Each country is encouraging foreign investment due to their realization of the benefits associated to opening for the foreign investments. Foreign investments have enhanced the expansion of multiple business opportunities and many ventures are looking for foreign investors so that they are able to increase capital budgets and the technical expertise. This may also in turn enhance the management practices of such companies. The type of foreign investment that is most common is the Foreign Direct Investment (FDI). This is the act of investing capital in an enterprise that carries out its activities in another foreign country. The investment can be done by an individual a company or a group of companies. The investor is granted a control of 10% of the shares of the enterprise he invests into and they also enjoy a share of profits too. Due to the fact that the investor is a foreign party, different policies, regulations and governing factors are applied (Sornarajah, 2010). Both parties will enjoy some benefits and may still suffer some disadvantages in relation to various factors.
FD1 and exchange rates
One of the factors that that may influence the activity of FDI is the forecasting of the behavior of foreign exchange rates. Exchange rates can be defined as the price of a foreign currency in the domestic currency. They matter in their volatility and their levels. The foreign exchange rate influences the total foreign direct investment amounts to be allocated in different countries. When a currency loses its value, this means that its value decreases relatively to the other currencies value. We can use the FDI to forecast the foreign currency rate. For example, if the wages of a country and its production costs reduces this indicates a reduction in the value of tat countries exchange rate. This movement attracts foreign investors and the depreciation of the currency exchange rate improves the rate of return to foreign investors. The main disadvantage of this investment in forecasting the foreign exchange rate occurs in case of an offsetting increase in production costs and wages in a destination market for capital investment. Anticipating the movements of the exchange rate will also diminish the relative wage importance and resulting to a higher financing cost of the investment project.
FDI and Interest Parity
Interest rate parity has a major role in the foreign exchange markets. It connects the spot exchange rates, the foreign exchange rates and the interest rates. Forecasted exchange rates may reflect higher foreign financing costs since the conditions of the interest rate parity tend to equalize the risk adjusted forecasted rate of returns. FDI implications of the foreign exchange rates are relevant to the interest- parity caveat (Sornarajah, 2010). However there are some arguments against this relevance. Some experts argue that there is an imperfect consideration of the capital market across the countries. Capital markets are not perfect and lenders in the market cannot have perfect information on the foreign investments results. This type of investment therefore requires the lenders to be given some extra compensation to cover the high costs related to the monitoring of the foreign investments.
Foreign Investment Policies
The FDI policies have a key role in the economic growth of many developing countries across the world. FDI inflows that are attracting and have conductive policies therefore play a major role in emerging markets. The developed countries may also seek to attract more FDI and to use various incentives and policies to attract foreign investors. This is particularly for the capital intensive industries and those with advanced technologies. The main objective of the policies is creating a business environment that is friendly and that the foreign investors will feel comfortable with both financial and legal framework of the country and be able to reap profits from a business that is economically viable (Blonigen, 2011). With outsized profits and prospects of growth opportunities encourage great capital inflows. Providing fiscal incentives to attract FDI may lead to the growth of foreign investments and profits at the same time. Investors will look for the environments where decision processes are predicted to work.
Governments are therefore incentivized to come up with rational decision making track record. If policies are effective, important FDI investments will be injected into a country and this will help the country’s economy to grow. Various countries will offer different types of fiscal incentives which vary according to the FDI investments level attracted. Different governments are setting up agencies that will improve FDI by promoting policies that are friendly, indentifying prospective investors and sectors and structuring the deals and incentives for the key foreign investors. Global trade associations also play a role in investing activities whereby they create a positive environment whereby both the investor and the recipient country will enjoy some benefits. The governments must enact policies that will provide necessary skills and training that will upgrade the work force so that they met the foreign investor’s employment needs.
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Government Limitations on Foreign Investments
Local governments may impose qualitative and quantitative limitations for foreign direct investments. Other governments may also limit the inbound FDI through restrictions regarding profit repatriation, investment limits sector wise and through the provision of subsidies to the competitors in the host country. Policies regarding expropriation and nationalization are used to restrict FDI in sectors that are sensitive (Blonigen, 2011). This is advantageous as it promotes good relations with the government. This is because FDI may drive some local producers out of business; the purpose of government limitations understands the ways in which good relations may be formed.
Trade Regulations and Policies
Important policies with investing firms search for low taxes. Low taxes are an important variable in determination of where a firm or an individual will invest. It is therefore a policy for foreign direct investments to seek low tax states and the policy of the countries government to lower the corporate taxes plus other financial incentives. This is beneficial in the long-term however in the short-term the tax revenue and the services the FDI will take out from the economy may not match (Mihai, 2012). This will create a disadvantage in the short term. In the long term this early losses will be compensated.
International Finance Regulations
Commercial law reform is a significant factor for foreign direct investments. FDI arrangements are evolving to multilateral market arrangements that involve venture capital, hedge funds and private equity. This has led to an increase in credit arrangements and other financial regulations for FDI. This is beneficial for business risk assessment and also the countries risk. Other finance regulations and modern commercial laws will enhance competitiveness and also capacity building. This will in some cases also reduce systemic risk. A finance protocol established in 2006 has greatly affected developing countries.
References:
Mihai, C. (2012). THE CONTEXT AND NEW TRENDS OF FOREIGN DIRECT INVESTMENT FLOWS. USV Annals of Economics & Public Administration, 12(1).
Sornarajah, M. (2010). The international law on foreign investment. Cambridge University Press.
Blonigen, B. A., & Piger, J. (2011). Determinants of foreign direct investment (No. w16704). National Bureau of Economic Research.
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