Sunday, April 29, 2007


Foreign direct investment (FDI) is defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor."The FDI relationship, consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm.

Types of FDI:
(1)Greenfield investment
(2)Mergers and Acquisitions
(3)Horizontal Foreign Direct Investment
(4)Vertical Foreign Direct Investment

Types of FDI based on the motives of the investing firm:
(1)Resource Seeking
(2)Market Seeking
(3)Efficiency Seeking

FDI inflows, mostly in the form of acquisitions, can cause concerns in host countries

Even the most advanced economies wear blinkers as far as FDI is concerned. At another level, issues of security can never be wished away in countries such as India.

For countries such as India, FDI is considered a superior form of investment to, say, portfolio flows, although it is the latter type, coming under the broad category of foreign institutional investors (FII), that has underpinned the stock markets' phenomenal rise. It is also well known that the country's external account is critically dependent on these capital flows to bridge the widening current account deficit.

FII flows are, however, less stable than FDI. Besides, FDI is supposed to bring in technology and better management practices and generate employment in the recipient country.

These assumptions may prove wrong in many cases.It is naïve to think that FDI's come in only to set up large, greenfield ventures. A greater proportion of total FDI flows is in the form of mergers and acquisitions (M&As). In a globalising world, this is only to be expected. But M&As often involve change in ownership, result in hostile takeovers and more generally strain existing regulations in many countries. Besides, technology has made it possible for funds to flow instantaneously across national borders.The reality is that there are sectoral caps in India for FDI.These may not have economic logic.

Case Studies::
On March 9(2006), DP World, an entity owned by the UAE Government and engaged in the management of ports worldwide, decided to sell its stakes in six American ports rather than face growing political opposition within the U.S. The company had acquired the rights to manage those ports following its earlier takeover of P & O, a major British shipping and port management company.

As long as P&O was managing those ports nobody raised any concerns over security or for that matter over anything else. Even the Dubai company's takeover of P&O had hardly created any ripples. But substitute British ownership and management with Arab control and you have a huge problem. The U.S. Congress was poised to legislate against the deal and although the U.S. President had argued in favour of DP World, the company decided to divest rather than confront the politicians.

The DP World episode has other messages too. Thanks largely to M&As, ownership of companies is constantly changing. Governments have very little say on deals that take place in some other country but impact their national interests. A large majority of cross-border M&As involving American companies originate from western democracies and are seldom subject to a similar degree of scrutiny. There has been of course a glaring display of double standards.

Apart from the obvious one of U.S. politicians opposing a deal simply because the new owner is from the Arab world (even if from a friendly country) there is the other matter of being selective: it is well known that the U.S. cannot do without the huge investments other countries including cash rich Arab countries are making everyday.

Lakshmi Mittal's bid for Arcelor, Europe's biggest steel maker, has met with opposition, not entirely for economic reasons. Top political leaders of France and Luxembourg are mobilising opposition to the deal citing economic patriotism. The real reason is the supposed "lack of a cultural fit" between the takeover target and the would-be acquirer.

Last summer, a Chinese oil company CNOOC was thwarted in its bid to buy Unocal, an American petroleum company that had put itself on the auction block. Despite the better terms offered by the Chinese company, Unocal was pressured by American politicians and others to accept an inferior bid from the local Chevron. Here again, a fear of letting strategic energy assets get into foreign, more specifically Chinese, hands had weighed with the politicians.

Right now in India, security concerns have been raised over the sale of a 10 per cent equity stake in the telecom joint venture Hutchison-Essar by the holding company Hutchison-Telecom International. The buyer, an Egyptian company Orascom, has a large presence in Pakistan and Bangladesh.

Security issues ought to dominate FDI policies especially if sensitive sectors such as telecom are involved. However, policies once framed must be made transparent.

Source : The Hindu ,Wikipedia
Source Writer :: C. R. L. NARASIMHAN

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