School of Economics and Business Sarajevo
Subject: International Economics and Business
Professor: Snježana Brkić, phD
POTENTIAL BENEFITS
OF
FOREIGN DIRECT INVESTMENT
INVESTMENT
FOR A
HOST
HOST COUNTRY
COUNTRY
Alma Kovač(77562), Enisa Šeho (77514)
January 16th, 2025
CONTENTS
1. INTRODUCTION
2. TYPES OF FDI
3. MOTIVES OF FDI
4. CHARACTERISTICS OF FDI
5. BENEFITS OF FDI
6. CAPITAL INFLOWS
7. TECHNOLOGICAL TRANSFER
8. EMPLOYMENT AND MANAGEMENT
9. CONCLUSION
10. REFERENCES
Introduction:
WHAT IS FDI?
FDI refers to the investment made by an
individual, organization, or entity from one
country (known as the "home country") into
another country (referred to as the "host
country") to establish a long lasting interest and
a significant degree of influence or control over
a business or operation in the host country.
The investment involves foreign assets like
property, equipment, technology, or shares to
establish or expand business operations, or gain
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a significant stake in a foreign enterprise.
TYPES OF FDI: BY FORM
Greenfield investment
Direct investment to build a new
manufacturing,
marketing.
or
administrative facility, as opposed to
acquiring existing facilities.
Example includes Ford establishing its large
factory
in
Rayong,
Thailand,
to
manufacture small cars for emerging
markets.
An acquisition
-The purchase of an existing company or facility.
-Example of an acqusition is the case when The
Chinese personal computer manufacturer Lenovo
made an ambitious acquisition of IBM's PC business,
which now accounts for two-thirds of its annual
revenue.
This deal provided Lenovo with valuable strategic
assets such as brands and distribution networks and
helped it rapidly extend its market reach and become
a global player.
A MERGER - special type of acquisition in which
two companies join to form a new, larger firm.
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Vertical
Integration
TYPES OF FDIBY LEVEL OF INTEGRATION
Horizontal
Integration
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-an arrangement whereby the firm owns, or seeks to own, multiple stages of a
value chain for producing, selling, and delivering a product or service
- an arrangement in which the firm owns, or seeks to own, the activities
performed in a single stage of its value chain.
MOTIVES FOR FDI
Ultimate goal of FDI and international collaborative
ventures is to enhance company competitiveness in the
global marketplace, managers pursue these strategies for
complex reasons.
We classify the reasons into three categories: marketseeking
motives, resource- or asset-seeking motives, and
efficiency-seeking motives.
In many cases, the firm aims to satisfy several motives
simultaneously, within a single venture.
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Picture #1: MOTIVES FOR FDI
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CHARACTERISTICS OF FOREIGN DIRECT INVESTMENT
1
Substantial
resource
commitment
2
3
4
Local
presence and
operations
Firms invest in
countries that
provide specific
comparative
advantages
Intense
dealings in
the host
market
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Picture #2: FACTOR TO CONSIDER IN SELECTING FDI LOCATIONS
WHY FOREIGN
DIRECT
INVESTMENT?
Benefits of foreign direct investment (FDI), such as positive effect on
capital, technology, resources, labor market and the business
environment of a host country help with the growth of one economy,
especially an economy in the developing world where alleviation of
poverty is crucial.
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Statistical data for B&H
According to CBBH revised data, in 2021 B&H
attracted EUR 578 million and FDI increased by 37.2%,
compared with the previous year. Increase of FDI
was registered in 2022.
According to FIPA data, direct foreign investments in
the period January-September 2023 amounted to
1.442 billion convertible marks (BAM), which is an
increase of 23.9 percent, since the investments in
2022.
From the graph, we can conclude that FIPA has
recorded a constant growth of direct foreign
investments in all fields for the past three to five
years.
Picture #3: FLOW OF FDI IN B&H, 2008-2022
Based on CBBH data, by activities, most
investments were realized in the area of
Electricity, gas, steam and air conditioning
supply in the amount of 102 million EUR,
followed by the area of Financial service
activities with 75 million EUR and Manufacture
of basic metals 63 million EUR.
According to the area in 2022 in Federation of
B&H registered FDI amounted 512 million EUR
(or participation 69.5% in the annual amount),
FDI was 202 million EUR
(27.4% share) in Republic of Srpska, and in
Brčko District FDI was 23 million EUR (3.1% share
in the annual amount).
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Picture #4: TOP INVESTOR COUNTRIES IN B&H, DECEMBER 2022
CAPITAL INFLOWS
Many Multi-National Enterprises, due to their large size and strength,
have access to a lot of resources that a host country’s companies
do not have.
That includes financial resources, which makes it easier for such
enterprises to invest and expand their businesses into other
countries.
