FDI – FOREIGN DIRECT INVESTMENT

Theoretically, the FDI which stands for "Foreign Direct Investment" refers to an investment in the acquisition of foreign assets with the intent to control and manage them. In fact, such companies can make an FDI in several ways, including purchasing the assets of a foreign company; investing in the company, new property, plants, equipment; or participating in a joint venture with a foreign company which typically involves an investment of capital. Normally, FDI is primarily a long-term strategy where companies usually expect to benefit from it through an access to local markets and resources, often in exchange for expertise, technical know-how, and capital. Subsequently, a country’s FDI can be both inward and outward where the inward FDI refers to investments coming into the country, and the outward FDI are the investments made by companies from that country into foreign companies in other countries. Thus, the difference between inward and outward investments made is called the net FDI inflow, which can be either positive or negative.

Firstly, there are two main categories of international investment – portfolio investment and foreign direct investment. Portfolio investment refers to the investment in a company’s stocks, bonds, or assets, but not for the purpose of controlling or directing the firm’s operations or management. Typically, investors in this category are looking for a financial rate of return as well as diversifying investment risk through multiple markets. As for the FDI which stands for "Foreign Direct Investment" in other definitions, it refers to an investment made from a party in one country into a business or corporation in another country with the intention of establishing a long lasting interest. This is what generally differentiates FDI from foreign portfolio investments where investors passively hold securities from a foreign country, and a foreign direct investment in contrast can be done by obtaining a long lasting interest through the expansion of one’s business into a foreign country.

Secondly, there are two forms of FDI in the realm of international business, namely are horizontal and vertical FDI. The horizontal FDI occurs when a company is trying to establish a new market such as a retailer, for example, that builds a store in a new country to sell to the local market. Whereas the Vertical FDI refers to when a company invests internationally to provide input into its core operations, which is usually in its home country. To illustrate this further, a company may invest in production facilities in another country. When a company brings the goods or components back to its home country (e.g. acting as a supplier), this is known as the backward vertical FDI. However, when a company sells the goods into the local or regional market (e.g. acting as a distributor), this is referred to as forward vertical FDI. In any cases, the largest global companies often engage themselves in both backward and forward vertical FDI depending on their industry.

Thirdly, many companies engage in the backward vertical FDI. The auto, oil, and infrastructure which include industries related to enhancing the infrastructure of a country such as energy, communications, and transportation are good examples of the backward vertical FDI. Companies from these industries invest in production or plant facilities in a country in order to supply raw materials, parts, or finished products to their home country. In recent years, these same industries have also started to carry out forward FDI by supplying raw materials, parts of components, or finished products to newly emerging local or regional markets.

Meanwhile, there are different kinds of FDI – two of which the "Greenfield and Brownfield" are increasingly applicable to global companies. The Greenfield FDI occurs when multinational corporations enter into developing countries to build new factories or stores. These new facilities, in addition, are built from scratch which is usually in an area where no previous facilities existed. As the name originates from the idea of building a facility on a green field, such as farmland or a forested area, companies build new facilities which can best meet their needs as well as create new long-term jobs in the foreign country by hiring new employees. Bottom line, many foreign countries tend to offer prospective companies tax breaks, subsidies, and other incentives to set up the so-called Greenfield investments.

On the other hand, the Brownfield FDI takes place when a company or government entity purchases or leases existing production facilities to launch a new production activity. One application of this strategy is where a commercial site used for an "unclean" business purpose, such as a steel mill or oil refinery to be cleaned up and used for a less polluting purpose, or a commercial office space and a residential area. Usually, the Brownfield investment is less expensive and can be implemented faster, yet, a company may have to deal with many challenges including existing employees, outdated equipment, entrenched processes, and cultural differences.

As we know, many governments encourage FDI in their countries as a way to create jobs, expand domestic technical expertise, and increase their overall economic standards. Such countries as Hong Kong and Singapore long time ago realized that both global trade and FDI would help them grow exponentially and improve their citizens’ standard of living. As a result, Hong Kong (prior to its return to China), was one of the easiest places to set up a new company where the guidelines were clearly available and businesses could set up a new office within days. This is also similar to Singapore albeit the country was a bit more discriminatory on the size and type of business, however, its government offered foreign companies a clear streamlined process for setting up a new firm.

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THE IMPACT OF POLITICAL AND LEGAL FACTORS ON INTERNATIONAL TRADE

As the governing body that have long intervened in international trade through a variety of mechanisms, some of the reasons why governments need to intervene in international trade are simply due to a combination of political, economic, social, and cultural reasons. Politically, a country’s government may seek to protect jobs or specific industries. And perhaps, some industries may be considered essential for national security purposes, such as defense, telecommunications, and infrastructure. A simple example would be a government may be concerned about who owns the ports within its country.

