Foreign Direct Investment In Conflict Zones: Analysis And Critical Discussion
Definition of Foreign Direct Investment
Discuss about the Analysis Of International Business Case Studies.
Foreign Direct Investment or FDI can be defined as the investment which is made to form the ownership within a particular business in a country by another business entity that operates in another country. The concept of foreign direct investment includes the acquisitions and the mergers made by the business organizations, establishing new facilities in foreign areas and reinvestment of the profits that are earned from the overseas operations. FDI can also be defined as the sum of long-term capital, short-term capital and equity capital. Foreign direct investments are made by the business entities based on the economy of the country where the investment is to be made and the growth rate of the country. There are three major types of FDI
that can be defined namely, horizontal FDI, platform FDI, vertical FDI (Driffield, Jones & Crotty, 2013).
The rapid growth in the population of the world has further helped in the increase of globalisation which facilitates the growth of FDIs in the various countries. The increase in FDI is related to the economic growth of the country where the investments are made by the business entities of the other countries. FDI investments can also be made to improve the infrastructure of the organizations and boost the developments as well. The local population in the areas where the foreign investments are made can benefit a lot from the growth of the company and the improvement of the infrastructure (Perri & Peruffo, 2016).
The report will be based on the analysis of a case study which is based on the discussion related to the FDI investments that are made in the high conflict zones. The problems that are faced by the business organizations due to the investments that are made in the conflict related areas are also analysed in the report. The analysis will further critically discuss the issues caused due to the investments made in the conflict zones.
The major focus of the case study is related to the examination of the investments that are made by the western business organizations in the high conflict areas. The strategy of the business organizations behind the investments made in the conflict zones is analysed in the case study. The sample that has been taken for the analysis are mainly the number of organizations which have invested in countries with low rates of income and weak institutions. The western firms are the major investors in the conflict zones and this trend is examined in detail in the case study. The foreign direct investments that are made by the business organizations have a significant effect on the economy of the countries where the investments are made. The motivation factors related to the firms which tend to invest more in the conflict zones are analysed in the case study (Driffield, Jones & Crotty, 2013).
The Significance of Globalisation on Foreign Direct Investment
The analysis in the case study is based in the links between the business organizations and the government of the countries where investment is made. The major focus of the study is based on the complex factors related to the business firms and the factors related to the host country where the firms are investing. The organizations which wish to invest or explore the markets in the conflict zones are mostly discouraged or criticised by the press and the industry as well. The example that has been discussed in the case study is related to a small and newly opened organization in Europe which desired to explore the oil and gas reserves in the areas of Sudan. Almost 500 multinational organizations have been involved in the investments that were made in the conflict regions in the world (Johns et al., 2015).
FDI has been given utmost importance by the professionals and it has also termed as a vehicle used for the purpose of development of the countries. The major area of focus is however the ways by which the business organizations are motivated to make these investments in the areas which are heavily affected by conflicts. As discussed by, Cortina, Köhler & Nielsen (2015), FDIs are of great importance for the purpose of stimulating growth in the countries, building facilities and encouraging huge developments. FDIs have played a major role in the economic development of the various countries and the ways by which the business environment is improved in these areas. However, there many factors related to the countries where FDIs are taking place which can adversely affect the importance of the investment for the country. The inflow of FDIs is affected by the institutions of the various countries which receive the investments. The countries which have weak institutions deter the investments that are to be made by the foreign business organizations. According to, Singh, (2016), the importance of the interaction between the international business, political capital and the risk is high. However, the authors have made least analysis about the factors that motivate the business firms which invest in the volatile areas. The major purpose of this case study is therefore to analyse the gaps that are present in the analysis and find the factors that act as motivators for the business organizations.
The relationship between the institutions and the international business is analysed in the case study in detail. The extreme issues that are being faced by the business organizations are related to the increase in terrorism in the various developing countries and the impact that this issue has on the operations of the firms. The relationship and the link between FDI and corruption in the countries where the business firms are investing is analysed in the report. The business organizations which invest in the unstable locations have to face the risk of increases the inequality in the income. The countries which fall in the conflict zones and the post-conflict zones have to face many problems including lack of the structure of governance, protection of the property rights and corruption. According to, Kolk, (2016), the investment of capital in the various areas is important for the improvement of the infrastructure and development of private sector as well. The research in the case study relates to the analysis of the role of corruption in the government to ensure short-term development.
