Foreign Direct Investment and the Impact of Terrorism Term Paper
- Length: 12 pages
- Subject: Economics
- Type: Term Paper
- Paper: #31922188
Excerpt from Term Paper :
Foreign Direct Investment and the Impact of Terrorism
Foreign Direct Investment provides many opportunities for both the expanding company and the host country. The host country receives an influx of business into their economy and the expanding company receives the ability to expand into new and emerging markets. There are many factors that weigh into a decision to expand and invest in another country. Of course, one of the key factors is a stable economy. The travel and tourism industry is one of the key industries that engages in foreign direct investment. This is especially true among the big chains. The following research will explore the factors that weigh into a decision to invest in a country, and will then focus on the impact that terrorism, has on this decision.
Patterns of FDI Growth Over the Past 20 Years
As the world moves toward a more global economy, there is a greater trend toward foreign direct investing than at any other time in the past. The flow of foreign direct investments has increased by nearly ten fold over the past 20 years (Stein and Daube, 2001). By comparison, imports and exports have only doubled. This growth has not been linear, but has progressed in spurts followed by period of stagnation, largely due to global factors, such as wars and economic stagnation in certain sectors of the world (Stein and Daube, 2001).
This growth has many benefits for the host country. However in some cases can be troublesome in a weak economy due to the increased competition on native businesses. On the other hand the host country often benefits from increased revenues and taxes by the new enterprise. The new enterprise will supply more employment for the area. It will also bring in new business from other areas. This is especially true in the travel and tourism industry (Stein and Daube, 2001).
Foreign investment can play a significant role in strengthening the economies of developing countries. The foreign investment decisions of Multinational Corporations (MNCs) are a major driver of the foreign country's development. Multi-national hotel chains are one of the most prevalent MNCs (Hong et al., 1999).
They can often the single most important driver of a local travel and tourism trade. There are many factors that enter into the decision of a hotel chain to develop in a particular area. The MNCs usually have sufficient capital to invest in such an enterprise. Some areas of the world are more developed than others in this aspect (Hong et al., 1999). For example, more than 70% of new hotel development in Latin America takes place in two key locations, Brazil and Mexico aspect (Hong et al., 1999).
These countries have many factors that make them attractive tourist spots. They have nice weather, a warm climate and miles of sandy oceanside beaches. The also have an inland tropical paradise, making them a great place to vacation. Other Latin countries have the same things, but are less developed in this aspect. There is a logical reason for this. The other countries often have factors that make them less attractive, such as a poor or highly inflationary economy, the risk of guerilla warfare or a government overthrow. These areas have the natural resources but are lacking the right combination of factors to make them an attractive location in which to expand. In the travel and tourism industry, it must also be remembered that if it were not an attractive place to relocate, it would also not be an attractive place to vacation either, for the same reasons.
For the travel and tourism industry, many hotels consider political risks one of the key factors in the decision to relocate to a particular area (Hong et al., 1999). Political risks are weighted heavily because they can have an influence on the instability of the countries as well, such as the economy or safety of staff and guests. MNCs do not engage in high-risk situations. There is a heavy amount of cash outlay to begin one of these projects and companies are reluctant to take unnecessary risks when there is this amount of risk involved. They will opt for a more suitable location for expansion.
Political risk is different from political instability (Hong et al., 1999). Political instability refers to the possibility of the over throw of the old government and another leader taking over. Political risk refers to a more localized event. Political instability may not necessarily involve a risk for the foreign company (Hong et al., 1999), especially if the transition of power is a peaceful one. On the other hand, political stability is not a guarantee against isolated incidents, such as terrorism (Hong et al., 1999). Hotels are often targets of terrorists and this is a consideration in the decision to relocate. The United States has always been a country that was safe, as far as the risk of terrorism was concerned. The World Trade Tower attack of September 11, 2001 proved to the world that no place is immune from terrorist attacks. However, there do seem to be certain areas of the world, such as the Middle East where these events are more common.
Travel and tourism sells the product of leisure, fun, relaxation, and amenities. The product is a break from the modern stresses and pressures from life. These things do not sell well in an area where there is a perceived risk to one's life. In addition to being able to provide relaxation and safety there is also the necessity of having a sufficient local economy to support this type of enterprise in terms of providing attractions to visit. The local economy must be able to support the building of shops, and other attractions to lure people into the area.
There are many factors that effect the decision of where to relocate a business. The decision must be carefully considered, as there is typically a large amount of capital at stake.
One of the key factors in establishing a presence in a new country is the quality of their government institutions. There must be a stable government and a stable economy. The amount of bureaucratic hassle and tax rates is also important. The inflationary index and general economy of the area all play important factors in the decision to relocate to a certain area.
Political corruption and the quality of the legal system are also an important consideration in this decision (Stein and Daube, 2001). There are other factors such as the living environment, social class system, the risk of terrorism, crime rate and a host of other factors (Stein and Daube, 2001). All of these factors add up into an overall picture of the host country. The amount of weight that company places on each of these determines what constitutes the best host country for a particular enterprise.
Some Real World Examples
Let us now look at some real world examples of location and the features that they offer. Russia and the United States have been working on building relations since the end of the cold war era. They have been trying to establish cooperative relationships and establish trade. However, the United States still wishes to Westernize Russia and Russia still does not wish to be westernized. The two sides are unable and unwilling to abandon the ideas that were held so dear in the Cold War (Bremmer and Zasslavsky, 2001). This inability to work out their differences creates a hostile environment in which to establish a basis for trade including foreign direct investment.
Each country within itself is stable and secure, yet neither is a good place for the other to be because of political tensions. They both have good economies and Russia's economy is experiencing steady improvement. There could also be a perceived risk to visitors due to prejudices of the citizens towards Americans. This is a case where one factor is positive, the economy, but the political situation is not favorable. In time hopefully these differences will work out, but in the mean time, these issues remain a barrier to expansion and this hindersbusinesses in opening new enterprises.
FDI in the Middle East
Pakistan has always been an area ripe for terrorists (Ahmed, 2002). However as far Middle Eastern countries are concerned the terrorism risk is not isolated to Pakistan. The World Bank President, James Wolfenstein expressed his desire to continue to trade with Pakistan. This made Pakistani officials glad as they are now realizing the opportunities foreign investment can provide for their developing country.
This is an important affirmation for Pakistan and their country was the victim of a suicide bombing in Karachi in may of 2002 that left four Frenchmen dead (Ahmed, 2002). These bombings were a topic of discussion at the Shanghai Investment conference that was sponsored by an Asian Development bank. Great Britain still planned on investing large amounts of money into the developing country. This was reassuring to the Pakistanis but it does not determine whether the individual investors will proceed to invest…