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Transcript of Foreign Investment
What is Foreign Investment?
Flows of capital from one nation to another in exchange for significant ownership stakes in domestic companies or other domestic assets. Typically, foreign investment denotes that foreigners take a somewhat active role in management as a part of their investment. Foreign investment typically works both ways, especially between countries of relatively equal economic stature. 1
Foreign investment allows countries to share resources, capital, production technologies and processes and helps small business become more competitive
Companies may choose to invest in other countries to move labor and share resources to become more productive and increase their profit margins by allocating material and labor resources effectively
Foreign investment allows countries to build trade agreements and partnerships which therefore opens up their domestic markets to a global scale and increases economic activity
Foreign investment is critical to countries economic success and sustainability, the government plays a key role in that it has to be able to maintain ties with foreign countries, establish trade regulations and ties, create incentives such as corporate tax cuts and reduce government regulations/policies/laws and regulations to attract foreign investors
The US dollar or USD is the most widely used international currency and is used to compare other countries currencies and trade values
By sharing resources and production techniques firms can become more competitive and more efficient in their productions
More jobs become available and more skilled workers will be needed as more foreign investment grows in the country
In economics, foreign portfolio investment is the entry of funds into a country where foreigners make purchases in the country’s stock and bond markets, sometimes for speculation. 2
Foreign Investors provide capital to firms for expansion, innovation and research & development efforts. these capital investments increase productivity, creates skilled jobs, profit, and a firms competitiveness
Globalization is closely related to foreign investment because it allows for more connectedness between governments, firms and consumers. As globalization increases it becomes easier to invest in foreign countries and more markets become available while trading between countries becomes even more interconnected. Globalization is a world where everyone is linked through technology and where free trade and the efficient operation of the world’s economy contribute to growing wealth for all. Economic globalization can be more efficient and produce much more global wealth. Financial connections are also important among nations.
Factors That Attract Foreign
Investment Into Canada
Canada is abundant in natural resources such as lumber, minerals and oil, etc. Foreign investors will realize these opportunities and invest in our country to gain access to these resources and use them in their manufacturing.
Canada has a diversely skilled workforce and themajority are educated. This is another key factor that determines if a country wants to invest in Canadian businesses.
To attract FDI, Canada should focus on creating a business environment that is more open to competition and conducive to innovation
Canada has to increase investment in machinery and equipment (M&E) and the education and skills of the labor force to ensure we stay competitive on a global scale.
Canada’s attractiveness is strong on the resources front. Between 2005 and 2009, the mining and oil and gas extraction sector received an average of 32 per cent of FDI inflows into Canada. This allure may fade in the future with investment opportunities growing in more cost-competitive regions such as Latin America. 3
Investing and setting up a business in Canada can also open doors to the larger US markets because of NAFTA and the Canada-US Trade Agreement (FTA)
A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. 4
Outsourcing manufacturing to a foreign country is an effective step a firm can take to maximize production, profit margins, and take advantages of the foreign countrys resources and technological advancements and manufacturing processes/techniques.
Some countries may have more natural resources,some may have resources that only that country can produce efficiently or exclusively (food products). Some countries may also have lower cost to production for certain products. So it is in the best interest of a foreign firm to invest in moving their production and manufacturing processes to other countries so that they can have the best possible chance to create their product efficiently and market it while maximizing their profits and appealing to a wider market.
To attract foreign investment and make Canada a global economic leader it has to focus on improving and establishing bilateral commercial trading relations and communicate with international trading partners while strengthening and expanding ties. In order to d this the Canadian government has developed a numerous amount of intergovernmental organizations designed to expedite mutual trade establishments and foreign investments and place the foundation for a dynamic government interchange.
In recent years Canada has been making efforts to increase exports of high-value-added products, such as high-tech and IT-related products.
$1 USD = $0.98 CAD
As of June 18, 2013
Foreign Banks in Canada
In the past Canada did not allow foreign banks to establish branches or subsidiaries in Canada
Under new legislation passed in 2001, foreign banks can now establish either full service or lending branches in Canada
The banking industry includes 24 domestic banks, 25 foreign bank subsidiaries, 24 full-service foreign bank branches and five foreign bank lending branches operating in Canada. In total, these institutions manage close to $3.6 trillion in assets (Source: Office of the Superintendent of Financial Institutions as of March 31, 2012).
