Sample Classic English Literature Essay Paper on International Business

Internal Trade and Foreign Direct Investment

Introduction

Foreign direct investment is the establishment of a new production facility, setting up of a firm, or the acquisition of a minimum share of an existing firm in another country referred to as a host country. Foreign investment is significantly accelerated by factors such as low costs of production, increased in demand of a certain commodity and increased competition.

Research Problem

How does FDI affect the host country?

The effects of foreign direct investment can be both positive and ruinous to the host country based on the factors surrounding the reason for the investment. “Foreign investments may produce some externalities in the form of higher employment rates and technology transfers, often filling the gaps between old and emerging market economies. They cause a lot of harm due to the aspiration to earn more via cheap resources for instance land and labor which are the primary aim of investors. Acquisition context may reduce the incentives to exit given unsatisfactory performance, specifically in cases where the choice of making an acquisition was made in order to enter a market as quickly as possible, perhaps to preempt competitors. Acquisition context may reduce barriers to exit if the acquisition was made in order to reduce risk over establishing a Greenfield venture, by taking over an existing revenue and profit stream, and if this does not materialize. FDI inflow increases competition in the local market and has numerous disadvantages for local enterprises that mostly do not possess the required technological know-how.

Foreign direct investment prompts the growth of many sectors in a country thus boosting the economy of the country. In view of all the benefits and possible negative effects of the foreign direct investment, it is arguably true that investment affects developing countries in a positive way. However, there is a dire need for the control of FDI seems not to be in the best interest of the host countries. Investments in most cases increase the market value of a company and this applies to domestic and foreign operations of the enterprise. According to Shimizu et al., foreign direct investment across boards poses a remarkable confrontation in the acquisition process given the increasing frequent numbers of acquisitions being undertaken an aspect that has encouraged foreign divestments (Shiminzu, 2008).  

Theoretical Framework-Hymen-Kindleberger Theory

I will use the Hymer-Kindleberger theory to carry out my research on foreign direct investment. The theory is also known as the monopolistic theory or industrial organization theory. Hymer tried to answer three vital questions using this theory. Theory states that multinational corporations peruse high profits when doing business. He argues that for products with fixed cost that are higher, you have to sell more so as to get much profits. Many firms internationalize so as to make much profit. Expanding to other countries in the world requires higher costs but these firms take monopolistic advantages to regain the money that is used and even make more profits. Hymer argues that through its control potential, foreign direct investment is a powerful means of expanding in different countries. Multinational enterprises could also capture value in foreign countries by establishing collusive oligopolistic conditions but this can only be achieved interpretation of investments around the whole world. Companies from developed countries that have a technological advantage of other take advantage of this to monopolize their products in host countries. The possession of knowledge in technology aids in improving other sectors of the economy and thus improving the process of production (Nayak, & Choudhury, 2014). Hymer argues that advantages are transmitted effectively from one unit to another unit firm, regardless of the fact that they are either located in one region or more than one country. Firms are able to take advantage of their market power to reap large profits in host countries for the reason that the market is not perfect.

Literature Review

Foreign direct investment makes a positive contribution to a host economy by supplying capital, technology and management resources that would otherwise not be available. Large firms and companies invest in long-term projects and repatriate profits only when the projects yield returns. Foreign direct investment brings resources and the revenues that are gotten from such enterprise thus having a positive effect on the economy of the host country.  Foreign direct investment contributes to economic growth not only by providing foreign capital but also by crowding in additional domestic investment. For nearly more than a half a century, there has been an expanded flow of goods and services across national borders.  According to the World Trade Organization, more than eight trillion and two trillion dollars worth of commodities and services respectively moved across the boarders in 2004. According to a report by the UNCTAD there are several mergers and acquisitions entailing large firms and considerably large sums of money in the reorganization activities which is a key detectable aspect of globalization. Technologies that are transferred to developing countries in connection with foreign direct investment tend to be more modern, and environmentally cleaner, than what is locally available However, not all mergers and acquisitions deals are successful due to a number of factors. There are several cross border pacts that result into foreign direct investment. Several factors contribute to this outcome ranging from political, managerial and empirical facets.

With regards to the political level, there are arguments put forth supporting the notion that globalization is the main factor leading to the instability of workers and the local citizens. Foreign direct investment is viewed as a cause of the unsteadiness. Also, there is a developed notion that investment through mergers and acquisitions do not add any value to the asset base and employment opportunities in a given country. As such, acquired organizations are dismantled and divestments become vivid.

FDI also promotes trade by providing the host countries with finished products to trade with other countries. The products that are produced by the foreign firms in the host countries are traded with other countries as products coming from the host country thus bringing foreign exchange. This is achieved whereby the goods produced by the foreign firms in the host countries are exported to other countries thus increasing trade between the host country and other countries around the world. However; this differs from one country to another depending on the motive off the FDI. Whether it is efficiency-seeking, resource-seeking, market-seeking, or strategic asset-seeking, FDI influences the development of the economy by stimulating export growth of the host countries. In an efficiency-seeking motivated FDI, output is intended for export, and thus it increases the host country’s export. As exportation rises, the local content exportation increases due to increases local firms’ input in the production of goods for export. This means that divestment is likely to decrease the exports of the country thus affecting its economy. This leads to loss to the host country for the reason that reduction of trade as a result of divestment results in the loss of foreign exchange thus affecting the economy of the country. Incentives to exist and barriers to exist represent a systematic way in which to investigate why cross-border acquisitions are divested. The main purpose of operating a foreign unit is to make a profit and minimize loses. A positive incentive to exist the host country exists when the current profits of an organization over a specific period of time do not meet the expected rate of return that the organization had.

