Foreign Direct Investment and Multinationals

The differences between the investment terms

TRIMs vs. TRIPs

Trade-Related Investment Measures are a set of standards of industrial policy that constitute the rules used by a country to guard the activities of foreign investors. Trade-Related Aspects of Intellectual Property Rights are not rules but agreements. The agreements provide limits that regulate intellectual properties.

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A tax holiday incentive is a plan created by a government to encourage foreign investment by lowering taxes. The investment tax credit is an incentive that allows firms to cut some amount of investment cost from their usual tax liability including the depreciation allowances.

BITs vs. DTTs

Bilateral Investment Treaties are agreements created through trade pacts that provide for the terms and conditions for privatization by firms of one state in another country. Double Taxation Treaties are agreements that often mitigate between two countries to levy a tax in a double liability. They mostly apply to income tax, assets, and financial transactions.

Home country advantages vs. Economies of scale advantages

Home country advantages are the aspects within a country that provides opportunities for businesses and economic growth while economies of scale advantages are the aspects within a firm that help it to grow such as the plant size and customer base.

Efficiency seeking FDI motive vs. Strategic asset-seeking FDI motive

A firm that seeks to engage in FDI to be efficient in its operations moves production to a higher level while a strategic asset motive involves creating a specific product in a unique but desirable manner.

Foreign Direct Invesment

Determinants of FDI and factors that affect the location decisions of FDI/MNCs

Human capital, agglomeration effects, and a liberal degree of trade regime affect location decisions of FDI. Human capital affects the decisions made by labor unions within a region. In Europe, FDI is attracted by agglomeration identified by the size of the market and a five-year moving average stock showing how FDI is sensitive to agglomeration patterns. Trade regime is the difference between exports and sales. The ratio of export to sales determines decision making regarding foreign investments.

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Factors relevant in attracting or impeding the flow of the service, infrastructure, and extractive sectors

Service, infrastructure, and extractive sectors are all attracted by the market size. The market size creates room for economies of scale hence an increase in production. Production factor specialization and market growth also improve total supply in service. Infrastructure and executive sectors can also grow the market.

Tax incentives that a host country provides to attract FDI

The tax holiday is used especially in developing countries to create benefits once the country has achieved its income level. Another target approach is allowing fast write-offs of expenditures to foreign investors. Lowering the effective corporate tax rate is also practiced by various countries. An extreme approach is used to reduce taxes on foreign investments by countries that are a tax haven. Finally, there are regional efforts to harmonize tax policies to provide good relations with investors by host countries.

Multinational Corporations

What makes MNCs from emerging economies different from MNCs from advanced countries?

Multinational Corporations’ motives in emerging economies involve working with governments to support economic incentives while in developed countries they compete with each other for markets. In developed countries, MNCs are privately owned. Emerging economies control most corporations until they are well established.

Why do MNCs engage in political activities in a host country?

Government policies that affect most operations in MNCs are influenced by politics. Politics, therefore, forms part of the external economic environment in any business.

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What are susceptible activities by an MNC that are often associated with bribery and corruption?

MNCs bribe government officials to get lucrative contracts. In the judicial systems, they deny people justice by influencing judges’ decisions due to their power. They also compete unfairly to obtain large markets by giving bribes and kickbacks to government officials.

Why do MNCs often attempt to change host country institutions’ incidences instead of just paying their way to get things done?

MNCs benefits from a corruption-free state hence they prefer changing the institution in their favor. They also practice social corporate responsibility which discourages corrupt deals.

Why do MNCs engage in socially attractive activities?

Social attractive activities are done for public relations and to show gratitude to the community for being part of the business. It is also the responsibility of any corporation to practice social responsibility as a business principle.

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What are the key reasons for the failure of multilateral level investment agreement?

The investment was not a top priority for countries such as the U.S and the European Union was bothered by the competition the agreement would create. The meeting in Singapore in 1996 also compromised a working group solution.

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