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Presentation Outline
Definition of FDI Introduction to FDI Statistical Data of FDI in Malaysia
Theories of FDI Positive Impact of FDI Negative Impact of FDI
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Definition of FDI
Foreign direct investment (FDI), defined as investment made to acquire a lasting interest in or effective control over an enterprise operating outside of the economy of the investor (International Monetary Fund 1993 as cited in Juma;2012) As an investment by foreign corporation in any country (Bose; 2012)
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FDI in Malaysia
Budget 2013 announced that net inflows of FDI amounted to RM13.6 Billion
Malaysia was ranked the third largest recipient of FDI among the ASEAN countries, after Singapore and Indonesia (Investment performance 2011) Total investment approved in the Malaysia economy in year 2011 was RM148.6 Billion
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Theories of FDI
1. Modernization theories Theory suggest that FDI could promote economic growth in developing countries
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Theories of FDI
2. Dependency Theory Dependence on FDI-lead to negative effect on growth and distribution of income Create industrial structure in which monopoly is predominant Economy controlled by foreigners would not develop organically but would rather grow in a disarticulated manner
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Theories of FDI
3. Product Life Cycle Theory Develop by Raymond Vernon Explain why US manufacturers shift from exporting to FDI Relevant to manufacturers initial entries into foreign market Manufacturers-gain monopolistic export advantage from product innovations
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Cont
Stage 1: New product stage, where the product continues to be concentrated in the United States Stage 2: Product becomes standardize in its growth Stage 3: Mature stage: cost competition among producers and start to look countries that can offer lower production cost (Shenkar, 2007)
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Theories of FDI
4. Monopolistic Advantage Theory Stephen H. Hymer found that FDI take place because powerful MNE choose industries/markets in which they have greater competitive advantage Suggests that the MNE posseses monopolistic advantage that enables it to operate subsidiaries abroad which is more profitable than local competing firms Monopolistic advantages drawn from two sources namely superior knowledge and economies of scale (Shenkar, 2007).
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Theories of FDI
5. Japanese FDI Theory Developed in 1970s by Terumoto Ozawa the theory relates with the FDI inflow and outflow of a country and its relation to economic growth
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Theories of FDI
1. 1st phase of economic growth The country is underdeveloped Labour costs are very low Become a target by foreign companies who seek to lower down their production cost At this stage, there is almost zero FDI outflow 2. 2nd phase of economic growth New FDI starts to flow inside the country due to growing internal markets and improve standard of living More FDI outflow happens due increase in labour cost
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Theories of FDI
3. 3rd Phase of economic growth Competitiveness of a country measured based on level of innovation FDI inflows and outflows are motivated by both market factors and technological factors
http://unctad.org/en/docs/iteiitv1n1a3_en.pdf
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Theories of FDI
6. Five Stage Theory - John Dunning Stage 1 Low incoming FDI, but foreign companies are beginning to discover the advantages of the country No outgoing FDI no specific advantages owned by the domestic firms
http://aib.msu.edu/awards/19_1_88_1.pdf
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Example
Wal-Mart set to grow in China Tuesday, April 2, 2013 Wal-Mart (WMT.NYSE) says its growth in China is on target and it plans to invest US$80 million (RMB500 million) to upgrade existing stores in the market, The Wall Street Journal reported. The retail giant said it plans to remodel 50 of its nearly 400 stores in China, and open 30 new stores in the country in several second-tier cities. Wal-Mart will also look to boost investment in warehouses and logistics networks to reduce costs and increase food safety standards. Wal-Mart may add 18,000 jobs to its China payroll this year http://www.chinaeconomicreview.com/wal-mart-set-grow5/28/2013 22 china
3. Transfer of Technology
Ramirez highlighted that FDI allows transfer of technology and specialized knowledge which in turn increase productivity (as cited in Arango;n.d)
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Vertical technological spillover (inter industry) as a result of the interaction between domestic and foreign firms that are not in the same industry. (Aldaba; 2012)
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Kirkulak, Qiu and Yin (2011) reveal in their study that China has an abundance of energy and the most common form of energy is coal
Most of the sulfur dioxide (SO2) released into air is from coal (coal is the most primary source to meets its national energy
HOW government of China control pollution? By having environmental policy-mainly base on taxation
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High level of FDI volatility-lead to less innovationreduce R&D effort and reduce cost involve in R& D (Robert Lensink and Oliver Morrissey as cited in Changwatchai;2010).
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