Many foreign companies have access to financial resources not available to host- country firms because of their large size and financial strength. The funds may be accessible from internal company sources, or, because of their status, large foreign enterprises may find it easier to borrow money from capital markets than host-county firms would. The free flow of capital within the host country and the economic interaction and integration such investments place the host country at an elevated ground for economic development (Denisia, 2010). As large multinationals, the subsidiaries of the large foreign firms have a greater access to financial resources generated by the MNEs or through capital market borrowing. 

Foreign direct investment comes with new Technology that plays a vital role in the promotion and growth of any country. It stimulates economic development when incorporated in the production processes or when used for the advancement of the quality of services. FDI offers the technologies that host countries, especially developing and underdeveloped countries, lack.  Most countries lack the necessary technologies for research and development and therefore, the presence of MNEs is of great importance. These MNEs offer the host countries the essential technological know-how for effective production thus ensuring increased and quality production. Without the MNEs, the host countries may face a great challenge in the processes of production due to insufficient technological understanding and the lack of effective and adequate machinery for production. Technologies that are transferred to developing countries in connection with foreign direct investment tend to be more modern, and environmentally cleaner, than what is locally available

The existence of MNEs in host countries leads to the transfer of knowledge and thus increases the existing level of knowledge within the country. Workers gain new skills through explicit and implicit training. Training in foreign firms is of good quality given that only the most prolific enterprises trade. Workers take these skills with them when they re-enter the domestic labor market. Foreign enterprises engage employees in constant training through programs that ensure they are equipped with the necessary knowledge to undertake institutional duties. Additionally; other ways of knowledge transfer include the transfer of skills, the transfer of management practices, and different corporate cultures. Local employees in the multinational firms are equipped with managerial skills and the essential technical skills. Foreign investment leads to the development of a country’s in many aspects for instance it develops human capital resources, enhances competition by providing a competitive environment. It also boosts the socio-economic status of the host country through technological advancement and the provision of employment. Foreign direct investment can contribute to economic growth of the host country crowding in additional domestic investment” (Jenkins & Thomas, 2006).

Foreign direct investment has also its own disadvantages in the host country. Local enterprises are unable to compete with large firms on the local market thus foreign direct investment kills local firms. Foreign direct investment kills local enterprises thus leading to the collapse of the firms in the host country. Foreign companies have greater economic power than local competitors and this makes them to have a greater competitive advantage over local firms. If it is a part of large international organization, the foreign companies are able to get funds from a range of sources to subsidize its costs in the local market, which drives local firms out of business and allow the firms to monopolize the local market.

Methodology

Qualitative research design will be used since it aims at describing existing phenomena. I choose the qualitative way of writing; because I hope that through more enrich knowledge to support my point of view deeply. I hope my project will find out the point others did not pay attention to, or more in-depth investigation rather than just finish an assignment.

Data Collection

I will use both the types of data which are Primary and Secondary data. 

Primary data

The secondary data will guide me in regards to foreign direct investment and the benefits it has to host countries. I will develop tools to collect relevant primary data from the specific respondents. It will also be necessary to know whether the concept is accepted among the managers of the corporation and the beneficiaries in host countries. Primary data will be gotten by the following means.

  • Surveys: – Questionnaires will be given to different managers of multinational corporations and beneficiaries in some host countries in a random manner. The questionnaires will be distributed to different respondents. These will be administered to obtain views of respondents on their perception on foreign direct investment and its benefits.
  • Interviews: – I will also carry out one of one interview of three managers of different multination corporations. This will be aimed at getting their view on the issue and how they feel it has been of help to the host countries.

Secondary Data: –

Documented information is available through various sources. I will use the following sources of secondary data: –

  • Published information in journals on foreign direct investment
  • Books on multinational corporations and foreign direct investment.
  • Academic papers on foreign direct investment.

The secondary data will be useful because it will act as my guide when carrying out the research.

Tools for data collection

Two types of questionnaires will be used in the research of foreign direct investment. The first questionnaire will be prepared and administered to managers of multinational corporations in host countries. It will be used by the three selected managers of multinational corporations in host countries. Another batch of questionnaires will be administered to beneficiaries, for instance, employees of multinational corporations in host countries.

Data analysis

The data will be processed and analyzed with the aid of the statistical packages for social sciences and excels spreadsheets. Statistical packages for social science will be used to analyze the data.

Ethical Consideration

            I will ensure that I adhere to all rules that are required in carrying out research. I will not divulge information that I get unless required to do so with the consent of the source.

References

Denisia, V. (2010). Foreign direct investment theories: An overview of the main FDI theories. European Journal of Interdisciplinary Studies, 2(2), 104 – 110.

Jenkins, C&, Thomas, L. (2006). “Foreign Direct Investment in Southern Africa: Determinants, Characteristics and Implications for Economic Growth and Poverty Alleviation.” In Globalization and Poverty Project. Oxford: University of Oxford

Nayak, D. & Choudhury, R. (2014). A selective review of foreign direct investment theories (No. 143). ARTNeT Working Paper Series.

Shimizu, K, Michael, H, Deepa, V., Vincenzo, P. (2008). Theoretical foundations of cross-border mergers and acquisitions: A review of current research and recommendations for the future. Journal of International Management, 10(3): 307-353.