C8.4 Effects of FDI — Transcript

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1. 0:00and of course the benefits for a host
2. 0:01country is you get a transfer of
3. 0:03technology will come in so if
4. 0:06uh gm wants to build a manufacturing
5. 0:08plant
6. 0:11it's going to start training the local
7. 0:12population in how to make cars and how
8. 0:15to utilize advanced
9. 0:16software and technologies and tools and
10. 0:19it's also going to hire a lot of local
11. 0:21people
12. 0:21and when you hire a lot of local people
13. 0:23that keeps them off the street
14. 0:25they make less trouble you don't have to
15. 0:27subsidize their unemployment or
16. 0:29or welfare you um provide
17. 0:32um the resources for their income for
18. 0:35them to pay taxes to the government
19. 0:36helping the government collect more
20. 0:38income
21. 0:38so so employment is a huge win effect
22. 0:42for a host country
23. 0:43com a country to take in far and direct
24. 0:46investment
25. 0:47now the balance of payments account
26. 0:51uh records the country's payments and
27. 0:54the receipts from other countries so
28. 0:56if the foreign direct investment is made
29. 0:59inside the company in the country and
30. 1:01they're producing the goods inside the
31. 1:03country and exporting them the balance
32. 1:05of payments will be more favorable
33. 1:08so the country will have more exports
34. 1:10generally
35. 1:11due to this you know a foreign direct
36. 1:13investment and you know
37. 1:14it's favorable to have a surplus rather
38. 1:16than a deficit of exports
39. 1:19you know uh and it's one thing that the
40. 1:21united states usually has more
41. 1:23imports and exports it's a hot a hot
42. 1:26button topic because of that because
43. 1:27when that's mostly because we consume
44. 1:2920 to 25 of all the world's goods and
45. 1:32resources of course we're going to have
46. 1:34a trade deficit
47. 1:37but if you um if you are a country
48. 1:41that's allowing a lot of
49. 1:42foreign direct investment and a lot of
50. 1:44people are setting in shop like they did
51. 1:45in china to manufacture goods and
52. 1:47services in china and export them
53. 1:49you're going to have a favorable current
54. 1:51account surplus
55. 1:52which means you export more than you
56. 1:54input and import and that's usually good
57. 1:56for a country because it can help the
58. 1:57country build up
59. 1:58uh currency supplies which they can
60. 2:01later use to invest
61. 2:03in buying u.s treasuries like japan and
62. 2:05china have done
63. 2:06so in the recent past
64. 2:11effects effects on competition and
65. 2:13economic growth
66. 2:15so increases the level of competition in
67. 2:17the market which is good because it
68. 2:18drives down prices and
69. 2:20improves the local market so consumers
70. 2:22can afford to buy more
71. 2:24and have lower prices and controls
72. 2:26inflation uh
73. 2:27but the decrease the increase in
74. 2:29competition can lead to
75. 2:31um the benefits of increased
76. 2:34productivity
77. 2:36more process innovation as they're
78. 2:37competing against each other
79. 2:39and overall a better economic growth if
80. 2:42the competition leads to
81. 2:44you know a fierce or domestic
82. 2:47competition will make them stronger in
83. 2:49international
84. 2:50trade so if the domestic market is very
85. 2:52competitive and they're fighting with
86. 2:54each other through innovation and trying
87. 2:55to
88. 2:55outdo each other with design and cost
89. 2:58and price
90. 2:58then their products naturally become
91. 3:00much more
92. 3:02competitive overseas as well so there
93. 3:04are some benefits
94. 3:06for that now the costs um it can have
95. 3:09effect on local competition so foreign
96. 3:10direct investment can come in
97. 3:12and it can displace uh an indigenous
98. 3:15competitor
99. 3:16and this would be bad because now your
100. 3:18country is losing its own domestic
101. 3:20manufacturing source uh and loses some
102. 3:23will control
103. 3:24um and pride over the domestics
104. 3:28so like the united states losing not
105. 3:30manufacturing televisions or microwaves
106. 3:32or
107. 3:33uh microwave ovens or things that they
108. 3:35invented and having to import everything
109. 3:38um
110. 3:42and you know if they drive all of all
111. 3:43the competition away
112. 3:45then that leads to a foreign entity
113. 3:47controlling a monopolistic
114. 3:49um company inside of your country which
115. 3:52is
116. 3:52also not a good thing because
