Download What is foreign direct investment?

Mustafa & Cansu YÖRÜKOĞLU
INDEX
I. What does foreign investment mean?
II. What is foreign direct investments?
A. Types of foreign direct investments
B. The Differences Between FDI and Other Investments
III. Turkish Case
IV. Conclusion
I. FOREIGN INVESTMENTS are defined as residents of a country make their own fortune out of
their own countries. Fortunes that are obtained in foreign countries are either fiscal or real (physical).
Foreign Direct Investments
a. The shares of capital which provide control in the management
b.The full-ownership of all the factors of production
II. FOREIGN DIRECT INVESTMENTS (FDI) are defined as in the Balance of Payments (BOP)
Manual, are investments made to acquire a lasting interest by a resident entity in one economy in an
enterprise resident in another economy. The purpose of the investor is to have a significant influence,
an effective voice in the management of the enterprise.
A. There are three types of FDI:
1. Equity Capital is defined as buying the shares of an enterprise out of foreign direct
investor’s own country. This is also called “first investment”.
2. Profits converted into new investments comprise profits which aren’t obtained by the
foreign direct investor.
3. Internal Debts in Corporation mean that are short or long-termed debt and credit funds
between direct investors and tied enterprises at issue.
Developing countries are not able to allocate sufficient resources to the investments that would
contribute to the economic development. The main reasons for that are low per capita income, unfair
income distribution and high consumption tendency. At this point, foreign capital can fulfill the need
for resources to some extent.
In our time, foreign direct investments have taken the place of "direct aids" that were extended in
the 1960s by a state to the other or by an international organization to a state through official
channels. Foreign direct investments have an advantageous effect on many macro economic variables
in the investment country such as production, employment, price, income level, imports and exports.
Moreover, they play an important role in the accumulation of technology and management know-how,
formation of competition and improvement of international relations.
A foreign investment can be accepted as FDI even if all production factors don’t belong to the
foreigners. A foreign investor can obtain some part of the shares which will provide control of
enterprise (partial foreign-ownership). This is also called “FDI”.
Firms invest directly in foreign countries to obtain:
1. the benefits of lower production costs;
2. local technical expertise; and
3. local foreign government investment grants.
The major problem with FDI is, of course, that it requires substantial capital investment that cannot
be sacrificed easily, whereas cancellation of a contract manufacture agreement is (subject to the
details of the contract) cheap and straightforward.
III. TURKISH CASE
The liberalization and the rapid growth of the economy in recent years made Turkey an attractive
market for foreign investors. To invest in Turkey means also, to rely on laws protecting foreign
capital, working in a totally liberalized environment, being able to recruit qualified labour force and
enjoying convertible Turkish currency and free profit and capital repatriation.
10 GOOD REASONS FOR INVESTING IN TURKEY:
1. Unique geographical location - Turkey enjoys a very special location at the crossroads between
East and West, overlapping Europe and Asia geographically. The proxy to the new emerging markets
in Middle East and Central Asia creates unique business opportunities.
2. A strong international investment record -The experience of more than 4000 foreign capital
establishments, including 104 of the Fortune Top 500 companies, confirms Turkey as a predominant
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investment location.
3. A fast developing economy - The average growth rate of 6,8 % for the last 3 years prior to 1999,
which is well above many OECD countries, implies a dynamic and growing economy. WTO outputs
also state that Turkey is among the most dynamic 20 countries in the world trade.
4. A huge domestic market - With a population of 63 million and an increasing consumer purchasing
power, Turkey offers a huge and dynamic domestic market to investors.
5. High-skilled, competitive labour - The Turkish labour force is well-known with its skills and
learning capacity, and competitive labour rates offer cutting edge for industries.
6. High quality standards - The new quality oriented generation in both manufacturing and services
sectors ensures high quality levels. Turkish companies have proven their high quality levels by
winning the European Quality Award consecutively in 1996 and 1997 as well as winning the
European Quality Award for Small and Medium Sized Enterprises.
7. The gateway of energy resources - Turkey is located at the gateway of Middle East and Caspian
petroleum and Central Asian natural, which are regarded as the future energy reserves of the world.
8. A well developed telecommunications network - Turkey has a relatively "young"
telecommunications network with the latest technology, which can easily compete with the developed
countries.
