Foreign Direct Investment

Submitted To:
Sir AHMAD Ghazali

Group Members

Bilal Mughal 13024854-088

Ghulam Mustufa 13024854-086
Ali Raza 13024854-141
Sehrish Shahid
13024854-0
Talha Bin Asif13024854-124
Ubaid raza 13024854-082

Introduction

Continue
Increasing foreign direct
investment is usually used as one
indicator of growing economy.
Foreign direct investment (FDI) plays
a positive role in the process of
economic growth.

Types of FDI
1) Inward Foreign Direct Investment:
Inward FDI for an economy can be
defined as the capitalprovided from a
foreign direct investor (i.e. the coca cola
company) residing in a country, to that
economy, which is residing in another
country.

Example
Procter & Gamble (P&G) decides
to open a factory in Pakistan. They
are going to need some capital.
That capital is inward FDI for
Pakistan.

Types of FDI Continue

2) Outward Foreign Direct

Investment:
Foreign direct investment by a
domestic firm establishing a facility
abroad. Contrasts with outward FDI.
Example:
Q mobile wants to establish a new
facility in UAE. Q mobile needs capital to
establish new facility in UAE. It is outward
FDI for Pakistan.

Forms of FDI

Two main forms of FDI:

1) Greenfield
Investment
2) Merger &
Acquisition

Forms of FDI
Greenfield Investment:
A green field investment is a
form of foreign direct investment where
a parent company builds its operations
in a foreign country from the ground
up. In addition to building new facilities,
mostparent companies also create new
long-termjobs in the foreign country by
hiring new employees.

Example
A company start its operations in
new country from the ground up that
is greenfield investment.

Forms of FDI
Merger & Acquisitions:
Mergers and acquisitions (M&A) is a
general term that refers to the
consolidation of companies or assets.
While there are several types of
transactions classified under the notion
of M&A, a merger means a combination
of two companies to form a new
company, while an acquisition is the
purchase of one company by another in

Example
For example was the Pakistani operation
of America and emirates banks were sold
to union bank. Later on Union Bank and
Standard Charted Bank merge and new
name is Standard Charted Bank.

Greenfield vs Merger
& Acquisition

Greenfield:

M & A:

You will have control You gain access to

over
an established

your staff.
market.
You will have control Your knowledge
over your brand.
base increases.
You will have greater You have skilled
control of all aspects
workers at your
of the business.
disposal.
Easy and Less Risky.

Why FDI?
There is a strong relationship
between foreign investment and
economic growth. Larger inflows of
foreign investments are needed for the
country to achieve a sustainable high
trajectory of economic growth.
> Exporting
> Licensing

Continue
Exporting:
Exporting is a function of
international trade whereby goods
produced in one country are shipped to
another country for future sale or trade.
Licensing:
A business arrangement in
which one company gives another
company permission to manufacture its
product for a specified payment .

Continue
Draw backs of Licensing:
Valuable
Technology/Formula
Strategies no given
Management

Theories of FDI
MAC Dougal-Kemp Theory
Industrial Organization Theory
(Hymer)
Location Specific Theory (Hurd &
Yarn)
Product Cycle Theory

MAC Dougall-Kemp Theory

A two-country model onebeing the

investing country and the other being the
host country and the price of
capitalbeing equal to its marginal
productivity, they explain that capital
moves freely from a capital abundant
country to a capital scarce country and in
this way the marginalproductivity of
capital tends to equalize between the two
countries.

Industrial Organization Theory

(Hymer)

The industrial organization theory is

based on an oligopolistic or imperfect market
in which the investing firm operates. Market
imperfections arise in many cases, such
asproduct differentiation, marketing skills,
proprietary technology, managerial skills,
betteraccess to capital, economies of scale,
government-imposed market distortions, and
so on.

Location Specific Theory

(Hood & Young)

Hood and Young (1979) stress upon

the location-specific advantages. They
argue that since real wage cost varies
among countries, firms with low cost
technology move to low wage countries.
Again, in some countries, trade barriers
are created to restrict import. MNCs invest
in such countries in order to start
manufacturing there and evade
tradebarriers.

Decision Framework
for FDI
Are
Are Transportation
Transportation cost
cost is
is
high?
high?

No
No

Yes
Yes
Easy
Easy to
to License
License

No
No

Yes
Yes
Tight
Tight Control
Control
Necessary
Necessary

Yes
Yes

No
No
Protection
Protection Possible
Possible or
or
not
not
Yes
Yes
Licensing
Licensing

Import
Import
Barrier
Barrier
ss
Yes
Yes

No
No

Expo
rt

No
No

FDI