C8.5. Government policies and FDI — Transcript

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1. 0:00okay but you know government policy
2. 0:04is government policy and it could
3. 0:05regulate based on the attitudes of
4. 0:08populations and diplomats
5. 0:10they can be um concerned about uh
6. 0:13encouraging or discouraging foreign
7. 0:16direct investment for
8. 0:17for different reasons you know um
9. 0:21depending on what you know the
10. 0:23government policy
11. 0:25um you know you know for example host
12. 0:28countries add to our attitude
13. 0:30towards this uh is is going to be a big
14. 0:32factor in whether to locate the
15. 0:34production
16. 0:35into that foreign country so if the
17. 0:37government's not supportive of it
18. 0:38countries
19. 0:39companies may shy away you know
20. 0:41investing in in countries have huge um
21. 0:45you know that have very open permissive
22. 0:48policies towards
23. 0:49foreign direct investment it's clearly
24. 0:50preferable to invest in countries that
25. 0:52are hostile towards it or restrictive
26. 0:54however these issues are not
27. 0:55straightforward and it takes time to
28. 0:57understand
29. 0:58a country sometimes isn't so
30. 0:59straightforward and just
31. 1:01their their their nuances to the policy
32. 1:03and what they're really trying to get at
33. 1:05so you know you may not really even
34. 1:07realize it until you have some
35. 1:08experience in the area
36. 1:10so despite moving forward with free
37. 1:13market stance in recent years many
38. 1:15countries have a rather pragmatic stance
39. 1:17toward foreign direct investment
40. 1:19in such cases a firm considering foreign
41. 1:21direct investment must
42. 1:22you know often negotiate specific terms
43. 1:24of the investment in the countries with
44. 1:26the country's government
45. 1:27you know before making the investment
46. 1:29and such negotiations consent
47. 1:31center on the host government trying to
48. 1:33attract
49. 1:35um the foreign direct investment
50. 1:38and incentives the host government are
51. 1:39prepared to give a multinational
52. 1:42uh and what the firm will commit in
53. 1:44exchange
54. 1:45for tax reductions or gifted land or
55. 1:48uh minimum wage guarantees the host
56. 1:52government is on
57. 1:52if a host government's uncertain about
58. 1:54the benefits of foreign direct
59. 1:55investment
60. 1:56it may choose to restrict access
61. 1:57allowing these companies only into a
62. 1:59special economic zone
63. 2:01uh not free access to the entire country
64. 2:04but to a large degree the outcome of any
65. 2:07negotiations agreement depends on the
66. 2:09relative
67. 2:10bargaining power of each parties and
68. 2:11each size bargaining power depends on
69. 2:13three factors
70. 2:14the value each side places on what the
71. 2:18other has to offer
72. 2:19the number of comparable alternatives to
73. 2:21each side
74. 2:23and the time horizon for each party
75. 2:26and from the perspective of a firm
76. 2:28negotiating the terms of an investment
77. 2:30with a host government uh the firm's
78. 2:32bargaining power
79. 2:33is if the firm's bargaining power is
80. 2:35high when the host government places
81. 2:37high value
82. 2:38on what the firm has to offer the number
83. 2:41of comparable alternatives
84. 2:42open to the firm is greater and the firm
85. 2:45has a long time in which to complete the
86. 2:47negotiations
87. 2:49and you know the the reverse of this
88. 2:50awful holds also holds true the firm's
89. 2:52bargaining power is low when the host
90. 2:54government places low value
91. 2:56on what the firm has to offer and and
92. 2:59the number of comparable
93. 3:00uh alternatives open to the firm is
94. 3:02fewer and the firm has shorter time
95. 3:04you know to negotiate so if it's sort of
96. 3:06like say
97. 3:07there's a industry that's known for a
98. 3:10lot of pollution
99. 3:11and a lot of um you know
100. 3:15using a lot of chemicals or something
101. 3:18that's really not good for local
102. 3:19populations or drinking water
103. 3:21the foreign governments may be hesitant
104. 3:23allowing them to build their
105. 3:24manufacturing or chemical plants
106. 3:27in those countries and in the past we
107. 3:29had a horrible thing happen in india
108. 3:30where there was a chemical
109. 3:32company that something happened at the
110. 3:34plant gas was released and killed
111. 3:36a huge amount of domestic population i
112. 3:39think maybe it was 3m
113. 3:40i'm not exactly sure so don't quote me
114. 3:42on that so there there are and
115. 3:43governments learn
116. 3:44like once these abuses happen that they
117. 3:46gotta be a little bit more picky about
118. 3:47the type of foreign direct investment
119. 3:49that comes into the country
120. 3:52okay so
121. 3:57so many nations governments have backed
122. 3:59insurance programs to cover major types
123. 4:01of foreign direct investment risks so
124. 4:03the government
125. 4:04can actually buy insurance um and they
126. 4:07they will sometimes eliminate the double
127. 4:09taxation of foreign income
128. 4:10so as not to discourage foreign direct
