International Factor Movements in World Economy and International Economic Relations System

International capital movements

The Main Points and Forms of International Capital Movements

International capital movement is a rather developed component of the international flows of factors of production. Its nature consists in the partial removal of the national capital, after which it is included to the manufacturing process or other turnover in other countries. Under modern conditions, the capital mobility is relatively high, although it has more restrictions than the international trade. The growth rates of capital movements between countries are several times greater than the growth rates of both production and international trade.

International capital movements can replace or complement the international trade, if the efficiency of use of capital is higher than the result of international trade.

International capital migration is not a physical movement of production means, but a financial transaction: loans, purchase and sale of securities, the investment.

Specific forms of international capital movements are distinguished by the following features:

• sources of capital origin;

• the nature of use of capital;

• terms of capital investment;

• the purpose of capital investment [19; p. 171].

By the sources of origin, capital is divided into official capital and private capital.

Official capital is funds of the state budget or the budget of international organizations (IMF, the World Bank, etc.), which move abroad or from abroad according to the decisions of governments or intergovernmental organizations. Its source is money of taxpayers.

Private capital is funds of private firms, banks and other non-state organizations, which are provided in the form of investment, commercial loans, interbank crediting.

By the nature of use, capital is divided into business capital and loan capital.

Business capital is funds that are directly or indirectly invested in the production for profit earning. It is usually private capital.

Loan capital is funds that are provided to a borrower to obtain a given percentage. On an international scale, loan capital is basically official capital.

By terms of investment, capital is divided into short-term, medium-term and long-term capital.

Short-term capital is capital investment for less than one year, mainly in the form of the trade credit.

Medium-term and long-term capital is capital investment for more than one year.

All investments of business capital are mainly in the form of direct investments, as well as in the form of state credits.

By the purpose of investment, capital is divided into direct and portfolio investment.

Direct investment is capital investment in order to acquire control over the object of allocation of capital. It is mainly export of private business capital.

Portfolio investment is capital investment in foreign securities without the right of control over the investment object. It is mostly export of private business capital as well.

From a practical standpoint, the most important fact is the functional division of capital into direct and portfolio investment. The major role in international capital movements is played by international loans and bank deposits.

The forms of international capital movements are defined in the investment and banking laws of each country.

Foreign Direct Investment

The place of foreign direct investment within international capital movements

Foreign direct investment (FDI) has a special place among the forms of international capital movements. This is due to the following two main reasons:

• foreign direct investment is a real investment, which, unlike portfolio investment, is not purely financial assets denominated in the national currency. It is invested in business, land and other capital goods;

• foreign direct investment, unlike portfolio investment, usually provides a managerial control over the object of the invested capital.

Prior to the emergence of transnational corporations (TNCs) all private foreign investments were mainly "portfolio" ones. With the appearance of TNCs (i.e. enterprises that own or control the production of goods and services outside of the country in which they are based), part of international capital movements take the form of foreign direct investment.

Foreign direct investment is a kind of foreign investment, intended to invest in production and to provide the control over the activities of enterprises by means of acquisition of a controlling interest. The proportion that determines the ownership varies in different countries. In the USA, formally a direct foreign investment is any capital investment if an investor holds a 10% interest in the company. Foreign direct investment covers all types of investment, either buying new shares, or simple crediting, if only an investing firm holds more than 10% interest in a foreign company. The proportion of participation in the company's capital can be obtained in exchange for technology, skilled stuff, markets, etc.

Investor's property (complete or partial) and his control over the foreign enterprise, which becomes part of the organizational structure of TNCs as its branch or subsidiary company, are the main differences of foreign direct investment from other types of investing.

The hallmark of foreign direct investment can be considered a prevailing of the sales of the product, produced abroad with the help of FDI, over the sales of domestic products in the form of trade exports.

The factors that affect the growth of foreign direct investment and make proactive growth of FDI compared to the growth of the world trade (as well as GDP of the industrialized countries) are as follows: integration of production, its evolution towards a so-called international production; a growing role of TNCs; economic policies of the industrialized countries to support economic growth and employment; the trend of the developing countries and countries with economies in transition to overcome the crisis of the economy and social sphere; environmental factors that encourage the developed countries to transfer harmful production into the developing countries. When the government participates in foreign direct investment, their additional motive may be the achievement of certain political objectives: providing strategic resources, expanding its sphere of influence.

Foreign direct investment is the basis of TNCs domination in the world market. They allow the transnational corporations to use enterprises in foreign countries for producing and marketing of products and disseminating rapidly new products and new technologies at the international level and, thus, enhance their competitiveness. As far as they are concerned, FDI are motivated ultimately by profits.

The structure of the main factors of foreign direct investment can be presented as follows.

Marketing factors: 1) market size, 2) market growth, 3) a tend to hold a market segment, 4) a tend to succeed in export of parent company, 5) the need to maintain close contact with customers, 6) dissatisfaction with the existing state of market, 7) export base, 8) following the buyers, 9) following the competition.

Trade restrictions: 1) trade barriers, 2) preference of domestic goods by the local consumers.

Cost factors: 1) a desire to be closer to the sources of supply, 2) availability of labor resources, 3) availability of raw materials, 4) availability of capital and technology, 5) low-cost labor, 6) low cost of other production costs, 7) low transport costs, 8) financial and other incentives offered by the government, 9) more favorable price levels.

Investment climate: 1) the overall attitude to foreign investment, 2) political stability, 3) restrictions in the ownership, 4) exchange rates adjustment, 5) stability of foreign currency, 6) the structure of taxes, 7) good knowledge of the country.

General factors: 1) expectation of high profits, 2) other factors.