9. Economic and political stability - Turkey is identified with its democratic parliamentary regime
and a stable growing economy within its region.
10. Strong ties with Caucasia and Central Asia - Turkey is the leading investor in Caucasian and
Central Asian Republics. Due to her strong cultural and historic ties, Turkey provides privileged
access and a perfect base to develop business with these countries.
Within the manufacturing industries, the leading sectors are;
- Automotive and transportation equipment; food, beverage and tobacco industries; chemical and
petroleum products; electrical machinery and electronics.
Within services sector, the leading sectors are;
- Banking; trade & retail chain stores; telecommunications; tourism.
IV. CONCLUSION
Turkey, situated at the crossroads where two continents meet, is an ideal center for investors
looking for a location at the heart of Euro-Asia. With its dynamic and growing economy, huge market,
competitive and skilled labor force, Turkey offers numerous opportunities to international investors.
The liberal foreign investment legislation and the experience of more than 6.000 foreign capital firms
ensure a stable and reliable investment environment.
In Turkey, developments in foreign investments accelerated along with the changes in the
economic and social structure. The deregulation of interest rates, establishment of organized financial
markets for money, foreign exchange stocks and securities, liberalization of capital movements and
reforms in the banking sector are just same of the major economic policy changes while one of the
major policy decisions was the adoption of liberal and flexible foreign investment practices. As a
result of the changes in the foreign investment legislation, the investment climate was made more
efficient and suitable for potential investors, starting with the 1980s.
In 2003, the Government has initiated a comprehensive reform program to streamline all
investment-related procedures and to attract more private direct domestic and foreign investment. The
Government has established a Coordination Board for Improving the Investment Climate (YOIKK).
The Board assigned specialized technical committees to work on developing concrete proposals and
strategies in order to overcome all main obstacles. As productive collaboration between the public and
the private sector is key in this process, each technical committee consists of private sector and
government agencies representatives.
The key reform areas have been determined as company establishment, employment, licenses,
location of investment, taxes and incentives, customs and standards, intellectual property rights, small
and medium sized enterprises, promotion of investment, foreign direct investment regulation.
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Dila CANDAY
FOREIGN DIRECT INVESTMENT
.What is foreign direct investment?
Foreign direct investment (FDI) is a term used to denote the aquisition abroad of physical
assets,such as plant and equipment,with operational control ultimately residing with the
parent company in the home country.It may take a number of different forms including:
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the establishment of a nev enterprise in an overseas country ;either as a branch or as a
subsidiary
the expansion of an existing overseas branch or subsidiary
the acquisition of an overseas business enterprise or its assets.
. Why prefers a firm direct foreign investment to the central of its own
country?
FDI is in the context of its impact on developing countries and the strains that exist between
the host countries and the firms,it is easy to assume that most FDI is made in developing
countries.They operated in extractive resource industries or plantation industries.British
companies invested in the United States,Canada,India,and countries in Africa because crops
such as tobacco,cocoa,tea,and cotton grew there,not in England.
Royal Dutch Petroleum grew and invested overseas to gain access to oil reserves.
Other companies went overseas to find tin,gold,copper,bauxite,diamonds,etc..
.Strategic motives for direct foreign investment
Surveys and case studies of multinational firms indicate that their motivations for making
direct foreign investments are based on strategic considerations of five main types,from which
the firms may be classed as:
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market seekers
raw material seekers
production efficiency seekers
knowledge seekers
politicial safety seekers.
.Behavioral motives for direct foreign investment
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An outside proposal,provided it comes from a source that cannot be easily ignored.The
most frequent sources of such proposals are foreign governments,the distributors of
the company’s products,and its clients.
Fear of losing a market.
The bandwagon effect :very successful activities abroad of a competing firm in the
same line of business,or general belief that investment in some area is a “must”.
Strong competition from abroad in the home market.
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.Economic motives for direct foreign investment
* PRODUCT AND FACTOR MARKET IMPERPECTİONS : Product
and market imperfections
open the door to direct foreign investment.Market imperfections may occur naturally,but
they are usually attributed to policies of firms and governments.
