Foreign Direct Investment Report: US Trends and Global Impact

This report delves into the concept of Foreign Direct Investment (FDI), examining its significance in the global economy, particularly in the context of globalization and international trade. It explores various theories of FDI, including the monopolistic advantage theory, product life cycle theory, internalization theory, and eclectic theory, providing a comprehensive understanding of the drivers behind FDI. The report conducts a detailed cost-benefit analysis of FDI, evaluating its impact on both host and home countries, considering factors such as economic growth, employment, balance of payments, and infrastructure development. Furthermore, the report includes a trend analysis focusing on the United States, highlighting the country's position as a major recipient of FDI and examining the trends in investment inflows. The analysis covers the period from 1994 to 2018, with a specific focus on the recent fluctuations in FDI in the US. Overall, the report offers insights into the dynamics of FDI and its implications for economic development.

Running Head: Foreign Direct Investment
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Executive Summary
Trade is always an important part of economy and after globalization it reaches to the
international level. Due to international trade the role of foreign direct investment has been
increasing in development of the economy. Foreign Direct Investment simply is an investment
made by a company in other country business for higher return on investment for long run.
There are many modes of doing FDI that include by setting up of subsidiary in foreign country,
acquiring stake in company outside the home country and majorly through mergers and
acquisitions. This report consists of concept and theories of foreign direct investment and the
cost benefit analysis of FDI in relation to host country and home country. The trend analysis of
the United States will be explained in this study with relate to overall investment in the world.

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Table of Contents
Executive Summary.....................................................................................................................................1
Introduction.................................................................................................................................................3
Theories of FDI............................................................................................................................................4
Cost and Benefits Analysis...........................................................................................................................5
Trend Analysis: US.......................................................................................................................................7
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10
Appendix...................................................................................................................................................12

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Introduction
When resident of one country invest in others countries to acquire the ownership of assets is
considered as Foreign Direct Investment. The economic growth of developing nations depends
on or connected with the inflow of FDI in countries. In this era of globalization, constant inflow
of FDI is proving to be an effective way for faster growth of developing countries and also
playing an important role in steady development of the nations (Wren & Jones, 2012).
The role of FDI in economic development is vast because it provides financial resources,
technology advancement, infrastructure and innovative management techniques in a country
where investment is done or it refers to the participation of one country in another country by
the way of joint venture and expertise. There are two kinds of FDI; outward and inward foreign
investment or difference of both is net FDI inflow in a country. When accompany receive more
investment from other countries in a particular year it is called inward FDI and when more of
the investment is done in other nation by a country then it is called outward foreign direct
investment. Net inflow of FDI includes surplus of inward investment over outward investment
(Paulo & Bento, 2009).
Globally, FDI fell by 23 percent, from $1.87 trillion in 2016 to $1.43 trillion in 2017, which shows
a higher decline due to some macroeconomic variables that include decrease in GDP,
international trade, decrease in value of mergers and acquisitions and other Greenfield projects
(Bank, 2018). The flow of FDI in developing countries was found to be stable but in developed
countries FDI fell sharply (Figure 1). During 2017, total share of developing countries in global
FDI inflows was 47 percent compare to 36 percent in 206, an increase of approximately 10
percent in the overall share (UNCTAD, 2018).
Year Growth of Foreign Direct Investment, net inflows (% of GDP) Last 10 years
2007 5.272
2008 3.761
2009 2.173
2010 2.742
2011 3.025
2012 2.720
2013 2.573
2014 2.278
2015 3.146
2016 3.159
2017 2.349

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Theories of FDI
The growing importance of Foreign Direct Investment in international platform can be
understood with the theories of FDI that aim in knowing framework and elements of trade.
There are four main theories of foreign direct investment:
a) Monopolistic Advantage Theory
The theory states that the firms who invest in other countries have competitive
advantage in that country against all the local firms. FDI takes place in market where
investing firms have higher competitive advantage through that they gain strong
position in foreign market compare to resident market. The firms gain the market
because of two sources: superior knowledge and economies of scale. The knowledge is
related to technologies, management skills, industrial organization and product
differentiation because of that firms start investing in foreign countries by setting up
subsidiaries which gives higher return (Hoshino, et al., 2018).
Another element is economies of scale; this can attain through horizontal and vertical
investment. When per unit cost reduces by increasing the production through horizontal
investment than economies of scale can be attain. In vertical investment firm locally
produce those parts of final product for which cost of production is low and gain
advantage of achieving economies of scale (Hoshino, et al., 2018). Monopolistic
advantage can be achieved by investing in foreign country that directly leads to higher
return on investment.
b) Product Life Cycle Theory
This theory explains a link between international trade and FDI and state reasons why
firms moved from exporting to FDI by including criteria of time in above theory. When a
firm introduces a product at home country they gain advantage of monopoly in the
market as there is no substitute and when product comes to its growth stage firm start
to export the product to gain monopoly in foreign countries but according to this theory
when product reaches to declining stage in home country firm started to invest in
foreign countries to take over the foreign market. The focus of theory is on stages of
product and how it impacted the decision of FDI for the companies (Shenkar & Luo,
2008).
c) Internalization Theory
When the firms profit reduces despite of its technological advancement and product
resources because of inefficient environment or competitive scenario in external market
the firms started developing an internal market by investing in multiple countries or
start creating their own market for achieving its objective. Internalization is considered