Furthermore, foreign capital has a positive effect on technological
advancement and improved infrastructure, elevating an
economy’s productivity. This creates a “ripple effect” that spills out
into other sectors.
According to a study done by Bosworth and Collins (1999), that
includes 58 developing countries during 1978-1995, every dollar of
capital inflows increases domestic investment by 50 cents. Once
capital inflows take form of FDI, then it’s an almost one-to-one
relationship between FDI and domestic investment (80 percent),
concluding that FDI is complementary to DI.
Picture #5: IMPACT OF FDI ON DOMESTIC MARKET
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TECHNOLOGICAL TRANSFER
Advanced technology may help in a production process,
such as robotic automation, or they can be incorporated in
a specific product (smartwatch).
Most developing countries do not possess adequate
knowledge and/or skills to create new technologies that
can help with production or development of new
products.
FDI plays a crucial role when it comes to transfer of
modern technologies to the developing world, where
most of the times that technology is more modern,
efficient and environmentally “cleaner” than the one that
might be produced locally. This boosts an economy’s
productivity, allowing new products, services and
processes to appear in different sectors.
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EMPLOYMENT
AND
MANAGEMENT
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FDI affects employment both directly - by
opening new workplaces for host country’s
citizens or indirectly - new job opportunities
from the local suppliers or from local spending
by Multi-National Enterprises’ employees.
According to a report by Aaron C. (1999), there
were additional 26 million jobs created in
developing countries worldwide through FDI.
Furthermore, for every 1 direct job created,
there are additional 1.6 indirect jobs created
through linkages between domestic producers
and foreign investors.
In order to illustrate how FDI can potentially
affect employment of one economy, we will
use an example of a German retail giant “Lidl”
expanding to the Bosnian market.
According to a published article by Connecting
The Region (2024), Lidl plans on expanding
number of stores annually, potentially reaching
70 to 80 stores within a decade. As for the
upcoming opening of first stores, there will be
additional 1,500 employment opportunities on the
job market for the locals.
Not only does this benefit every newly employed
individual, but it also positively impacts the
domestic private sector through backward
linkages.
“Backward linkages” essentially means that
there are new opportunities for domestic
suppliers to provide domestically produced
inputs for Lidl.
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In terms of managerial benefits, MNE’S managers transfer important foreign knowledge and skills which can be
essential for a more productive domestic workforce. Host country’s workforce can gain knowledge through explicit
and implicit training.
This knowledge can further be transferred onto domestic companies when the trained staff decides to re-enter the
workforce, thus providing the domestic companies with valuable knowledge and abilities.
Lall, S. and Streeten, P. (1977). in their article "Foreign Investment, Transnationals, and Developing Countries." divide
these benefits into three parts:
1. Managerial efficiency which is a result from better training and higher standards,
2. Entrepreneurial capability in seeking investment opportunities and
3. Positive externalities arising from trained employees
MANAGEMENT
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CONCLUSION
In order to get maximum benefits from foreign
direct investments, there must be an adequate
enabling environment which encourages such
investments, as well as domestic investments to
rise.
It is important to mention that FDI, even though it
can be extremely beneficial for a host country’s
economy, can leave a negative impact on the
environment, if there is no encourageous laws by
the government.
Foreign Direct Investment is a fundamental
mechanism for growth of a developing economy
and, as such, creates
economic and social
improvement.
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REFERENCES
1. Aaron, C., 1999. The Contribution of FDI to Poverty Alleviation. Report, The Foreign Investment Advisory
Service, Singapore.
2. Cavusgil, S.T., Knight, G. & Reisenberger, J.R., 2013. International Business: The New Realities. 3rd ed.
Boston: Pearson.
3. Connecting Region, 2024. Lidl expands in Bosnia and Herzegovina with major investment plans.
Available at: https://connectingregion.com/news/lidl-expands-in-bosnia-and-herzegovina-withmajor-investment-plans/ [Accessed 29 December 2024].
4. Harbi, S., n.d. The Effects of Foreign Direct Investments for Host Country’s Economy.
5. Kotak Securities, n.d. Advantages of Foreign Direct Investment (FDI). Available at:
https://www.kotaksecurities.com/investing-guide/share-market/advantages-of-fdi/ [Accessed 29
December 2024].
6. Lall, S. & Streeten, P., 1977. Foreign Investment, Transnationals and Developing Countries. London:
Macmillan.
7. Loungani, P. & Razin, A., 2001. How beneficial is foreign direct investment for developing countries?
Available at: https://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.htm [Accessed 29
December 2024].
8. FIPA, n.d. Foreign Investment Promotion Agency of Bosnia and Herzegovina. Available at:
https://www.fipa.gov.ba/Default.aspx?langTag=bs-BA&template_id=123&pageIndex=1 [Accessed 29
December 2024].
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