Question

• Essay 3 – Analysis of corporations’ decision in foreign directed investments (FDIs) [maximum 300 words]: Increasing returns to scale as a reasoning of corporations in concentrating production of each good in one place and serve customers in all locations from that place, which drives corporations to decide FDIs rather than exports to serve a foreign market. (FDI or Shipping)

Review the theory of increasing return to scale for FDIs and attend the Industry Talk event, then write a short essay to demonstrate how you reflect the applicability of the theoretical background of FDIs into real-life cases.

Answer 1

Corporations and firms may prefer FDI to Export to serve a foreign market.

FDI occurs when a firm invests directly in new facilities to produce and /or market in a foreign market. Whereas exporting involves producing the goods in the home country and then shipping them to another country for selling.

A corporation or firm must assess the advantages and disadvantages of these two choices to determine the best decision for the business.

Limitations of Exporting:

• The viability of an exporting strategy can be constrained by transportation costs and trade barriers.
• More capital (financial resources) is required to produce and maintain the stocks in the foreign markets.
• Exporting is riskier such as credits, financing, collections, etc., are borne by the manufacturer himself.
• It's too expensive as well such as market investigation, research and promotional expenses.

Foreign direct investments may be undertaken as a response to actual or threatened trade barriers such as import tariffs or quotas..

Foreign direct investments benefit the home country as well as the host country.

Corporations will look into the benefits of FDI includes:

• The Effect on the capital amount of the home country's Balance of Payments from the inward flow of foreign earnings.
• The gains from learning valuable skills from foreign markets can be subsequently transferred back to home country.

Home countries can both encourage and restrict FDI by local firms.

FDI trend in economy:

Over the past 20 years there has been a marked increase in both the flow and stock of FDI in the world economy.

FDI has grown more rapidly tha world trade and world output becuase:

• Firms still fear the threat of protectionism.
• The general shift towards democratic political institutions and free-market economies has encouraged FDI.
• the globalization of the world economy is having a psotive impact on the volume of FDI as firms undertake FDI to ensure they have significant presence in many regions of the world.

Over the last 20 years, there has been a shift away from FDI in extractive industries and manufacturing towards services.

Historically, most FDI has been directed at the developed nation of the world, with the United states being a favorite target.

So FDI can be seen as an important source of capital investment and a determinant of the fututre growth rate of an economy.