When it comes to addressing national security purposes, some governments may not want advanced technological information to be sold to unfriendly foreign interests which can impact both the import and exports of a country as a whole. As governments may influence trade to reward a country for political support on global matters, they on the other hand are also motivated by economic factors to intervene in the international trade. With that being said, they may want to protect young industries or to preserve access to local consumer markets for domestic firms.

Furthermore, governments have several key policy areas that can be used to create rules and regulations to control and manage international trade. Many governments continue to intervene in this particular area is owing to the fact that there has been a major shift towards free trade among nations. Because of this, those rules and regulations imposed are as follows:

 

1. TARIFFS

- Tariffs are taxes imposed on the imported products. There are two kinds of tariffs exist, one is specific tariffs which are levied as a fixed charge, and the other one is ad valorem tariffs which are calculated as a percentage of the value. Many governments, unfortunately, still charge ad valorem tariffs as a way to regulate imports and raise revenues for their coffers (money box/treasury).

 

2. SUBSIDIES

- A subsidy is a form of government payment to a producer. The basic types of subsidies include tax breaks or low-interest loans for which both of them are very common. Subsidies, in addition, can also be cash grants and government-equity participation, which are less common because they require a direct use of government resources.

 

3. IMPORT QUOTAS AND VOLUNTARY EXPORT RESTRAINTS (VER)

- Import quotas and voluntary export restraints (VER) are two strategies to limit the amount of imports into a country. The importing government directs import quotas while VER are imposed at the discretion of the exporting nation in conjunction with the importing one.

4. CURRENCY CONTROLS AND ANTI-DUMPING RULES

- Governments may limit the convertibility of one currency (usually its own) into others in attempts to limit the imports. While some governments will manage the exchange rate at a high level to create an import disincentive, they in contrast establish rules and regulations against any form of dumping practices, which is none other than when a company sells its product below market price often in order to win market share and weaken its competitors.

 

5. LOCAL CONTENT REQUIREMENTS AND FREE-TRADE ZONE

- Many countries continue to require that a certain percentage of a product or an item be manufactured or assembled locally. Some countries, in fact, specify that a local firm must be used as the domestic partner to conduct business. In conjunction with free-trade zone policy, many countries designate certain geographic areas in attempts to promote trade with other countries where they are free from tariffs, taxes, have less procedures or restrictions, and so forth.

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A FRAMEWORK FOR ETHICAL DECISION MAKING IN INTERNATIONAL BUSINESS

By definition, both ethics and ethical behavior seem to have strong historical and cultural roots that vary by country and region. The field of between ethics and international business is a deep, natural one which is a branch of philosophy that seeks virtue. Ethics, for instance, deals with morality about what is considered "right” and wrong" behavior for people in various situations, while business ethics emerged as a field in the 1970s and they did not arise until the late 1990s. While ethical decision making is arguably considered as tricky stuff (particularly, regarding international business issues), indeed, it does help those who are interested in international business to examine various kinds of business activities by questioning whether or not if a business conduct is ethically right or wrong.

To begin with, there are two of the biggest challenges to identifying ethical standards which are associated to the questions about what the standards should be based on, and how we apply those standards in specific situations. Although some experts on ethics agree that the identification of ethical standards can be very difficult, however, they have reached some agreement on what ethics is not. Ethics from a business viewpoint is not the same as feelings. Feelings provide important information for our ethical choices. Even though there are some people who are inclined to have highly developed habits that make them feel bad when they do something wrong, however, there are others who feel good even after when they are doing something wrong. As a result, our feelings often times will tell us it is uncomfortable to do the right thing even if it feels hard to do.

Furthermore, ethics is not religion nor culturally accepted norms. Many people are not religious, but ethics applies to everyone. Most religions do advocate high ethical standards but sometimes, they do not address all the types of problems we face. Some cultures, perhaps, are quite ethical but there are also others become corrupt or blind to certain ethical concerns. As the United States was to slavery before the Civil War, the saying that goes "When in Rome, do as the Romans do" is not a satisfactory ethical standard. After all, being ethical does not always mean following the law and just because something is possible, it does not necessarily mean it is ethical.

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THE FORMS OF INTERNATIONAL BUSINESS

When a firm makes choices about foreign operations that increase national and local responsiveness, the organization is more able to adapt to national and local market conditions. In contrast, the greater the level of standardization both within and across market, the greater the possible level of global efficiency. In many cases, the choice of foreign location generates unique advantages which includes better access to raw materials, less costly labor, key suppliers, key customers, energy, and natural resources. For instance, Google locates its computer-server farms (the technological backbone of its massive Internet services) closer to dams that produce hydroelectric power since it is one of the cheapest sources of electricity. And ultimately, managerial choices regarding the trade-off between global efficiency and local responsiveness are a function of the firm’s strategy, as they are likely to be a significant determinant of firm performance.

