The paper "Host and Home Countries Intervene in Foreign Direct Investment " is a good example of finance and accounting coursework. Both host and the home countries are involved with foreign direct investment (FDI) for various reasons. Due to the dynamism that is involved in the ways of business operations in the current age, there are many FDI that are involved (Blonigen, Davies, Waddell, & Naughton 2007). The complexities involved in their operations will mostly call for the government to intervene. There are concerns as to whether there exist justifiable reasons for the involvement of the government.
There is a need to establish whether the natural flow of the FDI is sustainable by themselves excluding the intervention of the governments. The government intervention can be of a restrictive nature or promotional in scope. The host government’ s promotion interventions can be broadly categorized into two: financial incentives and infrastructure improvements. Examples of the restrictions that are exhibited by the host government may be ownership restrictions and performance demands. The promotional methods by the home countries include insurance on assets abroad, special tax treaties, loans and loan guarantees, tax breaks on profits earned abroad and the persuasion of the FDI acceptance by the other nations.
The restrictions involved include imposing of differential tax rates and sanctions. (Wang, Hong, Kafouros & Wright 2012) Foreign direct investment (FDI) involves the purchase of the physical assets or a significant amount of ownership (stock) of a company in another country so as to gain a measure of management control. It’ s a different concept from portfolio investment which is an investment that is not aimed at obtaining a degree of control.
The reasons for FDI growth include increasing globalization, internal mergers and acquisitions, and entrepreneurship and small firm issues (Stiebale & Reize 2011). Among these reasons, increasing globalization is one main driver behind global flows of foreign direct investment. The globalization of the world economy encourages firms to use FDI as a way to create low-cost production basis. Multinationationals are also promoted to both in the advanced and the developing economies to buy businesses in other markets. (Tvaronavičiene & Kalaš inskaite 2010) In the 1980s companies were able to get around trade barriers.
This allowed the firms to produce in the most efficient locations and export to markets. The international mergers and acquisitions rise and fall as the year changes depending on the condition of the national economies. As (Rugman 2013) asserts, the theories that govern the issues surrounding FDI include the international product life cycle theory, market imperfection theory, eclectic theory and the market power theory. The product theory states that a company will start to export its products and later engage in foreign direct investment as the product progresses in its cycle.
Three main stages are considered in this theory. Stage one is where the buyer demands and the high purchasing power encourage a company to design and introduce a concept of a new product that is new. There are no export markets initially. However, exports increase late at this stage. Stage two is the maturing product stage where the markets, both domestically and internationally, become aware of the product existence and the value gains attached. There is sustainable demand rise that over a fairly long time period. Sales begin in these nations near the end of this stage and manufacturing is established in the developing countries.
The final stage, stage three, is called the standardized product stage. Here, the prices are lowered so as to maintain a sustainable sales level since competition from companies selling similar products exerts pressure.
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