Many large international banks have a presence here — through a subsidiary, representative office or branch of the parent bank. Most specialize in corporate and investment banking (e.g., niche financing) and have only one or two offices/branches. A notable exception is HSBC Bank Canada, which has a strong retail presence with branches across Canada. 5
Foreign banks have the choice of two vehicles for establishing and operating bank branches in Canada: a "full-service branch" or a "lending branch". (Both are covered under the term "foreign bank branch" or FBB). Foreign banks that currently operate through a deposit-taking subsidiary in Canada can maintain the subsidiary and establish a branch, or they can "convert" the existing subsidiary into an FBB. 6
The impact of exchange rate movements (also known as currency risk or exchange rate risk) applies when you purchase mutual funds that hold foreign securities such as U.S. stocks.
Canadian investors typically purchase U.S. mutual funds using Canadian dollars, but in order to buy U.S. stocks and bonds, fund managers first have to convert this money to U.S. dollars. 7
Currency movements can present an element of uncertainty for Canadian investors holding foreign mutual funds in their portfolios. A declining Canadian dollar can add to the returns of mutual funds that invest in foreign markets, while a soaring Canadian dollar can negatively impact reported returns on foreign investments, particularly U.S. equity funds.
Competition is a factor that comes with foreign investment and it can have both negative and positive effects on a country's economy.
- Competition increases consumer choice. In a competitive market, both the quantity and the variety of goods available to consumers are increased. By choosing among the products available, consumers determine whether firms succeed or fail. For example, the styles, models and optional features of automobiles provides consumers with ample choice at different price levels. Unpopular models are quickly discontinued and removed by manufacturers.Economics textbook
Competition increases entrepreneurial freedom. In a competitive market place, there are few obstacles barring producers from getting into an industry. Entrepreneurs will be attracted to industries where profit potential is seen to be relatively high. For example, many entrepreneurs have recently chosen to enter the growing field of information technology by developing and marketing specialized computer software. Economics textbook
Competition encourages investment and growth. When there is healthy competition in an industry, products and services often improve. improvements and innovations in the production process are rapidly implement across the industry in order to improve efficiency or increase a firms share of the market. To maintain competitiveness, firms are motivated to invest in and develop new technologies. Economics textbook
When Apple Inc. first introduced the MacBook Pro 2010 the PC market was stale and there was little to no innovation in computer technology and design. When it was released PC manufacturers soon started to rapidly invest in innovation and new technological advances in computers. The computer market has since then become highly competitive and innovation is reaching a pinnacle with new computer designs and technologies to make computers faster, thinner, lighter all while having better battery life. The prescence of competition in this market has driven it to become more innovative and productive. The competition has also greatly lowered the price of computers greatly and made it more accesible to consumers.
Apple has been a major driving force in the technological and media industries with its highly innovative products and services. This innovation and market pushing products that have been produced by Apple Inc. is especially seen in their iPhone, iPod, Mac, and music services.
Competitiveness is vital to a country's economic strength and growth in innovation and productivity, and is a factor that comes with foreign investment as foreign firms enter the host country and bring their products and services to new markets.
Competition keeps prices down and product quality high. In a competitive environment, there is increased pressure at competitive prices. Firms have less ability to manipulate prices upward because doing so will drive buyers to other competitors. Economics textbook
Competition can lower the market share of a company because since their is competition between other company's the consumers will be spread apart therefore lowering the market share of the company.
Foreign investment leads to more job creation increased productivity and economic growth and allows firms to locate and share various technologies and manufacturing processes/techniques from the host country or foreign firms that brings new technologies and labor practices into the country.
Potential business and jobs are being moved out to other countries instead of staying domestic and helping the local economy.
Profits and capital are moved oversees.
Increases foreign trade with various countries and opens doors to country's to make bilateral agreements and ties and laws that would make it easier for country's to become integrated and form stronger economies.
Will lead to increased technological innovations and advancements in diffrent industries. manafacturing processes will be refined and workers will get more training and skills as new firms enter the host country.
Increased production and profit in country bringing in foreign investment because GDP will go up as aggregate supply and demand curves shift outward and the standard of living is increased due to the various firms and their goods and services entering the market.
As the country that is inviting foreign investment in becomes more economically stronger and powerful and GDP increases, they will become global leaders and play key roles in international summits and meetings on international relations and economic issues.
Trade barriers and regulations are reduced to accommodate and attract foreign investment
The issue of foreign ownership is controversial. Concerns include loss of control over economic decision-making.
Increases production efficiency and sustainability. Manufacturers are forced to innovate in new production and manufacturing techniques to get an edge over the competition.
