Blog5: Country's agreement and disagreement on FDI

Foreign direct investment (FDI) enjoys more popularity recently. It focus on investment around the whole world, there are three main formats to explain FDI. First of all, one domestic country invest money in build factories and land aboard, which is also called “Greenfield Investment”. Secondly, companies taking a majority of a foreign company’s shares, hence, control that company. Last but not least, companies reinvest their profits, which gained from the original direct investment, into the same foreign company.

One of the successful FDI case recently is from Europe’s cross-border fund industry. Figures from the European Fund and Asset Management Association show that their assets under management of the Greek fund industry decreased by two-thirds during last five years. However, Europe’s cross-border fund industry, whose large foreign investment in Luxembourg, experienced a significant rise on its assets (Financial Times). The reason to this prosperous foreign investment may primarily due to the low cost for running business in those developing countries, for companies need to switch their focus from technology monopoly to products’ low price when it comes to a mature stage during Product Life Cycle. However, with an increase number of FDI, local government becomes worried about their financial resources. Italy government began modify their tax legislation, which reduced their tax rate to the same level with cross-border ones, in an attempt to stop the outflow (Financial Times). Honestly, I don’t think it will help local government to reduce FDI. Indeed, people could be forgiven for thinking that companies in Italy choose doing business aboard because of its high tax rate in its own country. However, if companies’ main market is in aboard, therefore, the main reason for them to do FDI may not rely on tax rate, as a rule thumbs; it is the high cost on transportation and impediments on export that let companies domiciled in another country. Hence, it is advisable for Italian government to reduce its cost on transportation especially on those products with low-profits but need to charge a high transportation cost. Moreover, in order to reduce the FDI as Italy wish, the essential part is to stimulate export policy, one of the main reason to companies prefer FDI is they want direct control of their foreign subsidiaries instead of franchise their operations to overseas companies, after gain the direct control on aboard, they will earn a high priority in the foreign competitive market. However, if Italy government release their export policies, like reduce tariffs. Is it seems much better for companies to do business within their home country than going aboard?