Craig on Singapore having retained its position as the city of the future shows that China cities performed particularly well, but the effects of recession emerged as one of the reasons for a possible lower ranking. For instance Tokyo was placed at the second place. It scored well in the categories under observation. Of importance to highlight is the economic potential, business friendliness and the resources. Therefore the competition of FDI projects is bound to increase in the country, with projections having been seen to be on the upward trend(Courtney, F., 2012).The other Asian cities have dropped from their previous positions with Taiwan being ranked 5th.This is an economic advantage to China, but more of it shall be amplified by the prevailing market conditions. The Chinese cities dominate the economic ranking, with seven of the top coming from the same country. It is estimated that its GDP is bound to grow by 10% in the next five years (Courtney, F., 2012).
While this is good news to China, another improvement was foreseen in the retail industry as advanced by Julianne Mervyn in the third article, ‘China overtakes Spain as top destination for retail FDI projects.’
China experienced a 2% increase in retail FDIs as compared to other nations (Julianne, M, 2012). Spain is reportedly said to have dropped from the first position to fourth place. This is after an almost 40% decline as the number one destination for retail FDI projects. The UK, Germany and France were also not spared the rod. They also experienced sharp declines in retail FDIs.While this was the case, London still remained the most preferred destination for retail FDIs. This therefore means that China will be seen as the favourite investment region in the next five to ten years. With increased FDI in the country, investors will be looking at the fertile grounds so as to install their businesses before other likeminded merchants set camp in the same region. For a business man with business acumen, the increased FDIs mean a lot to them. With Britain holding as the top preferred destination, there emerges another market in the Asian countries. There will be an attraction towards the Asian region as investors try to diversify in the areas of encroachment. Markets in this region will therefore be highly attractive to investors in the next few years. This will be the case if market demands and prevalence maintain their steadiness.
The Mexican Maquiladora industry has recently experienced problems ranging from environmental challenges to even human resource and working conditions of the region. The region has been seen to have heavily increased in industrial development, but with low implementation of an environmentally friendly economy (Shorris, 2006). There has been pollution into rivers. The high populations of the Maquiladora region, intense industrialization and poor environmental management policies have led to increased environmental issues (Baklanoff& Eric, 2008). This has led to vulnerability to environmentally related illnesses and deaths in extreme cases. The working conditions of the people have also been compromised in the industry.
Most plant industries prefer to employ women as compared to men (Shorris & Earl, 2006). Reasons have been advanced for this. It is generally looked at that, women are able to persevere and easily follow directions at the plant as compared to their male counterparts who lack the dexterity to withstand the work. Although agreements between the Mexican government and the USA, i.e. La Paz agreement stipulates that wastes created by American companies be shipped back to America, nothing of that sort has been done (Sklair & Leslie, 2011). Some companies have been found to avoid paying the waste management fees, hence leading to more jeopardy. Proper mechanisms should be placed and strict measures taken against companies which do not follow the stipulations of the treaty. The US should look into the market conditions of the regions, understand the logistics and the prevailing market conditions in order to be draw a comprehensive analysis for investment. However, there is plenty of market and it is still quite open for interested parties. An investment would therefore definitely form part of the main courses.
Chiang, A. (1995). Fundamental methods of mathematical economics (3rd ed.). New York: McGraw-Hill. Pp. 45-108
Courtney, F., (2012). Asia-Pacific Cities of the Future 2011/1.Retrieved from http://www.fdiintelligence.com/Locations/Asia-Pacific/China/China-overtakes-Spain-as-top-destination-for-retail-FDI-projects
Gwarney, J., Lawson, R., & Somida, D. (2000). Annual Report 2000 Economic Freedom of the World. Canada: Fraser Institute.
Julianne, M., (2012). China overtakes Spain as top destination for retail FDI projects. Retrieved from http://www.fdiintelligence.com/Locations/Asia-Pacific/China/China-overtakes-Spain-as-top-destination-for-retail-FDI-projects.
Mark, T. (2012).Manufacturing FDI looks beyond China towards rest of Asia-Pacific. Retrieved from http://www.fdiintelligence.com/Locations/Asia-Pacific/Manufacturing-FDI-looks-beyond-China-towards-rest-of-Asia-Pacific
Shorris, E. (2006). The Life and Times of Mexico. New Mexico: W.W. Norton and Company. ISBN 9780393327670. Pp. 56-78
Sklair W., & Leslie T. (2011). Assembling for Development: The Maquila Industry in Mexico and the United States. New Jersey: Taylor & Francis. Pp. 3+