117. 3:54monopolistic enterprises tend to abuse
118. 3:56customers provide inferior products at a
119. 4:00higher price
120. 4:01so this could be a potential threat um
121. 4:04and just like you could also have
122. 4:08a balance of payment going in the wrong
123. 4:10direction so capital outflows as a
124. 4:12foreign subsidiary
125. 4:14repatriate earnings to the parent
126. 4:16company in the foreign country
127. 4:17uh and this debit would be a debit in
128. 4:19the current account so the the host
129. 4:21country
130. 4:22balance of payments associated with the
131. 4:24imports the imports
132. 4:26of input uh products by the foreign
133. 4:29subsidiary so this would make
134. 4:30uh would basically what i'm saying here
135. 4:32is that if a foreign
136. 4:34direct investment results in a lot of
137. 4:36cash being uh
138. 4:38created in profits of the domestic
139. 4:40economy and it's exported to the home
140. 4:42country of the foreign direct investment
141. 4:44now the the currency level in the
142. 4:47domestic country will be much lower
143. 4:48that's why
144. 4:49uh countries such as brazil and china
145. 4:52and india have
146. 4:53have certain restrictions about what
147. 4:55money can be taken out of the country
148. 4:57although because the united states taxes
149. 4:59this money on the way
150. 5:00back to united states there's been
151. 5:01little incentive for foreign
152. 5:04direct investment profits to come back
153. 5:06into the united states
154. 5:08because of that taxing situation and
155. 5:09it'll always be talk of a holiday from
156. 5:12this tax to try to repatriate as much of
157. 5:14this money back to the united states
158. 5:16for investment back in this country
159. 5:20it's always a political hot button
160. 5:24okay and also if you talk about national
161. 5:28pride and autonomy
162. 5:29you know you don't want to be a country
163. 5:31where uh
164. 5:33foreign competitors own all the
165. 5:35industries
166. 5:36and produce all the products and goods
167. 5:38and services and they may hire all your
168. 5:40your um citizens but you have no
169. 5:43nationalistic pride or the ability to
170. 5:45really
171. 5:46control these industries uh and
172. 5:49uh over over a point the country has no
173. 5:52real you know ability to
174. 5:54um invest and foster direct because the
175. 5:57direct ownership by citizens in your
176. 5:59country will make sure that the profits
177. 6:01stay local and that
178. 6:02your citizens are getting the maximum
179. 6:04benefit so if it's all foreigners making
180. 6:07money in your home territory it's sort
181. 6:08of draining your company
182. 6:10of wealth over time and that's a real
183. 6:12negative
184. 6:16so if the home country benefits um
185. 6:22if the it's gonna if you have uh
186. 6:25domestic people
187. 6:26companies investing in foreign countries
188. 6:28and foreign direct investments
189. 6:30the home country you're gonna have um
190. 6:33of course a stronger balance on their
191. 6:36accounts if the money is being
192. 6:38repatriated
193. 6:41there could be additional employment
194. 6:43generated even if they do a foreign
195. 6:45direct investment in a foreign country
196. 6:46they may have to hire more employees
197. 6:48here
198. 6:48to manage and remotely deal with the
199. 6:51foreign subsidiary
200. 6:52especially if it's expansion rather than
201. 6:54a move of production
202. 6:56and they can learn valuable skills and
203. 6:59know-how and
204. 7:00valuable market insights into the
205. 7:02culture of the foreign market they're
206. 7:04investing in
207. 7:05and help you know bring some of those
208. 7:07ideas back home and transfer to the home
209. 7:09country
210. 7:10well one such example that i know of is
211. 7:12um
212. 7:137-eleven created a uh division in
213. 7:16japan and later the japanese 7-eleven
214. 7:19broke off and became its
215. 7:20um own company that i believe later
216. 7:24purchased the united states 7-eleven
217. 7:26which is run out of texas
218. 7:28now 7-eleven in japan was thriving they
219. 7:31initiated
220. 7:31certain um operational changes to bring
221. 7:35in fresh fruits and vegetables fresh
222. 7:37packed sandwiches
223. 7:39on our redesign of how the operational
224. 7:42and the product contents of the 711
225. 7:44stores in japan
226. 7:45were working they're very successful
227. 7:47inside the united states 7-eleven was
228. 7:49failing and not doing very well at all
229. 7:51and got into a bad situation so the
230. 7:54know-how
