Fdi in North America Free Essays

Analysis of Foreign Direct Investments of North America Kristin Daughdril amp; William Cassidy Business Administration 418 Abstract Foreign Direct Investment (FDI) is an investment involving a long-term relationship and reflecting a lasting interest in and control by a resident entity in one economy of an enterprise resident in a different economy (UNCTAD). There are two types of FDI, inflows and outflows, which can be used to help determine the investment strategies and economies of countries engaged in FDI. North America has been the source of nearly one-half of all investment and almost three-quarters of the jobs created throughout the globe (Huggins, 442). We will write a custom essay sample on Fdi in North America or any similar topic only for you Order Now North America is probably the most important continent when it comes to dealing with FDI. The three main countries of North America, the United States, Canada, and Mexico, all rank in the top 15 of world economies, proving them to be desirable partners in FDI transactions. The trends of FDI discussed in this report will be unparalleled to this information and can lead to some predictions on how future trends of the countries of North America will continue to be superior to that of the other continents of the world. Keywords: Foreign Direct Investment, FDI Inflow, FDI Outflow Foreign Direct Investment is investment of a company located in a different country either by buying a company in the country or expanding its business into the country. FDI can be done for many purposes. Companies may have tax incentives abroad, cheaper labor, abundant resources, target-specific markets or other reasons to enter into direct investment with a foreign country. Three components of FDI include equity capital, reinvestment earnings, and intra-company loans. These three components are the values that, if changed, will affect FDI first-hand. FDI inflows are flows of investment into the reporting country from a non-resident entity. Outflows are just the opposite. They are the reporting countries’ investments into a country abroad. FDI has become a major factor in accessing economic power in the world economy. The North American continent consists of many countries including the United States, Canada, Bermuda, Greenland, Mexico, Belize, Haiti, the Bahamas, Jamaica, and many others. This report focuses on the only two developed countries in North America, US and Canada, as well as another top economy of the world, Mexico. It has been found that North America has been the source of one-half of all foreign direct investment in the globe (Huggins, 442). All three countries are ranked in the top 15 in world economies. All three counties are members of WTO and, in spite of the differences in views on international trade and investment among the three countries; they entered NAFTA (North American Free Trade Agreement). NAFTA, along with the Canadian US Free Trade Agreement, CUSFTA, has increased the desirability of interest in the North American economic integration (Bird, 406). In the Americas, FDI is governed by a multi-layered system of agreements that include national investment statutes, bilateral investment treaties, free trade agreements, common markets, and multilateral instruments (Haslem). NAFTA: Recently, foreign direct investment has changed from relying on how much a country exports, to now focusing more on trade between countries. In order to focus more on trade, many countries have abolished some trade barriers between countries, causing countries to do away with the protectionism strategy. Mexico, Canada, and the US decided to become a part of the North American Free Trade Agreement. This agreement allows the countries to trade freely. As a result of NAFTA, their foreign direct investment rose dramatically; Mexico, as well as Canada, has seen a great increase in FDI and import production. This also lowers the cost of trading between these countries because they are close to each other. This reduces the cost of transportation, causing an incentive to trade together. This treaty is a big reason for Mexico and Canada’s success. Mexico: Mexico is the second largest recipient of FDI in Latin America and the Caribbean. Foreign direct investment plays a big role with Mexico’s success. More countries participate in trade with countries that have an open economy, since they do not have as many taxes and tariffs that many protectionist countries have. According to the World Investment Report 2006 published by the United Nations Conference on Trade and Development (UNCTAD), in 2005, ‘Mexico received more than 19 billion U. S dollars which puts it among the top 13 in the world and among the top four in developing countries. The United States has a big impact on Mexico’s economy. The spike in foreign direct invest in 2001 was due to the $12. 5 billion purchase of Banamex by United States’ Citigroup. This caused a dramatic increase in the FDI of Mexico in 2001. By looking at the graph of FDI flows within Mexico, it appears that there was a major drop of FDI in 2002; this is only due to 2001 being such a good year for Mexico. Canada: Foreign direct investment in Canada has increased dramatically from 1990 to 2002, an increase of four and a half times within these twelve years. The United States has a major affect on FDI in Canada. In 2001, United States obtained 90 percent of the inflows and 62 percent of the outflows. This is due to the signing of the North American Free Trade Agreement which has increased the cross-border transactions between the two countries. The removal of trade barriers has had a positive effect on the FDI in Canada. The increased presence of international entities in Canada helps to provide favorable economic conditions which are attractive to foreign investors. Since NAFTA, foreign direct investment has increased continuously; without it, Canada’s FDI would not be what it is today. United States: The United States have recently dominated the foreign investment playing field among the world economies. The position of the outward flow of FDI has exceeded that of the inward flow every year since 1982. Inflow and outflow are mainly dealt with developed economies, the largest partner being the United Kingdom, closely followed by Canada. Mexico is ranked number 12 as FDI partners with the US. Inward flows of FDI come mainly from the UK, Japan, Canada, and Switzerland. The US experienced steady growth from 1992 to 1998 followed by rapid growth in FDI inflow in 1999 and 2000. The high level of capital inflows between 1999 and 2001 reflects the strong foreign interest in US technology and telecommunications firms during the stock market boom years, prior to the market downturn in 2001 (Bloodgood). 001 recorded the lowest inflow increase the US had seen in many years. This could be due to the terrorist attacks on the world trade centers, causing the stock market crash. Investors may have feared the threat of potential future terrorist attacks. By 2004, investors saw past this threat and the US inflows went on the rise again (Dutta). United States’ outward flow of FDI transact main ly with the UK, Canada, the Caribbean, and Bermuda (Bloodgood). The flow of FDI into other countries stayed steady up until 2004 when the flow increased drastically. This was due to reinvested earnings and the decline of the value of US dollar compared to important host affiliates. Earnings in several industries grew sharply. In 2005, the US recorded its lowest percentage increase in FDI since 1982. The reason for this was that reinvested earnings turned negative in 2005, as cumulative retained earnings of foreign affiliates were drawn down to fund distributors to US parent counties as a result of tax incentives provided by the American Jobs Creation Act of 2004 (Koncz). The rise of outward FDI continued, however, to rise as though 2005 did not occur. Predictions: All three of the countries that have been studied from North America in the research paper have come across many setbacks and burdens in the past years when dealing with foreign direct investment. All three have also overcome many obstacles in order to pursue economic power by becoming international market influencers. All three counties show continued signs of reasonably steady growth in FDI outflow. Inward flow of FDI seems to be similar between the US and Canada. They have both had somewhat inconsistent rises in the inward flow. 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