FDI - Corporate tool or exploitive device?

It is common for companies in the modern business world to trade on a global scale. Improvements in travel and technology, a reduction of trade barriers and increase in foreign direct investment have all contributed to the success of globalisation.

The term foreign direct investment “FDI” simply put; refers to the process in which a company invests in a foreign country. These foreign investments can be categorised into two forms:

Greenfield investment – This literally refers to a company purchasing a “green field” in a foreign country and building new operational assets from the ground up on their newly acquired land. This is seen as very beneficial to the host country particularly if it’s a developing country as often large sums of capital are injected into the foreign economy to purchase or expand facilities. An example of this is the Hyundai case. In 2006 the company purchased land in Nosovice a village in the Czech Republic and built a brand new manufacturing plant, the first ever Hyundai plant to be constructed in Europe, creating 3,000 jobs for local people. The investment cost the company approximately €1bn, obviously such a large investment had a positive impact on the Czech economy. It apparently helped curb unemployment ‘by up to 2.5%’ (EIROnline, 2006) in the region and triggered significant growth in the country’s GDP.

International Mergers and Acquisitions – This method refers to the purchase of assets already owned by a foreign company. According to an article in the FT; companies in Northern Asia are set to ‘lead the way’ with this form of FDI due to ‘limited growth opportunities and higher costs’ (FT, 2011) in their home regions. An example of this occurred in 2011 when Japan’s largest pharmaceutical company Takeda purchased Germany’s Nycomed for $13.7bn. The acquisition of the German firm displays Takeda’s interest in global expansion, providing a ‘ready-made’ doorway into European markets, ‘Takeda said the deal would make it the world’s 12th largest drugmaker globally’ (FT, 2011).

Due to the economic and trade benefits of FDI, governments are often creating policies to encourage it. For example, the North American Free Trade Agreement ‘NAFTA’ was an agreement made between the United States, Canada & Mexico to remove barriers of trade between the three regions in order to encourage FDI. FDI then obviously has huge benefits; creating jobs, improving economies, providing opportunity for companies to grow on a global scale. However, it is not without its problems…

The growing trend of FDI is that it usually occurs between more economically developed countries. This is due to a variety of different reasons; less developed countries often have poorer infrastructure, weak market strength and unstable political problems. As a result, many avoid investing in these countries; however for some firms this cannot be avoided. Shell the oil and gas producers for instance must invest in operations in countries they identify significant oil reserves. Throughout previous years there have been several incidents of the kidnapping of Shell employees in Nigeria by armed groups claiming ‘to be fighting for a fairer share of Nigeria’s oil wealth’ (Donovan, 2010). The victims are usually released after a few days often after a ransom has been paid by the firm. It is examples such as this one that makes companies reluctant to invest in less developed countries despite the fact that it is these countries that would benefit most from FDI.

However, there have been some circumstances where corporations have opted to invest in less developed foreign countries to exploit cheap labour; this has often raised large ethical issues. In 2000 a case arose regarding the use of child labour in a Nike and GAP manufacturing facility in Cambodia. An investigation team discovered girls as young as 12 (three years younger than the legal working age of 15 in Cambodia) were working in these facilities, this unethical practice goes against the corporations’ strict code of conduct and yet it is occurring in their foreign factories. When the girls were questioned on their working conditions they stated that ‘they all work seven days a week, often up to sixteen hours a day’ (BBC News, 2000) receiving pay well below the minimum wage. However, it appears that these children have become reliant on this wage, one of the girls interviewed states: “I didn't want to come here - But we're very poor so I had to come” (BBC News, 2000).

Places like Cambodia are therefore in need of foreign direct investment but with stricter policies that encourage better working hours and decent wages for all employees. These changes could significantly improve their employee’s way of life. In addition, reasonable wages would lead to an increase in public spending, boosting the economy. However, unfortunately it is not that simple, for example, if companies like Nike and GAP were forced to pay a decent minimum wage etc then perhaps there would be no financial gain in investing in Cambodia in the first place.

The advantages of FDI are evident in the case of Botswana. The country’s economic policies promoted a ‘free market’ as a result, foreign direct investment was one of the key driving factors that boosted the country’s economy and allowed it to increase from the status of less developed to middle-income country. Economic growth has lead to a reduction in poverty within Botswana. In addition, throughout previous years the country was ranked the least corrupt country in Africa by ‘Transparency International’ (a non-government organisation that monitors political corruption) and achieved the highest credit rating for an African country by Poor and Moody’s investment services.

FDI is a powerful tool that can vastly improve a region’s economic growth, help reduce unemployment and allow investment in factors such as infrastructure. All these factors will lead to further FDI as the host country becomes more appealing to investors, providing mutual benefits to both parties. However, as demonstrated in the Nike and GAP case, often human rights have been exploited at the hands of FDI and all for what? So people in Western markets can enjoy cheaper trainers and hoodies, company executives can get richer, all whilst the poor, remain poor.

Sources used: 

EIROnline. (2006) ‘Hyundai plans major Greenfield investment’, European Industrial relations observatory on-line website, [Online]. Available at: http://www.eurofound.europa.eu/eiro/2006/04/articles/cz0604029i.htm. (Accessed: 01/03/12).

Whipp, L. & Jack, A. (2011) ‘Takeda Completes Nycomed Purchase’, The Financial Times Website, [Online]. Available at: http://www.ft.com/cms/s/0/cf277228-81a1-11e0-8a54-00144feabdc0.html#axzz1nsq1ydNC. (Accessed: 01/03/12).

Donovan, J. (2010) ‘Three British workers kidnapped in Nigeria’, RoyalDutchShellPlc.com website, [Online]. Available at: http://royaldutchshellplc.com/2010/01/13/three-british-workers-kidnapped-in-nigeria/. (Accessed: 01/03/12).

BBC News (2000). ‘GAP and Nike: No Sweat?’, BBC News Website, Available at: http://news.bbc.co.uk/1/hi/programmes/panorama/970385.stm (Accessed: 01/03/12).