Types of Foreign Direct Investment (FDI)

John Dunning in 1958 developed 'market-seeking FDI': that FDI was

transatlantic, driven by the desire of US firms to locate near to UK and
European markets for post-war consumer goods

Over the last 15 years, FDI is attracted to low-cost areas of Europe & Asia,
then India & China.

Recent FDI is linked to markets for global technology, companies sourcing

strategic asset.

However transport costs are becoming increasingly important due to the

environmental agenda, so global firms locate in the BRIC world in order to
secure their position for a policy of 'make here sell here' on a continental or
regional basis.

With this trend for FDI it is more likely to be manufacturing than services as
services FDI is typically market-seeking, focusing on key clients or markets.

Labour flexibility is a plus point for UK, but this is irrelevant compared to
emerging economies, due to labour costs, cooperation tax rates.

High performing sectors with high productivity growth, innovation and export
performance attracts similar profiles of inward investment. Likewise sectors
with comparative advantage based on low wage costs or high levels of public
sector support attract similar natured FDI. The difference of beneficial effects
of these types of investments is clear.

General trends in FDI

Multinationals are now sitting on large cash reserves which may fuel a surge
in FDI when investment opportunities appear more favourable.

FDI in Latin America has been volatile recently, but will experience long-term
growth due to increased used of policies designed to boost domestic
manufacturing and build domestic productive capacity. Thus this has initially
made exporting more difficult to Latin American countries.

China continues to be proeffered destination within East Asia for FDI but
rising wages and production costs means other South-East Asia economies
have risen in desirability.

FDI into transition economies boosted by investor-friendly environments, IE

Russian Federation's joining of WTO in August 2012.

FDI in Europe especially the Eurozone hampered in the short-medium term

by economic fragility - Greece crisis in 2015 - and hence doubts about the
stability of the Euro.

Will there be a competitive environment for inward FDI in UK?

Yes, due the faults of the competition as listed above.

During 1990s 95% of FDI policy changes worldwide made the investment
climate more welcoming for Multinational Enterprises (MNEs).

However recent national FDI policy changes worldwide making the climate
less welcoming risen from 6% in 2002 to 32% in 2010. Many developed
countries have increased screening mechanisms of incoming merger and
acquisitions (M&As).

Recently countries reversing trend of 1980s and 1990s of offering large

subsidies in order to attract internationally mobile capital.

In the 200s the UK's non-membership of the Euro would damage our ability
to attract inward investment. Shown in automotive industry, where inward
investors insist suppliers agree prices in Euro to avoid currency risks and
fluctuations.

The mechanisms by which structural funds are to be delivered are uncertain

due to the demise of Regional Development Agencies (RDAs) that aimed to
drive economic development, business efficiency, investment and
competitiveness, employment, skills and sustainable development in their
regions (9 across UK). The replacement, Local enterprise partnerships (LEPs)
do not receive any funding from central government or local councils so
cannot provide the same level of aftercare for inward investors.

Problems with FDI

Many countries have become aware of the 'hollowing out' of their local
supply chain when attracting inward investment. A local supply chain is a
policy to create jobs and develop local supply of goods / services in order to
become internationally competitive.

Often suppliers and producers of generic manufacturing inputs have been

relocated to China. However, transport costs from China are reversing this in
some cases.

Policy must also support innovation, exporting and skills development in local
and sectoral levels in order to maximise the gains of inward investment.

The desired outcome of FDI - agglomeration (economies of scale), technology

transfer, increased competition or creation of employment for low skill
workers - must be determed prior to investment and pushed by policy
makers.