INTRODUCTION

A country’s national trading policy influences both domestic and foreign investment and is vital for any development strategy. Investment has long been recognized as a key ingredient to economic growth and development and foreign investment has been a principal engine of worldwide economic growth over the years. The FDI has offered direct benefits to host countries which includes job creation and increased tax revenue. It also helps source countries, i.e., those where multinational firms are based, by allowing these firms to compete and earn profits abroad. Investment is also important to the global economy to finance current account imbalances.

The useful effects of foreign trade and FDI on efficiency and growth are usually recognized, and there is a good consensus that policy ought to aim at reducing or eliminating hindrances to international trade and FDI integration. Successive multilateral trade rounds, regional trade agreements, and bilateral and consensus investment accords have reduced formal barriers to trade and FDI.

The relationships between trade and investment have attracted economic and policy attention for several years. By the establishment of a WTO working group on the link between trade and investment at the Singapore Ministerial Conference of late 1996. They gave recommendations on the implications of the relationship between trade and FDI for development and economic growth; the economic relationship between trade and FDI; existing international arrangements and initiatives on trade and investment; and problems relevant to the planning of future initiatives which gave its report in the year 1998.

The current WTO trade negotiations aim at continuing this trend. However, border barriers are still important in some countries and industries, within the type of restrictions to FDI. Moreover, there’s growing recognition that policies aimed toward non-border-related objectives might have a major impact on the extent of trade and activities of international enterprise. The state of the domestic physical infrastructure can even influence countries’ capacities to participate in the globalization of economic activity.

OVER THE YEARS DEVELOPMENT IN OECD

OECD stands for Organisation for Economic Development and Co-operation. It was established in 1961, with the main objective of providing economic growth to its member countries. Trends in FDI Most global international investment activity goes on among OECD countries and takes the form of ownership changes in existing enterprises with green-field investment playing only a minor role in the OECD Report 2002.

In 1999, the OECD accounted for around 91 percent of world investment outflows and 74 percent of world inflows in UNCTAD, 2001[1]. Over an equivalent period, EU countries combined were each the largest recipients and therefore the largest suppliers of FDI in the OECD area, followed by the U.S. Japan, Canada, and Switzerland. the average share of FDI inflows in total business investment went from very little over three percent over the 1980s to nearly eleven percent within the 1990s, bringing about a vital increase within the outward and inward positions of most OECD countries.

The shift in FDI policy is not confined to these countries. every year in its annual report on FDI, the UN Conference on Trade and Development (UNCTAD) tallies all national regulative changes toward inward FDI. Throughout the 1990s, policy changes were overwhelmingly favourable for FDI. In 2000, for instance, of the 150 regulative changes tracked by UNCTAD, only 3 restricted instead of liberalized FDI policy. In recent years this trend is weakening. In its most recent year of data, 2006, UNCTAD reported that 37 of 184 policy changes—20.1 percent—were unfavourable to FDI[2].

A move far from FDI liberalization would raise vital questions about whether or not the high growth rates that have accompanied this era of globalization will be sustained. There are four main parts. Firstly, it identifies these legislative and regulatory changes to see what features seem to be common across countries and to evaluate whether these policies are restricting FDI flows or could also be enhancing them by codifying and instructive practices.

Secondly, it assesses the economic consequences of greater FDI restrictions, not just for host countries but for source countries and for the global economic system overall. Thirdly, it discusses the economic and political drivers of those FDI policy changes, as well as the emergence of recent countries as giant foreign investors, the larger role for government-linked companies, and the growing wariness in several countries toward globalization of all forms. And lastly, it recommends policies for both individual countries and multilateral organizations such as the International Monetary Fund (IMF) and OECD.

FDI RESTRICTIONS

Restrictions on FDI flows would damage host countries, source countries, and the delicate pattern of global current-account and capital-account imbalances that has persisted for several years. New FDI restrictions imposed throughout a period of broadly falling FDI flows could have a lot of impact than during a period of robust investment. New policies that mean longer, more complex and more regulated transactions will mean that the deals that result are less beneficial economically than they would have been without such restrictions.

The international agreements on FDI have been far less extensive than on international trade, global negotiations, and regional free-trade agreements often cover some aspects of international investment as well generally leading to lower barriers to FDI. Several bilateral investment treaties are signed among OECD countries, with the aim to curb barriers to FDI.

FDI restrictions might also be expected to influence bilateral trade abundant within the same means as tariff barriers are expected to influence bilateral FDI. By increasing the fixed prices of native production, they will create it ceteris paribus more profitable for horizontal MNEs to access native markets through exports. Therefore, the aggregate impact on merchandise exports is ambiguous a priori. FDI restrictions represent an obstacle to services trade because they hinder service provision through the commercial presence and could also affect other modes of service trade.

THE INTERLINK BETWEEN TRADE, DOMESTIC INVESTMENT, AND FDI

The relationship between international trade, domestic investment, and FDI is complicated and as such interlinked. The trade can either be substituted or can be used to complement FDI. Market-seeking companies will serve foreign markets through export sales or through foreign subsidiaries. The latter effectively substitutes FDI for trade.