Types of Foreign Direct Investment
The analysis is performed based on two major theoretical frameworks among which the first is related to the discussion of the role that the institutions play in the influencing the markets. The second framework is used to explain the importance of the structures of ownership related to the explanation of FDI. The major questions that are being addressed in the research are, the types of investments or trades that are sensitive to the conflict areas. The product markets or the sectors that are susceptible to the cross-national variations in the conflicts. The approaches that are taken by different organizations to react to the increase in conflict and the process that they can apply to mitigate the conflicts (Driffield, Jones & Crotty, 2013).
As discussed by, Hamilton & Webster, (2015), the institutions related to international business are important as the weak institutions tend to deter the firms from investing in the areas. The organizations are deterred from making investments in these areas not only due to the levels of corruption or the strict levels of law and order, they are most importantly deterred due to the levels of unfamiliarity. The advantage of the ownership of the firms can be experienced when the organizations invest in areas which have weak institutions and the environment of business is also risky in nature. The organizations which belong to the areas with stable business environment and low conflict are not likely to invest in high conflict zones.
The framework related to Corporate Social Responsibility and the political dimension can be added to the existing research that has been conducted in international business. The CSR related framework discusses that the organizations need to fulfil the economic responsibilities. This framework states that the organizations which operate in the low conflict zones need to understand the regulations not only of their own country. They need should also try to interpret the regulations and laws of the countries which are within the conflict zones (Cravino & Levchenko, 2016). The mitigating efforts of the home country of the organizations are taken into consideration in this case. The governance structures of the firm are also important to increase the investments in the high conflict zones. The ability of the organizations to invest in the high conflict countries is also affected by the support that is provided them by their own governments.
According to, Hutzschenreuter, Kleindienst & Lange, (2016), the decisions related FDI are not only made on the firm level, however it also involves the role that the government of that country plays in the decision that is taken by the firm. The strongest government institutions are mainly present in all the developed countries including, Japan, US, Germany and UK. The expectations are high that the business organizations which operate in these developed countries will invest in the organizations which are present in the conflict zones or the developing countries.
Analysis of a Case Study on Investments Made in High Conflict Zones
The theory related to international business can also be extended to relate the Foreign Direct Investment and corruption related factors. The argument is related to the high costs of transactions that are generated in the countries governed by weak institutions which deters the foreign investment. The main factors that can be related to this phenomenon are high levels of corruption and the political interference in these countries. The framework focusses mainly on the transition economies where extreme political corruptions are present. The most significant factor in this case is the link between the location advantages and the sectoral differences. The extraction of natural resources for the purpose profit in the conflict zones can be related to the response that is provided to the demands in the market.
According to, Picciotto, S., & Mayne, (2016), another major factor related to the analysis of foreign direct investment also needs to focus of the advantages related to internationalisation. The analysis of the foreign direct investment needs to be focussed on the business-state relations. The theory mainly suggests that the business firms which are larger in size are more prone to invest in the conflict zones as compared to the business firms which are of smaller size.
The ethical responsibilities of the organizations and the structures of ownership are also important to analyse the foreign direct investments in the high conflict zones. The ethical responsibilities of the business firms are determined mainly by three major factors which are, (a) the ways by which the business firms view their own ethical responsibilities, (b) the pressure that is experienced from the stakeholders from outside the host country of the company and (c) the assumptions that are made by the organizations about the expectations from the country where they operate. These three types of pressures are different for the various firms and research depicts that the business organizations which are not quite concerned about their corporate social responsibilities are much more likely to invest in the high conflict regions (Buckley & Ghauri, 2015).
The relationship between ownership concentration and CSR is discussed is analysed in the case study. The persistence related to ownership concentration mainly reflects the weakness of the institutions of the countries and the absence of these intermediaries in the capital markets. The strategic decisions related to the organizations with concentrated ownership are mainly taken by a small group of people and it does not involve many stakeholders of the company. The interest levels of these organizations are also high in case of expanding their business operations in the other countries. The organizations have formal memberships of the corporate groups and they also have huge informal networks which tend to facilitate their link with the internal capital markets and they are able to easily raise the capital that is important for expansion (Welch & Björkman, 2015).
