Foreign Direct Investment

Foreign Direct Investment

Foreign direct investment (FDI) is probably the single most important factor contributing to the globalization of the international economy. FDI are increasingly strong economic links between developing and industrialized countries, and also among developing countries. Foreign direct investment in developing countries (LDCs) have increased nearly four-fold in the 1990s and now account for almost 40 per cent, reaching some $120 billion in 1997. Foreign direct investment is now by far the largest source of all capital flows to the less developed world.

The objective of the FDI is to encourage the flow of investments for productive purposes among member”s countries, and in particular to developing countries. To serve this objective, the WTO must provide some type of guarantees (or insurance) covering foreign direct investment for all parties” host countries, home countries and Multinational corporations” against all the obstacles like Different needs, political risks, abuse of labor, Transfer Restriction, Breach of Contract, corruption, and Tax breaks.

WTO must carry out advisory and technical assistance for these parties so that their interests are protected, and must emphasis on multilateral investment agreement (MIA. ) No unilateral action or bilateral The host countries or the developing countries are interested in: (I) development of their services, communities and infrastructure that may help their industrialization and development, (III) production of exportable goods and (III) continuous technological development in their industrial production and services

Once MNC has been attracted to a particular destination country, they expect a high level of facilitation services. Governments all too often give inadequate attention to servicing investors” needs, even though large sums of money may have been spent on promotion activities and success has been achieved against fierce international competition. In retune, Investors from industrialized countries want to come to developing countries for two main reasons.

First, they apprehend that the return on capital in their home country is not adequate; second, they want to combine their capital with the cheap labor of the host country to reduce the cost of production. So the WTO should regulate the minimum wage for the worker in the host county. If the FDI is only for capturing the domestic market, it may still generate profit for the investor, but such profit may leave the country in foreign exchange. Where there are two serious implications.

First, in profitable domestic consumption sectors, foreign investments may overwhelm domestic investors (which may generally not be as strong as the foreign counterparts) and in some cases may eliminate them. Second, some critical sectors, like land, minerals and forests, where countries often like to have effective control on ownership because of social, political and strategic reasons, may, in a big way, pass under the control of foreign nationals. Investors have freedom without any responsibility, except in respect of their own profits.

The implementation of the obligations of home countries are ought to be ensured by locating the MIA in the WTO, so that for any perceived infringement, action can be taken against exports of the country. Tax breaks for multinational corporations Multinational corporations, whether American- or foreign-owned, are supposed to pay taxes on the profits they earn in their home country. For example, American companies and individuals aren’t supposed to gain tax advantages from moving their operations or investments to low-tax offshore “tax havens. ” But the tax laws often fail miserably to achieve this goal.

Moreover, IRS data show that foreign-owned corporations doing business in the United States typically pay far less in U. S. income taxes than do solely American firms with similar sales and assets. The same loopholes that foreign companies use are also utilized by U. S. -owned multinationals, and even provide motivation for American companies to move plants and jobs overseas. As a result, the WTO must fix these problems in the current system. The WTO must oblige all multinational corporations to provide income report in the overseas operation.

Also, the Home County has the right to inspect every movement of goods and services between a multinational company’s domestic and foreign operations, and then attempt to assure that a fair, “transfer price” was assigned to each real or notional transaction. Host countries insist that foreign firms must meet high domestic-content requirements, take on local partners, or engage in technology-sharing agreements, by contrast, suffer lags in technology acquisition, absence of best management techniques, weak penetration of foreign markets, and flimsy development of a supplier base.

Yet developing countries and economies in transition can”t find ways to protect and reward foreign investors who promise to meet domestic content, joint venture, or technology-sharing requirements. Political actions, changes in governments, events or instability may result in unfavorable changes in the value of a foreign security. A new treaty, the repeal or modification of an existing treaty or a change in formal diplomatic relations between the home and the host countries could affect the value or liquidity of investments in that country.

Corruption in the developing countries The definition of corruption is misuse of power for private benefit or advantage. Corruption is to all appearances widespread in developing countries and has very serious repercussions on their peoples’ quality of life – above all that of the poor and disadvantaged. This power may, but need not, reside in the public domain. Besides money , the benefit can take the form of protection, special treatment, commendation, or promotion; generally speaking corruption encompasses four main distinguishing features: Undesirable effects on third parties (home county).

Also the effects of corruption in developing countries ends up as obvious ignore of community interest. The WTO should monitor the MNC operations in the developing countries so that the real objective is achieved, and to protect the other parties. Breach of Contract ” home, host countries and multinational corporations” Different needs of investors and host countries Investors from industrialized countries want to come to developing countries main reason profit.

The host developing countries, on the other hand, are interested in development of their services and technological development in their industrial production and services. These two objectives are not incompatible. And the interest of foreign investors and host governments may be harmonized. But it is critical that any FDI agreement meet both objectives. This can be achieved if the investors decide on the capability of specific projects, and the host governments decide on the priority sectors and conditions of FDI, consistent with their economic and development objectives. Wherever the two agree, FDI will flow.

But for FDI to have a beneficial effect, it is important to realize that the roles of both sides are significant. An MIA is really not necessary for this purpose. What is needed is that governments have clarity of objectives, and these are spelt out clearly. Sets of transparent and stable criteria adopted and announced by governments can help the foreign investors to assess the viability of investments under those conditions. Naturally, governments wishing to encourage foreign investments will lay down criteria, which will welcome the investors in priority sectors rather than scare them away.

If there is sufficient scope for the convergence of the interests of investors and those of the host governments and if it can be brought about by the domestic policies and measures of host governments, why is it then that some industrialized countries are pressing for a multilateral discipline? The main reason is to eliminate or, at least, constrict the powers of host governments regarding the choice of the priority sectors for FDI and obligation of conditions on such investments, so that foreign investors are able to operate unencumbered by such constraints.

The main objective of the investors naturally is to earn high profit in a short time and repatriate the profit. And the objective behind bringing the proposed discipline on investments into the folds of the WTO Agreement is to utilize its dispute settlement process to enforce the discipline. The WTO, through its provision of cross-sector retaliation, will enable them to take restrictive measures against the developing countries, which may be perceived as violating the discipline. Foreign investment is often welcome to countries, as it increase the country’s capital and investment stocks.

But the main implication of FDI is that the returns on such investments – in the form of dividends and profits, as well as many fees including license fees, management expenses and so on – are sent out of the country in foreign exchange. Hence, if the investments do not help the country, either directly or indirectly, to earn foreign exchange, the negative effects of the outflow may be serious. A change in the exchange rate between the two countries currency may reduce the value of an investment in a security valued in the foreign currency, or based on that currency value.