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4015555

1110757

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Source: UNCTAD

The shift in FDI away from natural resources towards efficiency-seeking and strategic

Asset- and market-seeking FDI has also had implications for entry modes. For

Instance, privatisations in Latin America have accounted for a number of takeovers

Through cross-border Mergers and Acquisitions. There has also been an increasing

Amount of strategic alliances, in particular with Asian countries with appropriate

Technological capabilities.

A shift towards efficiency and strategic asset seeking FDI has also meant a growing

Globalisation of the production processes. A car used to be an assembly of metal

Pieces and production by assemblers accounted for 65–70% of the total value-added.

Organizational change, for instance, just-in-time (JIT) techniques, has facilitated the

Process of outsourcing. As a result, final assembly plants account for less than 40% of

The value of a car and the rest of the stages in the value chain take place elsewhere:

30% of the value of the US car goes to the Republic of Korea for assembly, 17.5% to

Japan for components and advanced technology, 7.5% to Germany for design, 4% to

Taiwan and Singapore for minor parts, 2.5% for advertising and marketing services,

And 1.5% to Ireland and Barbados for data processing (Venables, 2002).

Fragmentation is also common in the semiconductor industry.

Fragmentation of production processes is also called ‘vertical specialisation’ and is

Commonly referred to as the relocation of parts of the production process from one

Country to another (Feenstra, 1998). Several estimates find that fragmentation of production into

Global production processes has been increasing in world trade. Campa and Goldberg

(1997) find that the share of imported to total intermediate inputs (%) in

Manufacturing increased in Canada from 16% before 1990s to 20% in 1993, in the UK

From 13% to 22%, and US from 4% to 8%. Many developing countries such as

Malaysia, Thailand and Mexico have benefited from this.

FDI flows into the United States from

The British Virgin Islands, for example, sank from $16.5 billion in 2008 to a negative value of

$0.5 billion in 2009. FDI inflows to Latin America and the Caribbean (excluding financial centres) rose an estimated 27 per cent in 2011, to $150 billion. Foreign investors continued to find appeal in South America’s natural resources and were increasingly attracted by the region’s expanding consumer markets.

EFFECTS OF FDI

The point here is to emphasize that basic microeconomics implies that the impact of political risk on FDI should be dependent on the global volume of FDI activity. Namely, if a FDI wave is driven by a wave of optimism among investors, then the latter should simultaneously affect investor’s evaluation of political risk. Their increased optimism would thus result in a reduced sensitivity of FDI flows to political risk a quick glance at Figure 2 reveals that the evolution of