OENG1088 Emerging Economies Final Project - Assignment Solution

INTRODUCTION

Over the past decade, the foreign investment in emerging economic has risen dramatically as the transnational companies of the emerging economies have found to gain expertise in managing organization, processes and ventures.  Emerging economies (EE) are the countries that are investing more into the productive capacity while moving away from traditional economies by removing over reliance on export of raw material and agriculture. Being fully developed, EE are the countries that have the characteristics of a developed market, but still are not fully developed. The expression of EE was formulated in 1981 by Antoine W (Das 2009). Economies with higher annual growth rates, measured utilizing gross domestic product (GDP). The present days, multinational companies are investing and extending widely in emerging countries where those countries have a fertile environment for business development and a big base of clients. 

The concept of FDI has evolved significantly over past few years where definitions presented are yet not uniform. However, IMF has explained FDI as the process of “obtaining a lasting interest” by the investing company (direct investor) of one economy in the other economy’s company (direct investment enterprise) (Dănescu & Nisto, 2012). In order to make the definition simpler, the direct investment enterprise is defined to be the incorporated/unincorporated company in which the foreign investor holds more than or equal to 10 percent share/voting power. The cross-border capital flows (portfolio investment, capital investment, direct investment, bank lending) dates back to Middle Ages when the modern multinational enterprises emerged during industrial revolution in 19th century (Paul & Benito, 2018). Since then, the capital inflows from developed countries like Australia, Russia, USA, Canada, has been flowing to developing nations. These flows also took shape of the portfolio investment where the corporate bonds were used to be purchased or the long-term government debts used to be acquired in order to finance long term infrastructure projects or railroads. However, the importance of FDI started to impede during the late sixties, but in seventies the importance of bank lending became an important financing tool for EEs. Through over reliance on bank lending, the capital flight was financed and level of imports were raised (Pradhan, 2017). 

With the beginning of 1990, the focus on FDI in EE experienced upward plight due to Asian crises. Both bank lending and trade crediting increased substantially causing a steep rise in FDI. Till 2001, the rise in FDI was quite evident as the net outflows in EE’s capital accounts were rising at an increasing rate (Liu, 2016). With the economic reforms in EE, substantial progress could be seen as the international barriers for trade were kept on removing and macroeconomic policies were relaxed. Due to improved policies and reduction in trade barriers, the financial sectors including stock markets in EE developed even more that enabled the growth of economy and increased the financial intermediation (Hobdari, 2018). During the Asian crisis, the FDI rose from 3.7% of GDP in 1995 to 4% of GDP in 2002 (Paul & Benito, 2018). 

After 2002, the FDI in EE experienced setback due to sluggish macroeconomic performance of many of the emerging economies (Dikova & Witteloostuijn, 2007). The sluggish economic growth depressed the inward as well as outward investment in EE while making the EE less attractive for the outside investors. However, after 2003, the FDI in EE increased rapidly by 40/5 on average while again experiencing a dip of 17% in 007 due to financial crises and global economic downturn (Fu, Pietrobelli, & Soete, 2011). The global FDI environment kept on changing rapidly due to liberalization of FDI regimes, logistics advancements, increased competition and attractiveness of emerging economies. The scarcity of water, inelastic supply of critical resources and climate shocks also led to an increase in FDI especially in the agricultural sector of EE. The continued fluctuations in the overall FDI landscape in past four decades shows how globalization process has been affecting the EE and prospects of future investment possibilities (Hobdari, 2018). 

The increased reliance of EE on FDI is consistently seen as the development agenda with many positive implications including capital transfers and private capital flows between nations. Through FDI, the EE get to import improved management techniques along with access to advanced technologies and more link with international financial markets. The EE get a better chance on establishing long-term stable growth through FDI along with reduction in external vulnerability as through FDI, the EE can easily finance their current account deficits and avoid bank lending or portfolio investments with higher volatility rates (Pradhan, 2017). 

Foreign subsidiaries are partially or wholly owned companies that are part of a larger corporation with headquarters in another country which are managed by several ways, however, the most significant way in this management is the relational dynamic among the headquarter and the emerging countries (Dănescu & Nisto, 2012). The establishment of foreign subsidiaries in emerging economies such as China, India, and Vietnam are an extremely beneficial investment (Dunning 2009). The reasons why they invest in emerging economies are that an increasing capital, brand recognition, low production cost, and lower tax rates (McKinsey Global Institute 2003).