Foreign Direct Investment

FDI is a measure of foreign ownership of domestic assets such as factories, land and organisations. Foreign direct investments have become the major economic driver of globalisation, accounting for over had of all cross-border investments (BBC, 2011). FDI has become a major source of finance inflows for both developed and developing economies. The purpose of this blog is to understand the different types of FDI and show evidence in relation to current affairs.

From reading a journal written by Qui. L. and Wang. S. (2011), there are two different types of FDI; Greenfield and Brownfield investment. “Greenfield FDI refers to investments that create new production facilities in the host countries (e.g. starting a new plant), whereas brownfield FDI refers to cross-border mergers and acquisitions.”

Reported in the news this week is a relevant and interesting story, Fiat plans to invest $1.1bn in Russia (BBC News, 2012). The plan for this investment is a building of a plant in order to produce 120,000 cars a year for the Russian and nearby economies. The acronym BRIC, refers to Brazil, Russia, India and China, which are in a similar stage of economic development. The point being, many multinational companies are keen to invest in these countries, due to the advancing economies. The Russian government website, ‘Invest in Russia’, boast a GDP of 8.1% (2007), which far outperforms international growth rates. Another claim, is that they have one of the largest consumer markets, with around 140 million people, ‘whose income is increasing every year.’ Furthermore, Russia links Europe with Asia and also borders the North American continent. The government website continues to brag interesting facts about why Russia is so investable, however, fails to mention it is a cheaper investment alternative than the more developed countries, such as UK, the US and Japan (For more information – visit http://invest.gov.ru/en/why/reasons/).

This is prime example of ‘Greenfield investment’, however the question that need to be answered is, will it benefit the Russian economy?

With the current unemployment figure at 6.6% (January 2012), the new manufacturing plant should create more jobs for the economy. However, this could result in job transfer (relocation of employment), instead of actually generating new jobs. The obvious outcome is that the Russian economy as a whole will benefit from this prime example of FDI ‘Greenfield investment’.

Before Fiat planned to invest $1.1bn in to the Russian economy, Fiat were interested in a ‘Brownfield’ type investment with a Russian company Sollers. The original plan was to create a joint venture, which they hoped to produce 500,000 cars per year, as a result of. However, the Russian company opted to replace Fiat with Ford. Evidently, Fiat would have benefited greater by attaining the joint venture with Sollers, due to the sheer difference in manufacturing numbers. However, the main focus is that Russia has gained vastly with the joint venture between Sollers and Ford as well as Fiat investing a substantial amount into the economy.

Some would ask, why have Fiat still entered into Russia after losing such a crucial contract to its competitors. Well, according to an article published by Reuters (2012), Russia’s car industry looked set to overtake Germany as the biggest in Europe before the global economic crisis took effect. Apparently, four foreign carmakers and their partners have now agreed to invest $5 billion on local manufacturing.

So if the Russian car manufacturing industry is so popular with investment, who else will soon be investing in Russia? Would you invest in Russia?

Qui. L. and Wang. S. (2011). FDI Policy, Greenfield Investment and Cross-border Mergers. Review of International Economics. Volume 19, Issue 5, pages 836–851, November 2011