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as creation of contract by internalizing all foreign operation through a common
structure because there is no market for the product in other countries to rescue these
things firms start operating in intra organizational network. Internalization also stated
that common structure or unified governance of operations in multiple location give
transaction benefits to the company and other advantages include less government
interference, economies of scale, reduction in miscellaneous cost and overall control on
supplies (Ramamurti & Hashai, 2012).
With internalization firms attain competitive advantage globally and achieve economies
of scale with flexibility in operational activities. As there is less interference of
government a firm can shift its operations in answer to changes in tax structures, labor
rates, foreign exchange rates, government policies or due to any other uncertainties.
d) Eclectic Theory
This theory is based on wholesome approach for foreign direct investment and issues of
firms related to foreign production. It considered three parameters to evaluate and
analysis the foreign direct investment that are ownership (O), location (L) and
internalization (I) and also called OLI theory. This theory states that all these factors are
important in evaluating the pattern of FDI, ownership specific aspects contain both
tangible asset and intangible assets such as technology, human resource, information,
marketing skills and managerial skills of the firms. Location specific aspect refers to
market structure of the country, government rules and policies, political and legal
framework of the foreign country (Nabende, 2018). At the end Internalization refers to
firm common structure for forming an internal market due to inefficient external
market.
Overall all these theories give the deep analysis of why firms opted for foreign direct
investment and the pattern they follow in different situations. The monopolistic
advantage theory state that because of product differentiation firms get advantage or
higher return of foreign investment on other hand product life cycle theory focuses on
relation of product stages with respect to investment in foreign countries and
internalization theory state that the main reason of firms behind engaging in FDI is
internalizing their production to rescue the inability of external market.
Cost and Benefits Analysis
Foreign Direct investment involves some advantages to the host country as well as to the home
country but effect of FDI varies country by country because of various factors. FDI also incurs
some cost for host country and home country and all these aspects are discussed below briefly.

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FDI: Benefits to Host Country
 FDI can increase the value of economy by providing them the resources such as
technology, capital and management expertise that can increase the expanding rate of
economy (Javorcik, et al., 2017).
 The main advantage of FDI to the host country is improvement in employment; this is
done when foreign subsidiaries in host country hire more people from that country.
 FDI also affect the balance of payment structure of the host country and strengthen it in
positive manner. When foreign countries invest in host country by setting up
subsidiaries and starting production that products will be exported which increases the
export of the country that creates good value on balance of payment.
 It also helps in strengthening the economic and social infrastructure of the country as
firms build and invest in development of hi tech infrastructure in host country that leads
to economic development of the country (Narula & Pineli, 2017).
FDI: Costs to Host Country
 Cost to a country is the negative effect of FDI on host countries, when foreign firms
invest and produce quality products at cheaper rates than it directly have impact on
domestic producer as competition in the market increases.
 Due to FDI, balance of payment of host country is also affected because of import of
goods for production it increases the debit of current account that resultant in deficit of
balance of payment.
 Greater increase in FDI may affect the economic stability of the country because foreign
firms will focus only on maximizing their profits even at the cost of environment.
Eventually FDI may resultant in loss of power by the government in economic stability of
the country.
FDI: Benefits to Home Country
 Improved relation globally that help the country during crisis and FDI also leads to
smooth political relation with other countries.
 In relation to balance of payment home country also gets benefited because what is
debit to host country account will credit to the home country account that gives positive
impact.
 Expansion of the foreign companies to new market which increases the FDI inflow as the
profit earn by the firms will goes back to the home country (Perez & Nogueira, 2017).

