Both Ireland And Spain Attract Essay Research

Both Ireland And Spain Attract Essay, Research Paper

Foreign Direct Investment (FDI) refers to capital expenditures by companies (with their head office in another country) to either acquire assets of an existing firm in a foreign country with the intention of playing a role in managing those assets, or to establish a new firm. Put more simply, a firm in one country invests in another country in order to control and manage an actual productive capacity that will generate output.

There are a number of causes of FDI, some of which can be applied to almost all foreign investment, and others that are specific to the country in which the investment is being undertaken. The more general causes of FDI are:

h Neo-classical theory

This refers to the comparative advantages or natural resource advantages held by a particular country compared to another. If a country has a comparative advantage over another, (i.e. higher factor endowments compared to the other country) then it makes sense for the country with the lower factor endowments to invest in the other country and benefit from the higher productivity there.

For example lower labour costs or higher labour productivity in one country would encourage firms in another country (without these benefits) to invest and produce in this country in order to gain from this comparative advantage.

h Ownership, Location and Internalisation Paradigm

A firm may wish to produce in another country, the OLI paradigm explains why it does this through FDI as opposed to other methods of production such as licensing a domestic firm to produce you good.

The ownership factor indicates that a firm may wish to purchase an existing firm and use takeovers as a means of expansion rather than starting a new firm from scratch.

The location argument implies that a firm may benefit from having production facilities outside the domestic country. By being able to produce in different areas of the world the firm can reduce transportation costs and may open up new markets for its good.

The internalisation argument refers to how the production method or ingredients (etc) may be ownership specific, as a result the firm is unwilling to pass this superior knowledge on to other firms. In addition to this the investing firm may be unwilling for other firms to produce under their brand due to the possibility of poor quality production etc.

The combination of these factors points towards FDI instead of other methods of foreign production.

h New Trade Theories

These theories recognise other determinants of FDI such as:

Economies of Scale

Transport Costs and benefits arising from good infrastructures

Access to other markets (geographical location)

Trade Agreements

h Other Explanations

There are other common factors that vary from country to country that affect FDI. For example tariffs, subsidies, tax levels, regulation, safety standards, international relations, language difficulties etc.

The above determinants of FDI can be applied to both Ireland and Spain (aswell as most other countries receiving FDI). However there are a number of more specific determinants of FDI to Ireland and Spain individually.

Spain:

Lower labour and capital costs in Spain (compared to other EU countries) are thought to have encouraged FDI. However, growth in wage rates during much of the 1980 s meant that this advantage is not as important today. On the other hand, productivity in the 1990 s has risen more quickly than wage rates, meaning that Spanish labour market will continue to attract FDI. In addition to this Spain is considered to have a good human capital resource base, that is to say that there is skilled labour avaliable.

Spain joined the European Community in 1986. This led to unrestricted trade between Spain and other EU members. As a result, there was an increase in attractiveness for firms (wishing to sell in Europe) to invest in Spain. Trade liberalisation, in general, between Spain and other countries has promoted FDI in Spain. It can be seen that trade liberalisation has helped to encourage FDI in Spain

Small to medium sized, family owned businesses make up a large proportion of the Spanish markets. These small firms find it hard to compete with larger firms achieving economies of scale. As a result of this there are few barriers to entry in many of the markets, and so foreign firms can enter the market cheaply and easily. There is also the potential for larger, investing firms to takeover the smaller domestic producers and enter the market in this way. Here we can see how the structure of Spain s markets encourages and enables FDI.

European Monetary Union in Spain will encourage investors from outside of the EU if they wish to aim products at other countries within EU. The risks and problems associated exchange rate fluctuations will be eliminated and so FDI in Spain will be encouraged.

Both the Spanish government and the EU provide incentives for foreign firms to invest in Spain. The Spanish government offers grants to attract FDI away from Barcelona and Madrid in an attempt to develop poorer regions of Spain. The European Union will pay up to 80% of the start up costs of foreign firms who locate in particular Spanish regions.

Spain is a l

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