Foreign Direct Investment
Q1. Benefits and costs of FDI inflow for a host country such as Germany
Foreign direct investments contribute positively to the hosts’ economies through the following advantages;
- Capital inflows – most firms that look to invest directly in foreign markets are often highly established and large companies that have the financial and capital resources that may not be available in the host country’s industries. The resources amount to capital inflow that improves the host country balance of payments.
- Technology – this is an important requirement for economic growth since it stimulates creation and development of industries. FDI comes with the technology that host markets may not have.
- Advanced management expertise can be gained as local personnel are often contracted and trained to work with the foreign subsidiaries.
- FDI leads to the creation of jobs for the host countries since the foreign investors need personnel to work for them in their subsidiaries or branches.
Costs of FDI to the host country include;
- There is capital outflow from the host country especially when the foreign investors send earnings back to their mother countries.
- FDI lead to competition to local companies in the host market that may lead to their exit from the market
- There is a loss of economic sovereignty since the foreign investors will make their decisions regarding what to produce and invest.
Q2. Will foreign firms such as GM always make decisions in the best interest of the host country?
Foreign firms often make decisions regarding their operations and investments on their own as long as they meet the legal provisions of the host country. In this case, there is a loss of economic sovereignty since the companies make their economic decisions. Therefore, companies such as General Motors will make decisions best for them, but may be or may not be necessarily for the benefit of the host country.
When the foreign companies seek to expand in the host market, they may make decisions such as establishing new production plants or opening ne subsidiaries that will lead to the creation of more job opportunities and more capital inflow. However, in situations where the foreign companies experience dire straits in the host market, they may make drastic decisions such as massive layoffs of workers leading to unemployment or closing down their subsidiaries leading to losing of all economic importance of the FDI.
Q3. Magna’s plan to close a more efficient plant in Spain
The Spanish plant was to be sacrificed by Magna so that it would take over the Opel plant in Germany from General Motors. This action would put thousands of Spanish employees’ jobs at risk.
- Action to take if I were a Spanish government official
I would facilitate talks to the company so that the Spanish plant could be maintained so that employees of the plant can be secured of their employment. This is because the plain in Spain is actually more efficient to sacrifice. If the plant was unproductive, maybe then Magna could not be challenged in making such a decision.
- Actions to take if I were a German government official
Since the Magna plan was in favor of German jobs, I would be bound to support the plan so that there would not be a loss of the job opportunities that could lead to increased unemployment. However, this is a sensitive issue that would lead to loss of jobs and an efficient production in another country. As a government official, therefore, I could facilitate coming up with better strategies to keep the plants and jobs in both countries. Strategies such as cutting back production could be better than laying off workers and closing down a plant.
Q4. Independent research on FDI
- Toyota Motors Company FDI in the U.S
Toyota is one of the most prestigious vehicle manufacturing companies in the automotive industry, and it is based in Toyota City, Japan. The company has developed globally through its investments in various countries. In particular, Toyota Motors has a foreign investment in the United States of America through the establishment of Toyota Motor Sales Inc. in U.S.
- Reasons why Toyota picked the U.S
The US has been among the biggest and most flourishing economies in the world for several decades. The country has had a high demand for cars hence a potential market for automotive companies. High demand and highly growing economy in the U.S were the main reasons for Toyota to establish a foreign direct investment in North America.
- Toyota Motors FDI in U.S profile
Toyota Motors launched the Toyota Motor Sales Inc. in 1957 with an estimated initial cost of $3.6m. The company started a simple car distribution subsidiary whereby it was able to sell about 200 vehicles in the first year. Currently, the company employs over 6500 workers through its 13 manufacturing and component facilities. In 2008, its estimated capacity was estimated 2.02 million vehicles and this trend has been on the rise. To keep up with the increasing demand in the USA market, Toyota has dedicated its recent years to increased production through establishing more facilities and collaborations with other giant businesses in the automotive industry such as Ford and General Motors
- Incentives for entering the U.S market
Toyota Motors did not practically receive any support from the U.S government in establishing a subsidiary in the country. However, the country has always had an enabling business environment for investors from the global market. In addition, the country does not have stringent laws and policies regarding foreign investments that could have discouraged the Toyota investment.
- FDI details
Toyota Motors is one of the most constituted auto businesses in the United States. It enjoys a market share estimated to be 36% in the U.S market alone with major competitors such as Ford and GM. To facilitate its businesses, the company will soon relocate its headquarters from California to Dallas, Texas.
- Investment rating
The success of Toyota Motors FDI in the U.S depicts ultimate success in foreign business development. The huge market share and profitability show this unparalleled success.