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FDI: Costs to Home Country
 Home country is affected due to FDI, when foreign companies invest its resources such
as technology, capital and skills to host country than there financial position gets
stronger more than home country.
 Focus of companies shift to the host country rather than thinking of investing and
exploring in home country they started to invest in host country which decreases the
production in their country.
 FDI directly or indirectly affects the overall economy of home country by reducing
investment and employment in their country.
From the above cost and benefit analysis on both the countries it can be analyzed that the
benefit of home country is the cost of host country or it can be concluded that host country
gets many advantages of FDI compare to home country because of attracting large investment,
improving technology and infrastructure development that direct contribute to the economic
development of host country.
Trend Analysis: US
The United States is the most benefited country from Foreign Direct Investment in the world.
Due to developed global economy the countries try to compete in market by attracting new
investment in their countries but the US is the home to the largest amount of FDI in the world.
In 2018, Foreign Direct Investment in US showed an increase by 51938 USD Million and on an
average foreign investment in the country remains 25002 USD Million from 1994 until 2018
(Figure 2).Highest investment in the country was declared in third quarter of 2018 compare to
last three years. The trend in the United States shows an increase in inflow of foreign direct
investment in the country. In 2017, the US showed a greater decline in the foreign investment
because of the Tax Cuts and Job Act passed by the government it directly impacted the flow of
FDI in country. As a result of change in tax reform of the country, firms started pulling back
their earnings to the home country from rest of the world which leads to negative outflow of
FDI in the US and affected the inflow of FDI in country (Ballard, 2018).

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India
France
Singapore
Brazil
Australia
Ireland
Netherland
Hong Kong
China
United States
0
50
100
150
200
250
300
350
45 50 58 60 60 66 68 85
144
311
FDI Inflows
FDI Inflows
Top 10 countries FDI inflows in the world
The growth of the overall FDI in world mainly contributed by the US, it was observed that due
to decrease in the country’s outflow investment the global FDI was fell by 41 percent. US
economic growth and stability depends on the investment from international companies as
they provide lot of job to the American citizens which directly contribute to the GDP of the
country. At present, 6.8 million employees in America are working in international companies
and these firms also benefited the US by reinvesting their profits back in development,
expansion and training of employees which makes the US economy strongest for attracting
more foreign investment (OECD, 2017).
The United States position itself as the most attracting country to invest or to run business. FDI
in the country was found beyond $4 trillion with most of the investment was in the US
manufacturing sector because of that employment in this sector grew by 22 percent which
leads to overtake domestic growth of 7 percent (Figure 5). Under the new administration
number of trade related actions have been taken that created a negative scenario for the
investors and to overcome the impact of this on FDI government have to take some decisions in
related to free trade agreement, harmonizing the US regulations with global standard and
lowering tariff and non-tariff barriers (McLernon, 2018). The trend in FDI globally also affected
by this move so it can be seen that the United States contribute larger portion in foreign direct
investment globally, and investment trend of world is directly proportional to the country’s
trend pattern.

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Conclusion
Foreign direct investment plays a major role for economic development of the countries. FDI is
considered as the investment of one country in another country due to some attracting factors.
These factors was best understood with help of FDI theories; monopolistic advantage, product
life cycle and internalization. There are many benefits of increasing foreign direct investment to
a country for which it is appreciated by all nations globally. FDI become an important tool to
boost the economic growth of the nations and most favorably for the developed nations and
the United States is amongst the one developed nation which contribute the largest amount to
the world FDI. The United States is seen as an attracted place to invest with higher return, most
of the revenue and employment in the country is generated by international companies. Due to
change in some tax reforms in US, it impacted directly to the investors and lead to decreasing
FDI inflow of the country and that affected the overall economic growth of the world.

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References
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Bank, T. W., 2018. Global Investment Competitiveness Report 2017/2018: Foreign Investor. US:
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Hoshino, Y., Turnbull, S. & Ghahroudi, M. R., 2018. Foreign Direct Investment: Ownership
Advantages, Firm Specific Factors, Survival and Performance. London: World Scientific
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Javorcik, B. S., Turco, A. L. & Maggioni, D., 2017. New and Improved: Does FDI Boost Production
Complexity in Host Countries?. The Economic Journal, 128(614).
McLernon, N., 2018. America Cannot Afford to Fall Behind, US: SiteSelection.
Nabende, A. B., 2018. Globalisation, FDI, Regional Integration and Sustainable Development:
Theory, Evidences and Policy. New York: Routledge.
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