Introduction
Foreign direct investment (FDI) is defined as a cross-border investment by an entity resident in one economy with the objective of gaining a long-term interest in an enterprise resident in another economy. Another definition asserts that FDI “ involves the transfer of tangible and intangible assets from one country to another with the purpose of their use in that country to generate wealth under the total or partial control of the owners of the assets”. In both definitions, it is apparent that foreign direct investment involves the movement of capital and assets from a home country to a host country, where the money is going to be used to develop business channels and links in order to profit from them.
The purpose of this paper is to examine recent trends in world trade and the movement of foreign direct investments across the continents and countries of the world. The paper will focus on the retail sector and examine the trends in FDI. The paper will then proceed to examine the impact of world trade and FDI on the developing world and how this can aid development and growth. Finally, the paper will examine the international business strategies of a sample entity – Tesco and identify the main trends and features.
Recent Trends in World Trade & FDI
There are many dimensions in which the trends in FDI can be evaluated and analyzed. Most authorities in international business however assert that FDI has generally increased over the past years. The increase in FDI is said to be due to the changes that have occurred in investment laws, which are somewhat a reflection of numerous international treaties that are in place in different parts of the world today. There are numerous stability clauses that are instituted in nations around the world which guarantee investment contracts and make it difficult for local interference in FDI that has moved into various countries around the world.
The main trend in modern FDI movement is mainly horizontal – market seeking in nature, because most businesses seek to expand into nations where they will get large markets, like India and China. This is the main motivation and desire of FDI movements from the developed world to the developing world. On the other hand, the movement of FDI within the developed world and from the developing world to the developed world is mainly efficiency seeking (vertical).
In terms of values, it appears that FDI is mainly a north-north activity. In other words, FDI moves from one country in the northern hemisphere or the developed world to another developed country. However, there is an increase in the flow of FDI between the developed world the developing world as well as amongst developing countries. The trends are exhibited in the graph below which provides details of the FDI movement.
Figure 1: Inward Movement of FDI
The figure above shows that FDI movement to the developed world was twice as much as it was in the developing world in the year 2003. It stood at US$400 billion and US$200 billion respectively. Over the years, they both increased consistently and the figures doubled by 2005 for both regions. FDI continued to increase until it got to record highs in the developed world in 2007 when it reached over US$1,200 billion in 2007. However, obvious factors like the global financial crisis which hit the developed world caused the inflow of FDI to the developed world to slow down after 2007. This was marked by an increase of FDI to the developing world, particularly China after 2007. FDI inflow to the developing world overtook FDI movement to the developed world by the second half of 2011.
Figure 2: Outward Movement of FDI
These statistics show that the movement of FDI from the different regions of the world has increased consistently since 2003. Whilst the developing world was presenting almost zero FDIs in 2003, it increased consistently to a little over US$400 between 2010 and 2012. FDI outflow is almost always from a developed country. This has been the dominant trend in recent FDI movement and processes. And the process increased consistently from 2003 to 2007 where due to the obvious effect of the credit crunch, FDI reduced significantly. However, it is apparent that the movement of FDI from the developed world increased after 2009 due to the fact that it became clear that it was important for firms to diversify their portfolios and also seek new opportunities in other parts of the world where the economies are developing and growing significantly.
Trends in FDI in Retail Sector
The retail industry has been marked by various forms of mergers and acquisitions in the past decade because most retail giants around the world seek to purchase already existing retailing chains in order to establish and institute their brands there. Most retail entities in countries around the world seek to expand and become bigger. And this expansion trend comes with various hierarchical implications for all parties involved. For instance, European retail entities expand in to countries in the developing world like India and China. In the process, American retail entities that have a stronger asset base and a better financial position expand to Europe, where they tend to control more assets and get a better possibility of expanding than their European counterparts due to the capital controls they have.
The opening up of China and India as well as other emerging economies has caused retail giants like Walmart and Tesco to move into these economies rapidly. . Retail entities often target nations that have an emerging and a growing middle class because it is such individuals who come together to purchase products from such supermarkets and retail chains. In most cases, international retail firms in the developing world tend to localize their strategy in order to fit into the local context because the local cultures and systems are often different from the culture and practices of the home country.
Another feature of the developing world is that retailing in these countries are largely unorganized hence, there are many shops and sales outlets that exist as tiny points in every town or city, hence, the essence of FDI is to create a framework through which things could be streamlined and there could be a major process and system that will allow things to be done in an easier and more convenient way. This increases competition in the retail industry and get all the firms to work with each other in order to achieve the best results.