One of the most important market imperfections created by governments was the formation of the
Europen Economic Community (EEC) in 1957.The six original members agreed to remove
internal tariffs,erect a common external tariff,and coordinate their monetary and fiscal
policies.A similar opportunity developed when the Europen Free Trade Area (EFTA) was
established in 1958.
The most important competitive advantages enjoyed by multinational firms are:
- economies of scale arising from their large size
- managerial and marketing expertise
- superior technology owing to their heavy emphasis on research
- financial strenght
- differentiated products.
* PRODUCT CYCLE THEORY: Raymond
Vernon and his colleagues were proposing another
version of direct foreign investment theory based on product differentiation with a time
lag.VERNON’s product cycle theory requires imperfections in both the market for products
and the market for factors of production.It suggest that direct foreign investment is a natural
stage in the life cycle of a new product from its inception to its maturity and eventual
decline.New technological advanced ,or differentiable,products are discovered.
The new prpoducts are first inttroduced in the home market.After a short time lag the product
is exported.As the new product reaches maturity,competition from nearly similar products
narrows profit margins and threatens both export and the home markets.
At this stage foreign manufacturing locations are sought where market imperfections in the
cost of factors of production create a chance for lower unit production costs.Thus the foreign
investment is essentially a defensive investment designed to preserve profit margins in both
export and home markets.
* FOLLOW THE LEADER: Frederic Knickerbocker developed a theory of defensive direct
foreign investment.When one competitor undertakes a DFI, other competitors follow very
quickly with defensive DFI into that market.Direct investments are less profitable and riskier
than themselves.
* CREDİBİLİTY: Defensive investments also occur when credibilitiy with an existing
customer base becomes important.
* GROWTH TO SURVİVE: Firms invest abroad because they have saturated the domestic
market and any further exspansion domestically would lead to destructive retaliation by other
oligopolist or antitrust action.Growth abroad,either through new investments or acquisitions,is
the natural reaction of firms that have a grow to survive attitude.
* KNOWLEDGE SEEKERS: Multinational firms that have been identified as knowledge
seekers provide still another example of defensive investments.They are trying to improve
managerial expertise,technology or knowledge of product and factor markets.
* FOLLOW THE CUSTOMER: The growing presence abroad of service firms is a final
example of defensive investments.Banking,advertising,legal,and accounting firms have
typically followed their clients abroad.Their motivation is to counter efforts by other
international and local service firms to steal their clients.They are forced to invest in facilities
and staff in key foreign locations both for credibility and for convenience.
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RATIONALE FOR INVESTING IN TURKEY
Turkey is a country offering significant opportunities for foreign investors with its
geographically perfect position to function as a gateaway between Europe,Middle East and
Central Asia.The opportunities exist not only in the dynamic domestic market,but also
throughout the region.
Hospitality and tolerance being the traditional cornerstones of the Turkish way of life,the
country is open to foreign investors with many attractions to offer.
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Large and growing domestic market
Mature and dynamic private sector
Leading role in the region
Liberal and secure investment environment
Supply of high quality and cost-effective labor force
Customs union with EU countries
Developed infrastructure
Institutionalized economy
Competitive tax system
TURKEY’S COMMİTTED APPROACH TO FOREIGN INVESTMENT
The new foreign investment law :
Turkey’s foreign investment legistation,which has been gradually liberalized since the
1980’s,was revised most recently in 2003 through some structural reforms.The procedures for
foreign investment are simplified,some bureaucratic formalities are abandoned,and the
principle of equal treatment is reemphasized.
KAYNAKÇA :
1)Money in The International Enterprise,Sidney M.Robbins and Robert B.Stobaugh,BASIC
BOOKS,Inc.Publishers New York,1973.
2)Multinational Business Finance,Elteman,Stonehill,5th Edition,Addison-Wesley Publishing Company.
3)International Corporate Finance,Mark R. Ealer Frank,J. Fabozzi,Dwight Grant,The Dryden
Press,1996.
4)Multinational Finance,Audrian Buckley,Prentice Hall Europe,Third Edition,1996.
5)www.yased.com
6)www.hazine.gov.tr
7)Uluslararası Finans,Halil Seyidoğlu,Geliştirilmiş 2.Baskı,Gözem Yayınları,İstanbul,1997.
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