The firms can only make how much profit the market allows them to make and has to supply only the amount the market demands. Since the market is highly competitive it is not easier for a firm to increases its prices and therefore its profits, because no one would buy from them.
Productive efficiency is not being achieved, because the firms are supplying to the level that normal profits can be made according to the amount of competition and the market demands. The firms in the market will only ever achieve normal profits because this is what is achieved at equilibrium level.
North American Free Trade Agreement (NAFTA)
World Trade Organization (WTO)
Organization for Economic Co-operation and Development (OECD)
Includes 3 countries: Canada, United States of America, and Mexico
International Organizations allow country's to communicate with each other and create and regulate trading and other agreements/policies.
The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business.
The WTO agreements cover goods, services and intellectual property. They spell out the principles of liberalization, and the permitted exceptions. They include individual countries’ commitments to lower customs tariffs and other trade barriers, and to open and keep open services markets. http://www.wto.org/english/thewto_e/whatis_e/whatis_e.htm
Operated by the organizations member governments and decisions are made by the group as a whole, either by a group of ministers or ambassadors.
Their main purpose is to promote policies that will improve the economic and social well-being of people around the world.
NAFTA has generated economic growth and rising standards of living for the people of all three member countries. By strengthening the rules and procedures governing trade and investment throughout the continent, NAFTA has proved to be a solid foundation for building Canada’s future prosperity. http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/nafta-alena/
Definition of 'Foreign Direct Investment - FDI'
An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies. http://www.investopedia.com/terms/f/fdi.asp
There may be issues with nationalistic views, some people may not like the increased foreign prescnce which are taking over or making it difficult for domestic firms to compete in a fair market.
Some countries are concerned with the economic and political influence that some foreign firms might bring.
Firms can loose control of their ownership when there are an increased amount of foreign investors
Domestic firms may have lower market share/ penetration if they are unable to keep up with foreign firms.
Some people think that by increasing foreign investment it leaves their country vulnerable to the exploitation of foreign firms. An increased presence of foreign economic activity in the host country could leave their resources vulnerable to foreign firms that have control over them. This could result in a modern day economic colonialism or monopoly.
Foreign investors will have to be cautious when investing in foreign bonds and securities because of currency fluctuations, taxation, and portfolio risk.
Exchange rate risk is especially important, because the returns associated with a particular foreign stock (or mutual fund with foreign stocks) must then be converted into U.S. dollars before an investor can spend the profits.
The Combines Investigation Act was passed in 1889 to prevent firms from taking action that would "unduly lessen competition." Economics textbook
Prior to 1986, competition legislation was based on the premise that large corporations were able to exercise unfair influence on the domestic market place. Economics textbook
In 1986 the Combines Investigation Act was replaced by the Competition Act.
This legislation was implemented to encourage healthy competition in Canada while promoting economic efficiency and the ability of Canadian firms to to compete effectively in larger global markets.
Launched on January 1994
Since labor is cheaper in Mexico many jobs have been moved there especially from the US.
This agreement between the 3 countries has made it easier to trade between them and for companies to do business across all 3 countries.
Provides an international forum where governments can join and come to a consensus on economic development and plan for the future.
Firms have easier access to technologies, skilled workers, and resources because of the interconnectedness of these 3 countries as a result of NAFTA
Balance Of Payments
Can be used as an indicator of a country's economic and political stability.
Definition of 'Balance Of Payments - BOP'
A record of all transactions made between one particular country and all other countries during a specified period of time. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports. A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa. http://www.investopedia.com/terms/b/bop.asp.
are goods and services produced by a firm in
one country and then sent to another country.
are goods and services
produced in one country and brought in by another country.
International trade is the exchange of goods and services across international borders and is
also known as exports and imports.
Firms will engage in Foreign Direct Investment to increase sales and profits, to enter rapidly growing markets, to reduce
costs, to gain a foothold in economic unions, to protect domestic markets, to protect
foreign markets, and to acquire technological and managerial know-how.
If exports are greater than a country's imports then that country has a trade surplus. If the country is importing more than exporting it is experiencing a trade deficit. It is better to have a trade surplus because the country is less dependent on foreign goods.
Trade surplus represents a net inflow of foreign currency
Like exports and imports, FDI is a driver of international business
and many companies use FDI to establish footholds in the world marketplace by setting up
operations in foreign markets or by acquiring businesses there.
a intergovernmental organization of the world’s most
economically advanced nations that provides its members with a forum for examining
their economic, social, and governance
issues and discussing solutions.