To kick start with the above topic, we need to keep in mind that a business can be a person or organization engaged in commerce with the aim of achieving a profit. Business profit, as we know, is typically gauged in financial and economic terms. However, some levels of sustained financial and economic profits are needed for a business to achieve other sustainable outcomes measured as social or environmental performance. Perhaps, it may not be a surprising fact to notice that international businesses can take on a variety of forms. Recognizing that international business encompasses government and nongovernmental organizations (NGOs), there are many companies which are for-profit businesses also have a social and environmental mission and therefore, we can have a look at the example of a company with this kind of mission from the table presented below.

International Forms of Government

The first example of the forms of international business is the governmental bodies. They are generally considered to be the body of people that sets and administers public policy and exercises executives, political, and sovereign power through customs, institutions, and laws within a state, country, or other political unit. Simply put, the government is the organization or agency, for which a political unit exercises its authority, controls and administers public policy, and directs and controls the actions of its members or subjects.

Most national governments, in addition, not maintain embassies and consulates in foreign countries, but also participate in international treaties related to such issues as trade, the environment, and child labor. For example, the North American Free Trade Agreement (NAFTA) is an agreement signed by the governments of the United States, Canada, and Mexico to create a trade bloc in North America in order to reduce or eliminate tariffs among the member countries and thus facilitate trade. The Kyoto Protocol, another example, is an agreement aimed at combating global warming among participating countries. In some cases, such European Community (EC) agreements span trade, the environment, labor, and many other subjects which are related to business, social, and environmental issues.

Nongovernmental Organizations

Following the international forms of government, the second example is the nongovernmental organizations (NGOs) which include any nonprofits and voluntary citizens’ groups that are organized on a local, national, or international level. International NGOs (NGOs whose operations cross borders), historically, date back to at least in the year of 1839. During the twentieth century, globalization actually fostered the development of NGOs because many problems could not be solved within a single nation. What’s more, such international treaties and organizations as the WTO were perceived by human rights activists as being too centered on the interests of business. Therefore, in attempts to counterbalance this trend, the so-called NGOs were formed to emphasize humanitarian issues, developmental aid, and sustainable development. One prominent example, perhaps, is the World Social Forum (a rival convention to the World Economic Forum) which is held every January in Davos, Switzerland.

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AN OVERVIEW OF INTERNATIONAL BUSINESS

In theory, international business relates to any situation where the production or distribution of goods or services crosses nations’ borders. As it involves transaction across borders where business is conducted between countries, international business additionally refers to the performance of trade and investment activities by firms across the globe. Globalization, as we know, has shifted our country’s economy towards more independent and integrated; creating greater opportunities for companies to go internationally. In short, international business is all about cross border business which is conducted not only by the private sector, but also by the public sector or the government, which includes trading, manufacturing, investing (e.g. FDI – Foreign Direct Investment), and other services which also covers a whole range of sectors such as transportation, tourism, advertising, construction, retailing and mass communications.

To start off, such globalization can take place in terms of markets where trade barriers are falling and buyer preferences are changing. What’s more, international business encompasses a full range of cross-border exchanges of goods, services, or resources between two or more nations that can go beyond the exchange of money for physical goods to include international transfers of other resources, such as people, intellectual property (e.g., patents, copyrights, brand trademarks, and data), and contractual assets or liabilities (e.g., the right to use some foreign asset, provide some future service to foreign customers, or execute a complex financial instrument).

The entities involved in international business are ranging from large multinational firms with thousands of employees doing business in many countries around the world to a small one-person company acting as an importer or exporter. This, as a result, broaden the definition of international business, in which it also encompasses for-profit border-crossing transactions as well as transactions motivated by nonfinancial gains such as corporate social responsibility and political favor that can affect businesses in the future.

Furthermore, a business can be either a person or organization engaged in commerce with the aim of achieving a profit. Business profit, as we know, is typically measured based on financial and economic terms. However, some levels of sustained financial and economic profits are needed for a business to achieve other sustainable outcomes gauged as social or environmental performance. For example, many companies that are for-profit businesses also have a social and environmental mission such as Ben & Jerry’s (part of Unilever) and SC Johnson.

Meanwhile, the global part of a firm’s business can vary considerably from importing to exporting to having significant operations outside its home country. An importer buys products and services that are sourced from other countries, while an exporter on the contrary sells products and services in foreign countries that are sourced from its home country. Beyond these two activities which are importing and exporting, some organizations maintain offices in other countries, and this as a result forms the basis for their level of foreign direct investment where a firm is investing assets directly into a foreign country’s buildings, equipment, or organizations. In many cases, some foreign offices are carbon copies of their parent company in which they all have the value creation and support activities just in a different country.

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