Motivators for Foreign Investments in Conflict Zones
According to, Doh et al., (2017), the organizations which have concentrated ownership tend to face low amount of scrutiny from the various stakeholders of the company. This can help the organizations in engaging in the activities which can be otherwise be a reason for criticism in case of the other type pf organizations. Among the various factors that are related to the foreign direct investments including, CSR, politics and corruption, the effects of CSR are least discussed in the previous researches. This research is based on the CSR activities of the organization related to the perspective of the external stakeholders of the firm. The relationship between FDI and the concentrated ownership firms is much more complex as compared to the discussions that are made in the previous researches.
The reasons behind the investment made by the business firms in the conflict countries are analysed in the case study. The research studies previously made by the authors have depicted the extent up to which the political instability in the countries deters the foreign direct investment. The authors have previously suggested that the western firms tend to invest more in the areas which are politically unstable and the locations are ethically questionable as well. The various models that has been used in the research to explain the propensity of foreign direct investment based on the intangible assets, size, age and subsidiaries. These variables help in explaining the marginal decisions that are taken by the organizations to invest in the regions where conflicts are present (Lien & Filatotchev, 2015).
The sample that has been chosen for the analysis is around 2509 organizations which have invested in the conflict areas. The research further states that the existing research about the factors that deter the foreign investments may be true, however, it is not true for all the organizations. The findings from the research have utmost importance in case of the organizations which need to take decisions regarding the investment to be made in the low-income countries. The case findings have huge implications for the general research that has been previously done based on the relationship between the foreign direct investment and the development of the countries. The research in the case study was mainly based on the link between institutional quality of the countries and the foreign direct investments. The analysis in the case study however ignores the factors related to the motivation for the business organizations which invest in the conflict areas.
Factors Affecting Inflow of Foreign Direct Investments
According to, Enderwick, (2017), motivation acts as an important factor for the organizations which invest in the countries with high conflict. The research can however be extended towards considering the prospects for the contribution of FDI in the development of the countries after the conflict period has passed. The argument has been raised by, (), that the development of the countries which is assisted by FDI depends upon the transfer of the resources which are specific for the firms and the interaction levels with the advantages that are provided by the locations. The results that are obtained from the research suggest that the advantage that is acquired by the organization from ownership can act as important motivators for the foreign direct investments that are made in the conflict zones. The expectation of the firms is related to the improvement of the economic performance of the host country of the organization (Driffield, Jones & Crotty, 2013).
The research has depicted that the organizations which belong to the countries in high importance to CSR are less interested in investing in the high conflict zones. The reason behind this choice of the business organizations is the behaviour of the consumers in the high conflict zones. The consumer behaviour helps the organizations in becoming socially responsible. The organizations which belong to the countries with weak culture of CSR are much more keen on investing in the high conflict zones. As argued by, Holmes et al., (2016), previously, the CSR activities that are performed by the organization need to be contextualised taking into account the development of the institutions and economy of the country. The research made in this case study however suggests that the CSR related activities of the organizations are voluntary in nature and they can choose to comply with the regulations or further go beyond the limits and become socially responsible.
The organizations which belong to the countries with high conflict may not necessarily have a weak CSR, they can have different interpretations for the ways by which CSR can regulated and the scope of the CSR related activities. This depicts that the ownership of business is important and the governance related to international business also holds huge importance. As discussed earlier by, Alcácer, Cantwell & Piscitello, (2016), the factors related to the levels of corruption are important for the research related to international business expansion strategies and FDIs. The study performed in this case relates to the importance of the characteristics of the firm and the characteristics of the home country of the organization. The research therefore emphasizes that the governance of the home country is important in the decisions that are taken by the organization to invest in the countries with high conflict. The CSR of the organizations however, require analysis on the country level so that the motivation level of such countries related to the investment that is to be made in the high conflict zones.
Theoretical Frameworks Related to Foreign Direct Investment and Conflict Zones
Conclusion
The analysis of the case study depicts that the foreign direct investment related decisions taken by the business firms depend on many factors which include, political factors and the CSR related activities of the organizations. The various factors related to the propensity of FDIs include, age, intangible assets and many other factors. The results and findings of the research have depicted that the foreign direct investments made in the organizations belonging to a conflict zone can further help in the development of the countries. The condition of the countries after the conflict period can also be developed with the foreign direct investment made by the organizations belonging to the developed countries. The developing countries have been found to be the most affected by the conflicts in the economic and political areas. Therefore, the expectations related to investments are high from the organizations which belong to the developed countries and the low conflict zones as well. This is also related to the corporate social responsibility related activities that need to be performed by the organizations.
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