231. 7:55and the expertise that was developed in
232. 7:56japan came back to
233. 7:58help manage 7-eleven in the united
234. 8:00states
235. 8:02at one point which was the parent
236. 8:03company and actually saved 7-eleven
237. 8:06and brought them back from the brink to
238. 8:08a very strong company
239. 8:10so if 7-eleven really never made that
240. 8:12foreign direct investment initially into
241. 8:13japan
242. 8:14they never would have been able to bring
243. 8:16over and bring back the operational
244. 8:18efficiencies
245. 8:19and um store layouts and product
246. 8:22uh displays that were developed in japan
247. 8:25back to the united states to save the
248. 8:27parent company so
249. 8:28there's a good example where valuable
250. 8:29skills learned in the foreign market
251. 8:31and concepts such as operations and
252. 8:34distribution can be brought back to
253. 8:36another country
254. 8:37and really strengthen their ability in
255. 8:39the domestic market
256. 8:42of course
257. 8:47the balance of payments can be negative
258. 8:49or positive depending on
259. 8:51what's happening with that foreign
260. 8:52direct investment and the same thing
261. 8:54with employment
262. 8:55in the home country if the if it's going
263. 8:58to be a situation where
264. 9:00a job people are laid off here
265. 9:02production facilities are closed and
266. 9:03moved overseas
267. 9:04that could be a real negative for the
268. 9:07host country
269. 9:08and if the products are no longer
270. 9:11exported
271. 9:12but they are manufactured in the foreign
272. 9:14country and sometimes even
273. 9:16imported back to united states that can
274. 9:19hurt the balance of payment accounts as
275. 9:21well so there are sometimes
276. 9:23some some drawbacks to that
277. 9:27now international trade theory and
278. 9:31foreign direct investment
279. 9:34um
280. 9:36this could involve some of the concerns
281. 9:38over offshore production
282. 9:42you know foreign direct invest may
283. 9:44actually stimulate economic growth by
284. 9:46freeing up home countries resources
285. 9:48and taking some demands and reducing
286. 9:51inflation
287. 9:52to concentrate activities with a home
288. 9:54country has a more comparative advantage
289. 9:56so united states
290. 9:57if a lot of manufacturing takes up
291. 10:01electric and natural resources and
292. 10:03exporting it to a country where
293. 10:05those electric is a lot cheaper uh that
294. 10:07can be been
295. 10:08very beneficial and if if this redesign
296. 10:12focuses on the home country starts to
297. 10:14concentrate on activities that
298. 10:16has more of a comparable advantage
299. 10:18research development
300. 10:19uh design marketing innovation
301. 10:22it could be a better realignment of
302. 10:25resources
303. 10:26and customers will also benefit from the
304. 10:29lower prices and i think in this world
305. 10:31today i mean
306. 10:32close due to the all the textile changes
307. 10:35clothes used to be a very expensive very
308. 10:38expensive proposition in the past today
309. 10:40clothes are extremely inexpensive
310. 10:43compared to the salaries we make an
311. 10:45amount of money
312. 10:46you know um that takes so little money
313. 10:49to buy
314. 10:50um you know if you were to buy seven
315. 10:52shirts and seven pants
316. 10:54underwear and shirts and shoes at one
317. 10:56point
318. 10:57that could be inflation adjusted
319. 10:59thousands of dollars and today
320. 11:01we're talking of hundreds of dollars
321. 11:02instead uh the same thing for computers
322. 11:05electronic equipment
323. 11:06and many of the things that we enjoy in
324. 11:07a day-to-day basis we can we
325. 11:09have the ability to purchase a much more
326. 11:12consume much more because of these
327. 11:13foreign direct investments lowering the
328. 11:15costs
329. 11:16of many of the products that we enjoy on
330. 11:18a daily basis so
331. 11:20it can be thought of as a win-win from
332. 11:22the fact that
333. 11:23you know we can focus on our strength
334. 11:25and our competitive advantage and
335. 11:27and maximize the profits we make on
336. 11:29those ends and and
337. 11:31have jobs that have high paying salaries
338. 11:35and then these high paying salaries go
339. 11:38even further because we're importing and
340. 11:39we're bringing in
341. 11:41[Music]
342. 11:42goods and services at a lower cost so
343. 11:45now we can have a much higher standard
344. 11:47of living
345. 11:47through this foreign direct investment