Impact of World Trade & FDI on Developing Economies
The movement of FDI from the developed world to the developing world leads to a growth in GDP and an improved quality of life for these countries. This is because FDI movement leads to the movement of capital that enables these developed countries to add values to products and natural resources they often have in abundance and they get to sell these onto the international markets and get foreign exchange by way of high profit margins. This is also comes with better technology and better systems as well as strong management and new ideas that help to improve and bolster the local economy in both the short run and the long run.
Empirical evidence indicates that in most cases, FDI in every developing country creates a positive relationship with the growth of the economy and the country. Even in cases of serious financial crisis like the case of East Asia where things went bad in 1997, FDI still stabilized the economy and led to a series of positive results in terms of economic growth.
In most situations, FDI is utilized as a system and a process for the achievement of policy frameworks of governments in these developing countries. This includes the building of infrastructure to ensure that the country’s economy is put on a path towards the rapid development and enhancement of the country and its economy. Technology, degree of productivity and relative cost of operation all improve because they are all important and they tend to modify and change the economy for the best. This will help to promote a high degree of growth and the establishment of an economy that is robust enough and can accelerate the growth and enhancement of the economy.
Substitution and export potentials are built and enhanced by the growth of FDI in every country. Different elements and different factors cause most countries in the developing world to gain high growth and developmental rates. This also leads to improved and enhanced social systems and structures that causes the citizens of these countries to gain higher and improved social and economic sources.
Impact of FDI on International Business Behavior in Developing World
As identified above, FDI comes with the growth and enhancement of international trade agreements and this complements the activities and the processes that are carried out to ensure that there are better mechanisms of carrying out better controls and important structures of carrying out things to prevent the achievement of improved systems. This is typically based on the growth and enhancement of corporate governance systems and structures. These systems and structures lead to the creation of credible commitments and proper measures that are meant to enable corporate entities and their stakeholders to achieve credible commitments and trade agreements. As firms are able to achieve stronger mechanisms of corporate governance, credibility increases and more commitment is made by the international community for the achievement of more FDI. This helps to further grow the economy and promote more economic growth.
Other studies establish a relationship between FDI injection and the growth of foreign remittances and foreign government aid because they all work together to promote the development of the least developed countries. This is because in the real sense, some of the least developed countries are given assistance by the international community. However, this is similar to a welfare-state structure and it does not always bring the rightfully desired results. Therefore, the alternative approach is to get these states to develop their economies through capital injections that allow them to generate more money and develop on the level of liberal capitalist structures put forward by Milton Friedman. This is seen as the best way and manner through which nations in the developing world can develop.
Tesco & International Business Strategies
Tesco is a UK-based supermarket that is strongly steeped in the British cultural identity as a nation. It has a history that goes back to the early 1920s and it has grown and expanded to become a household name in the United Kingdom. Tesco began to expand in the late 1990s. They began to expand into various parts of the European Union with the hope of benefiting from the European Union expansion programs. Afterwards Tesco expanded to North America and then to other emerging economies in the Asian-Pacific region as a fundamental part of their expansion drive.
Tesco first acquired a shop in Hungary in 1995 and this was meant to build a Tesco line from the scratch in the country and the rest of Eastern Europe. Therefore, their FDI strategy is based on Greenfield strategies that seek to build foreign businesses from the scratch. Once the business was built, they moved their staff and management personnel to these new countries to manage and ran things.
However, after their entry to the US and Japan failed and the management was changed in 2010, Tesco embarked on a franchising model where businesses in most Eastern European countries were to be ran and controlled by individual owners. This culminated in a situation where FDI was only injected into these Eastern European countries to establish a centralized operation and consolidated costs. However, local investors also spent money to complement their effort.
Tesco’s expansion is usually horizontal in nature because primarily, they expend FDI as a means of getting into new markets and also acquiring some kind of profitability gains through those growth plans and activities. This includes the expansion into these new countries where the middle-class is growing like China, India and South Korea. These are nations that most UK businesses do not traditionally expand into. However, the desire to grow and expand into these new markets provides the impetus for the development of the Tesco way in these countries and communities.
Once Tesco establishes their basic infrastructure in a foreign country, they seek to impose their fundamental UK strategy of pursuing economies of scale. This has led to the FDI injections into various firms that complement their vertical integration strategy of gaining control over various local opportunities. Thus, they further invest into the local economy and ensure that they gain control and consolidate their presence in the country in question.
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