However, affiliates of foreign companies successively create new trade flows with their parent corporations or foreign suppliers and might also export to 3rd countries or back to the home country, so increasing trade. Same with the domestic investment can be used to complement FDI. The tendency when it is complementary is to increase economic activity and induce more trade for a given amount of FDI. Also, to the extent that investment either domestic or FDI will positively impact the economic growth of the host country.

POLICY AND OTHER DETERMINANTS

Two broad sets of factors jointly affect trade and FDI non-policy factors including the effects of gravity and factor proportions and policy factors. The influence of these factors is not necessarily the same across FDI and trade. It will vary as per the type of FDI either horizontal or vertical type. Moreover, their influence may also differ in some cases across trade in goods and trade in services.

With a watch to the mutuality between trade and FDI, this principal looks at key policy factors, grouping them into four categories: openness, product-market regulation, labor-market arrangements, and infrastructure.

OPENNESS

The openness of a country to trade and FDI is assessed in terms of policies that create or eliminate border barriers for exporters or investors, measured by indicators of tariff and non-tariff barriers, statutory restrictions to FDI, and multilateral agreements that create areas of trade among signatory countries. In addition to influencing trade openness, tariff barriers will even have a bearing on bilateral FDI relationships.

Vertical FDI aimed toward re-importing to the home country or exportation to third-party countries the final or intermediate merchandise created by foreign affiliates are often depressed by high bilateral tariffs between the host and investor country or third-party countries. Border openness to trade and investment and competition-oriented domestic policies have vital implications for OECD trade and FDI patterns.

PRODUCT-MARKET REGULATION

Product-market regulations will have an effect on foreign trade and FDI in multiple and from time to time conflicting ways. Here, the main target is on laws within the exporter-investor country or the importer-host country that curb market forces where competition is viable and impose unnecessary costs on the companies concerned in the bilateral trade or investment transaction.

A way in which relative prices can be affected is when the introduction of anticompetitive regulation in one country increases its production costs, for instance by discouraging efficiency enhancements and productivity growth. In the short run, this tends to make the products exported by this country less competitive in foreign markets. Moreover, cost-increasing regulations may also induce a reallocation of resources in both the exporter and importer countries, affecting their various abilities to trade.

Another way in which regulations can affect trade patterns is by raising barriers to entry that reduce the number of suppliers, and hence the number of different goods offered, in an export market. This may have negative repercussions on intra-industry trade. Thus, strict product-market regulation among the foreign country probably has conflicting influences on exports from the home country: on the one hand, it ought to stimulate exports through a competitiveness impact; on the other hand, it ought to depress exports by limiting access to the foreign market.

LABOUR-MARKET ARRANGEMENTS

A wide set of policies and establishments have an effect on the functioning of the labour market impinging on trade or FDI transactions. Both employment protection and labour income taxation are driven by important policy objectives but might even have side effects on the level and geographical allocation of trade and FDI. The tax wedge on labour income seems to influence FDI in a lot of a similar means as anti-competitive regulation. What appears to be relevant for bilateral FDI out stocks is the ratio between wedges in the partner and the home country: the higher this ratio, the lower the out stock of FDI from the home country to the partner. High tax wedges in each the home country and the partner are estimated to possess depressing effects on bilateral service exports, confirming that listed services might use labor inputs in each country concerned in the transaction.

INFRASTRUCTURE

The state of the domestic physical infrastructure can even influence countries’ capacities to participate in the globalization of economic activity. Policies will facilitate trade and FDI, for example by making areas of free trade, improving the business atmosphere in which exporters and MNEs operate, or reducing the price of transactions through the development of the required infrastructure.

Trade and FDI may also be affected by factors that are, or have been, closely related to government policies regarding transportation, communications, and energy supply. Indeed, because of their public good and natural monopoly characteristics, some fixed network infrastructures are financed through public investment. The availability of infrastructure might have an effect on comparative and absolute advantage and, therefore, cross-country patterns of trade and FDI.

Infrastructure is likely to be particularly important for trade in services because the main items traded depend heavily on the existence of high capacity and efficient networks in countries that are at both ends of the transaction. Thus, the combination of infrastructure conditions in the exporter and importer countries is likely to be relevant for services trade, much in the same way as for product-market regulation.

Improving network infrastructure has ambiguous a priori effects on FDI because inadequate infrastructure might inspire foreign investment in these industries. However, good infrastructure conditions are likely to be vital for reducing transport and communication prices and increasing trade, particularly in some services where international transactions need such conditions to be good in each origin and destination countries. Thus, policies that improve infrastructure can significantly increase both the bilateral and global volumes of service trade.

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[1] Golub, S., Hajkova, D., Mirza, D., Nicoletti, G. and Yoo, K., 2003. The Influence of Policies on Trade and Foreign Direct Investment. OECD Economic Studies, 2003(1), pp.7-83.

[2] Unctad.org.  THE DEVELOPMENT DIMENSION OF FDI: POLICY AND RULE-MAKING PERSPECTIVES. [online] Available at: <https://unctad.org/system/files/official-document/iteiia20034_en.pdf>