It is now the
umbrella organization that governs the international trading system. It is the successor to
the General Agreement on Tariffs and Trade (GATT).
The current account consists of merchandise trade, services, and unilateral transfers.
Capital account items are transactions that involve claims in ownership. Direct investment
involves managerial participation in a foreign enterprise along with some account
that involves degree of control.
Currencies, like any other products, services, or claims, can be traded for one another.
The foreign exchange market is simply a mechanism through which transactions can be made
between one country’s currency and another’s. Or, more broadly, a foreign exchange
market is a market for the exchange of financial instruments denominated in different currencies.
It is a value concept, in that all the items recorded
receive a monetary value, denominated in the given country’s currency at the time of those
BOP is measured because if a country
records a substantial imbalance between inflows and outflows of goods and services for an
extended period of time, some means of financing or adjusting away the imbalance must
People sending money to others in a different country.
Inflow and outflow of capital between residents of different countries.
Canadian government sending pension money to citizens in different countries.
Investors who establish either a new plant or business or take over an existing one by purchasing controlling shares.
Involves investors who receive dividends or interest in stocks or bonds, but who do not control a company.
Purchase of Canadian stocks or bonds by foreigners represent an inflow, or receipt for Canada.
Similar purchases of foreign stocks or bonds by Canadians represent an outflow, or payment.
Official International Reserves:
Composed of foreign currencies, mostly USD, and gold.
when income exceeds expenditures for a period of time, the individuals bank account increases. However, when expenditures exceed income, the individual must use the savings in the accounting to make up for the difference.
Can be used in the same way by Bank of Canada.
Managed by Bank of Canada..
If Canadians are importing more than they are exporting, they are demanding more foreign money than foreign suppliers are supplying.
The financial and capital accounts must finance foreign demand for the Canadian dollar by recording more outflows of Canadian money than inflows of foreign money
Balancing the Account
If Canada is exporting more goods and services than it is importing, the supply of Canadian dollars will be insufficient for foreigners to buy our exports.
Foreigners need Canadian currency to buy our exports.
A nation may have flexible or fixed exchange rates or a managed system of exchange rates (managed floats). Most countries today use managed floats.
An export, or receipt, is defined as an international transaction in which foreign currency is converted into domestic currency.
An import,or payment, is defined as an international transaction in which domestic currency is converted into foreign currency.
A currency appreciates when its value, in terms of another country, rises; it depreciates when its value, in terms of another country's currency, falls.
If the Canadian dollar appreciates in value, foreign importers demand fewer dollars because our exports become more expensive. When our dollar depreciates foreigners demand more of our dollar because our exports become less expensive.
When Canadian dollar appreciates foreign goods become less expensive so we buy more. When dollar depreciates foreign goods become more expensive so we buy less.
The supply of currency comes about when the citizens buy foreign goods and services and demand foreign currency in exchange for the country's currency.
For flexible rates the exchange rate is set by the forces of demand and supply in the market, there is no government intervention.
Managed floats are a compromise between fixed and flexible rates, whereby the central bank intervenes to change short-term fluctuations in the exchange rate but allows the long-term trend to be decided by the market.
2. Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 551. ISBN 0-13-063085-3.
8. Rugman, Alan M., Simon Collinson, and Richard M. Hodgetts. International business. 4th ed. Harlow, England: Prentice Hall/Financial Times, 2006. Print.
9. Economics textbook:
Bolotta, Angelo. Economics now: analyzing current issues. Don Mills, Ont.: Oxford University Press, 2002. Print.
Interest rates can influence the value of the Canadian dollar internationally, as higher interest rates attract more foreign investors and, therefore, increases the demand for the Canadian dollar.
Government may help stimulate foreign investment by providing trade incentives to foreign companies to come to the host country and invest.
Government can seek to control the flow of currency out of a country by setting restrictions on imports.
Firms can benefit from foreign firms acquiring them or merging with the existing firms. This will further increase job growth and stimulate the economy by reforming that industry in which that firm is in.
Building new partnerships with foreign countries will attract manufacturers and their supply chains, and will provide the host country with the opportunity to open new markets for goods made in our country by the host country's businesses.
A healthy amount of diverse economic competition in a country is vital to the stimulation of its economy.
Government must build new partnerships and agreements with foreign countries to improve and stimulate the economy. Government plays a key role.