129. 4:13investment
130. 4:14and they'll even relax restrictions you
131. 4:17know if they're trying to encourage
132. 4:19um outward foreign direct investment you
133. 4:22know
134. 4:22so double taxation something united
135. 4:24states has many comp
136. 4:26company countries have said listen if
137. 4:28you pay tax in the foreign country when
138. 4:30you bring the money home you'll have to
139. 4:31pay tax domestically
140. 4:32and a lot of like i said earlier a lot
141. 4:34of politicians
142. 4:35argued for the fact that that's how
143. 4:37united states should be because we want
144. 4:39these companies to bring back these
145. 4:40profits and reinvest in the united
146. 4:42states something that
147. 4:43they're not willing to do if they have
148. 4:45to pay income tax on
149. 4:46so you know even though
150. 4:50the united states does encourage outward
151. 4:52a foreign direct investment
152. 4:54they're not as accommodating as you
153. 4:56think they should be
154. 4:58you know if they're restrictive on
155. 5:02outgoing foreign direct investments
156. 5:06and this includes the united states
157. 5:07they've exercised control over
158. 5:09the foreign direct investment from time
159. 5:11to time and they can manipulate the
160. 5:13taxes to make it less favorable
161. 5:15they can restrict
162. 5:19certain corporations for investing in
163. 5:21certain nations for political reasons
164. 5:23such as cuba
165. 5:24we're not allowed to at one point you
166. 5:26know travel is restricted there's no
167. 5:28direct investment allowed so governments
168. 5:30and policies they're not a
169. 5:32completely free market they still play
170. 5:34with um
171. 5:35restricting for their own political
172. 5:37gains of what the host country is trying
173. 5:39to
174. 5:40um you know
175. 5:43you know where they're trying to bring
176. 5:45their policies to
177. 5:49now encouraging inward foreign direct
178. 5:51investments governments can offer
179. 5:53incentives to foreign firms
180. 5:54um to invest in their home countries and
181. 5:56this is a lot of developing nations
182. 5:59uh want developed countries to bring you
183. 6:02know
184. 6:03in this foreign direct investment to
185. 6:04bring money into the country and
186. 6:06resources
187. 6:07uh to transfer know-how higher employees
188. 6:11and they often try to capture foreign
189. 6:13direct investment away from
190. 6:15other countries and they'll fight each
191. 6:17other on negotiations
192. 6:19so companies can really benefit as these
193. 6:22you know as these companies countries
194. 6:24um really fight and offer a great deal
195. 6:27to have them come
196. 6:28into the domestic markets if it is
197. 6:31solely
198. 6:31just for the reason to reduce
199. 6:34unemployment would be a big gain
200. 6:36you know and of course they can be
201. 6:39restrictive a host country can be
202. 6:41restrictive
203. 6:42and there can be ownership restraints
204. 6:44placed on foreign
205. 6:45firms in certain sectors not allowing
206. 6:47the cause of national
207. 6:49security you could see how we wouldn't
208. 6:51want um
209. 6:52a foreign direct investor to come in by
210. 6:54a defense contractor
211. 6:55you know say russia buys um
212. 6:59northrop grumman that could be a big
213. 7:02issue
214. 7:03or china buys lockheed martin they we
215. 7:06the government is going to restrict that
216. 7:07because of national
217. 7:08uh concerns of them getting defense
218. 7:10secrets and defense plans and weapons
219. 7:12technology
220. 7:14and there can also be performance
221. 7:15requirements placed on
222. 7:17foreign direct investments to maximize
223. 7:19the benefits and minimize
224. 7:20the cost to foreign direct direct
225. 7:22investments in the host country so they
226. 7:23could say that
227. 7:25they have to expand by a certain level
228. 7:26or higher so they could hire so many
229. 7:28people
230. 7:29or so they could put actually
231. 7:31requirements on the foreign direct
232. 7:32investment
233. 7:35okay um international institutions in
234. 7:39foreign direct investment
235. 7:44the world trade organization uh has in
236. 7:47the past there wasn't
237. 7:48any um involvement by multinational
238. 7:50institutions
239. 7:51but the world trade organization has
240. 7:54established a uniset
241. 7:55universal set of rules to promote
242. 7:59and establish a consistency in foreign
243. 8:02direct investment
244. 8:03where you know to promote more
245. 8:07free trade around the world so there is
246. 8:08some international institutions who are
247. 8:10now involved in this so
248. 8:12this you know this is just another
249. 8:13cornerstone of what's setting the stage
250. 8:16for a um
251. 8:20the explosion of globalization and world
252. 8:22trade
253. 8:23next chapter we look at regional
254. 8:25economic integration
255. 8:27and we talk about how regional
256. 8:30geographic economies are coming together
257. 8:33to form trade blocs
258. 8:35and free trade zones and such like that
259. 8:37and that effect on international trade
260. 8:39okay i'll see you next time for chapter
261. 8:41nine
262. 8:42take care