International Trade: Balance of Payment

Subject: Economics
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Support for US to shift from exports to foreign direct investment

According to Elton et al. (2003), foreign direct investment encompasses the aspect of multinationals whereby an organization or an entity is controlled in its host country by the entity or organization in the home country. Foreign direct investment is popularly known as FDI. FDI is, therefore, an investment established in another country by an organization but not the government. FDIs can take many forms of investment like acquiring intangible assets of an organization in another country or buying of ownership stakes of a company in another country. FDI is “distinguished from portfolio investment, which entails purchase and trading in the marketable securities by citizens of other countries” (Appleyard et al., 2014). This distinction is in the sense that standards of control in the security markets differ with FDI regulations. FDI is “not only transfer of ownership, but it is also transfer of other factors such as capital, technology, management and skills related to organizations” (Appleyard et al., 2014).

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As a way of developing international trade strategy, the US shifted from the use of exports to foreign direct investment. This was probably due to the reasons highlighted below.

First, the US wanted access to international markets. Foreign direct investment is a pure strategy to venture into foreign markets. Therefore, the US shifted to FDIs in order to lay a firm foundation for venturing into international markets. Though some nations or countries limit operations of multinationals, setting foot and starting a company in a foreign market is in itself gaining access to that foreign market, restrictions notwithstanding.

Second, the “US targeted access to a wide array of resources or establishment of a pool of resources” (Havranek, 2011). The US, therefore, used FDIs in order for the multinationals they set in foreign countries to acquire capital and other resources. Some natural resources are only available in some countries. Examples of such natural endowments include, gold, oil, fossils and other precious metals.

Third, the US targeted low cost of production. When the US ventured into international markets and set multinational companies (MNCs), it benefited from components of cheap labor and low regulation, especially if the host country is in the developmental stages. This will in the long run lead to higher profit by the MNCs due to increased productivity resulting from the low cost of production.

Fourth, when the US ventured into FDIs, the market was liberalized and this created avenues for capital and increased revenue to the US from the multinational corporations that operate in the US, meaning US itself was the host country, thus accruing this benefit. This advantage manifests itself in the sense that the companies that set base in the US had to use local materials, local labor and local equipment as well. Consequently, the US benefits from the foreign revenue that is pumped into its economy. Taxation of the MNCs by the US government is also another avenue for earning revenue.

Finally, the US, as an economic platform, realizes many benefits. The multinational corporations set by the US government in the foreign markets will create a platform for benchmarking and thus create avenues for learning practices such as management, new technology, new business practices and economic components that will help develop new business. This is an indirect advantage, but crucial.

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The pros for foreign direct investment are too appealing to be construed that there are no cons. Actually, when the US ventured into foreign markets especially in the developing countries, it was faced by numerous challenges such as unstable political and legal systems. This, however, doesn’t mean that the US shouldn’t have put emphasis on foreign direct investment by overlooking emphasis on exports.The foreign markets may also have had barriers to entry amid other trade restrictions, but this did not derail the progress of US venturing into FDIs. Growth of the US financial market as a save investment factor laid the foundation for success of FDIs

According to Elton et al. (2003), a financial market can be defined as a place where intangible assets are traded. This is whereby equities, derivatives, bonds and currencies are traded. A financial market is subdivided into both capital market and money market, the former involves trading of securities that may have long term or short term maturity. A capital market is made up of both primary and secondary markets, depending on the nature of capital. Examples of capital markets instruments include, bonds and stocks. In the money market, securities that have shorter maturity period are traded. These securities are highly liquid. Such elements as “certificate of deposits (CDs), bank acceptances and commercial paper among others are all classified as money market instruments” (Kasperowcz, 2013). Financial markets impact greatly on the growth of a country’s economy and performance. In essence, it enhances smooth flow of businesses owing to an accrual of capital. A well-developed financial market, like that of the US, supports the activities of lenders and borrowers, and in the long run grows the economy.

The US financial market system is actually the best and most developed globally. The size of this market has laid a foundation for vast trading activities due to its liquidity and, therefore; the participants have unlimited opportunities as opposed to economies with small financial markets. The liquidity of the US financial system, therefore; supports venturing into FDI by the US. Actually, the financial institutions and industries in the US are well-developed. Therefore, I lay my critical argument in this statement. Foreign direct investments require a vibrant and strong financial market system as that of the US. This is to make it possible to fund the establishment and maintenance of multinational corporations by the US government in international markets. It is also “important to note that investors from other parts of the world have been highly attracted by the high liquidity of the US financial market” (Slaughter & May, 2012). This has, in turn, led to the establishment of new corporations in the US (either new establishments or strategic alliances). The USAID has greatly impacted to the growth of economies in the developing world, especially those in Sub-Saharan Africa. This can also be viewed as another form of foreign direct investments. The strength of a country’s financial market system determines its performance in the foreign direct investments sector. When the US switched gears from exports to FDIs, much has been achieved. The FDIs inflows are much higher as compared to capital inflows of the exports market. In the recent past, the market trends have consistently indicated that the US has been the world’s greatest receiver of FDIs in the world since 2006. Often, foreign corporations are establishing businesses in the US. This is coupled by the fact that the US’s financial market system beneficially supports the FDIs (both local and foreign investors).The financial market system has enabled success of foreign direct investments and established the need to shift emphasis from exports.

A predictable regulatory environment, highly innovative individuals, access to capital, use of new technologies and development of new infrastucture can be cited as some of the factors that have promoted foreign direct investment in the US. The US investors have established multinationals that have continued to impact positively to both the host and the foreign countries. This is in terms of new capital injections and research activities. The national income has significantly increased in the US and this has grown the US economy. As a matter of fact, the adoption of open regime for investments in the US has consistently made FDIs to flourish in the US. Foreign direct investments can, therefore; be viewed as positively impacting on economies and living standards of the participants. Innovativeness and use of new technology are also key factors for foreign direct investment success. Finally, the US financial market and system strength is the underlying factor for success of FDIs in the US. This shift from exports to foreign direct investments was, therefore, necessary and highly beneficial to the US economy.

Comparing and contrasting advantages of FDIs

There are a lot of comparisons and contrasts that can be drawn from the advantages accrued from the FDIs. Ideally, foreign direct investments lead to access of resources by the multinationals. On the other hand, this leads to exploitation resources in the host country by FDIs. FDI leads to establishment of new industries in the host country. This translates to a lot of disadvantages to the host country owing to the effects of new industries e.g. increased carbon footprint. Finally, while FDIs enhances access to resources, bureaucracies can derail entry, however; once entry is granted, exploitation of resources occurs.

References

Appleyard, D. R., Cobb, S., & Field. A. J. (2014). International Economics. New York: John Wiley & Sons.

Elton, J., Gruber, J., Brown, S., & Goetzmann, W. (2003). Modern Portfolio Theory and Investment Analysis. New York: John Wiley & Sons.

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Havranek, T., & Irsova, Zuzana. (2011). “Which Foreigners are Worth Wooing? A Meta- Analysis of Vertical Spillovers from FDI.” Journal in Ideas.repec.org., 4, 56-67.

Kasperowcz, P. (2013). “House passes bill aimed at boosting foreign direct investments in the U.S.” The HillJournal, 45, 8-10.

Slaughter, G., & May, R. (2012). “Legal regimes governing Foreign Direct Investment (FDI) in host countries.” Advocates for International Development, 3, 90-98.