The mentioned above factors of FDI are specified during the development of investment policy through the system of indicators, comprising about 340 indexes and more than 100 evaluations of experts in economic, legal, technical, social and other spheres. The data analysis form 10 fundamental factors to assess the potential of the country to act as host FDI or so-called competitive potential of the country. These factors include the following:

• dynamics of the economy (economic potential);

• production capacity of industry;

• dynamics of the market;

• financial support of the government;

• human capital;

• prestige of the state;

• availability of raw materials;

• the orientation to external markets (export potential);

• innovation potential;

• social stability.

Each of these 10 factors includes a system of specific indicators. For example, for human capital's evaluation, Swiss experts suggested using 36 indicators that include: population and its dynamics; the overall unemployment rate; migration of the labor force as a whole, including highly skilled one; the level of professional training; motivation of hired workers and their mobility; management and its professional adaptation; the level of wages; public expenditures for education per capita; the level of workforce with higher education; periodicals publishing; the health care system, etc.

In practice, most decisions concerning foreign direct investment are based on many motives and take into account many factors. Political motives for investing are rarely separated from economic ones.

On the basis of expert estimates, the most attractive conditions for FDI are possessed by the following countries: the USA, Canada, Germany, Switzerland, and Asia-Pacific newly industrialized countries (NICs).

Forms of foreign direct investments

Foreign direct investment is carried out in the form of transfer of capital from one country to another by means of crediting or buying the shares from a foreign company, which is largely owned by the investor or under his control, or by means of setting up a new business. Therefore, foreign direct investment tends to imply a high level of investor commitments to the controlled firm in relation to transferring of new technologies, managerial know-how, the provision of the skilled stuff. Immaterial, mobile assets become a rather widespread form of FDI under modern conditions. They may occur even with small initial funding or without any movement of financial capital abroad.

The mentioned form of foreign direct investment provides the controlled branch with: the transfer of the management skills; trade secrets; technologies; the right to use the trade mark of the parent company; etc. Therefore, a particular attention should be paid to the technology transfer.

Technology transfer does not mean only the emergence of new equipment in the market, but also mastery of technique of operations' performing on it. In the industries, where the role of intellectual property is essential, such as pharmacy, education, medicine, scientific researches, the access to the resources and developments of parent company generates benefits far beyond those that could be obtained by infusion of capital. It explains the interest of many governments to the fact that TNCs have research centers (capacities) in their countries. An integral part of the technology transfer is the management skills that are the most significant components of foreign direct investment.

The principles of technology transfer are usually the following:

1. The usefulness of the technology.

2. Favorable social and economic conditions for the transfer.

3. The willingness and ability of the host country to use and adapt the technology.

In the industrialized countries, complex technological processes are economically justified, and specialists from these countries are able to solve the problems and develop technology. The problems occur in the less developed countries with little industrial experience. Production capacity must be adapted to the production in small series; equipment and operations should be very simplified due to the lack of qualified and trained personnel. In most cases, in these countries the quality is only reaching the world standards. To overcome these problems, for example, the electronics giant 'Philips' created a special experimental plant. The plant contributes to the fact that a lot of elements, defining the possibility of production functioning, are adapted to the local circumstances, and thus the necessary know-how and other elements are transferred to the developing countries.

Technology transfer increases with the growth of the industrialization, which will create not only the demand for new technologies, but also complicate the processes and technology in the existing economic sectors.

The consequences of foreign direct investments

Foreign direct investment has a significant impact on the socio-economic development of investing countries (where the capital comes from) and destination countries (where the capital comes in), on different social groups in these countries, and on the state and dynamics of the world economy as a whole and of individual regions as well.

The analysis of FDI impact on the well-being of the individual groups of population shows that foreign direct investment brings the following:

• benefits:

a) to foreign firms and investors;

b) to workers of the receiving country (workplaces);

c) to the population of the receiving country from a possible increase of social services because of taxes on incomes from FDI;

• losses:

a) to workers of an investing country, as FDI means exports of workplaces;

b) to competing firms in the receiving country;

c) to taxpayers of an investing country, as profits of TNCs are more difficult to tax and the government either shift the shortfall in tax revenue to other payers or reduce the budget-funded social programs.

The general conclusion of economists, analyzing FDI is as follows:

1) an investing country generally wins because the benefits for investors

are more than losses of workplaces and other categories of persons in the home

base country;

2) a receiving country also generally wins, because the benefits for workers and other categories of persons are more than the losses to investors of the receiving country who are forced to compete with firms that have technological, managerial and other advantages.

The simultaneous existence of both costs and benefits breeds differences in the business world, among politicians, scientists and economists about foreign investment. In many countries, FDI gives birth to nationalistic sentiments. In the USA, for example, according to the survey, 48% of Americans are opposed to Japanese investment and only 18% agree to take them. The position of the developing countries is ambivalent. On the one hand, they fear excessive foreign influence and exploitation and, on the other hand, the disinvestment as a means of access to the latest technology, exports expansion, etc.

In many countries in the sphere of investment policy there are powerful conflicting pressure groups, seeking to limit FDI inflow or their wide attraction.

In the home countries of TNCs, the lobbying influence of these corporations on foreign policies of the governments often results in international military conflicts in order to protect the interests of investing firms that do not coincide with the interests of nations as a whole.

In the global scale, FDI, which reached $1.5 trillion in 2011, and $1.6 trillion in 2012, play a positive role [44]. Their distribution by countries, economic sectors, industries largely determines the structure of the world economy, relationship between its separate parts. Foreign direct investment for TNCs is an instrument of establishing of the system of international production, placed in many countries, but controlled from one centre.

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