Foreign Direct Investment mean an
individual, a group of individuals, an
incorporated or un- incorporated entity or a
public or private company investing his money
in other country.
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
6. TYPES OF FDI
1) Inward Foreign Direct Investment:
Inward FDI for an economy can be
defined as the capital provided from a
foreign direct investor (i.e. the coca cola
company) residing in a country, to that
economy, which is residing in another
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.
8. TYPES OF FDI
2) Outward Foreign Direct Investment:
Foreign direct investment by a domestic
firm establishing a facility abroad. Contrasts
with outward FDI.
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.
10. FORMS OF FDI
Two main forms of FDI:
1) Greenfield Investment
2) Merger & Acquisition
11. FORMS OF FDI
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, most parent companies
also create new long-term jobs in the foreign
country by hiring new employees.
13. 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 which no new company is formed.
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.
16. GREENFIELD VS MERGER &
Greenfield: M & A:
You will have control
over your staff
you will have control
over your brand.
It is likely to cost more.
The entry process may
You gain access to an
You have skilled
Easy and Less Risky
A merger can lead to
17. 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 is a function of international
trade whereby goods produced in one country are
shipped to another country for future sale or
A business arrangement in which one
company gives another company permission to
manufacture its product for a specified payment .
21. THEORIES OF FDI
MAC Dougall-Kemp Theory
Industrial Organization Theory (Hymer)
Location Specific Theory (Hood & Young)
Product Cycle Theory
22. MAC DOUGALL-KEMP THEORY
A two-country model – one being the
investing country and the other being the host
country – and the price of capital being 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 marginal productivity of capital tends
to equalize between the two countries.
23. INDUSTRIAL ORGANIZATION THEORY
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 as product
differentiation, marketing skills, proprietary
technology, managerial skills, better access to
capital, economies of scale, government-imposed
market distortions, and so on.
24. 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 trade barriers.
31. DECISION FRAMEWORK FOR FDI
Are Transportation cost is high? No
Easy to License
Tight Control Necessary
Protection Possible or not
32. BENEFITS FOR HOST COUNTRY
Inflow of equipment and technology
Contribution to export growth
Improved consumer welfare through reduced
cost, wider choice & improved quality.
33. DRAWBACKS FOR HOST COUNTRY
Crowing of local industry
Effect on national environment
Effect on culture
BOP deficit in form of currency outflow
34. Benefits for Home Country
BOP Surplus (Foreign earning)
Drawbacks for Home Country