Media Analysis: Foreign Direct Investments

Your Name
Subject and Section
Professor’s Name
October 20, 2020
Foreign Direct Investments
In terms of a nation's overall economy, foreign direct investments may be considered a sizeable boon to domestic business capital, financing, and operations. Foreign direct investment is defined as the purchase of actual assets or equity participation by a foreign company to gain a degree of control or beneficial ownership of an enterprise. (Hill, 2005, 209).
However, foreign direct investments are not so clear cut and simple. There are political and underlying economic implications for allowing foreign direct investments and foreign business participation in domestic relevant markets. For example, a foreign company that is doing very well in terms of its business and has a sizeable market share, when it directly invests in domestic companies, can boost that specific company's operations more often than not to the detriment of other domestic competition within that relevant market. In other words, massive international business conglomerates have the potential of quickly snuffing out the competition and dominating most of the market share within a country's economy—resulting in monopoly and a very significant chance of consumer and competitor disadvantage (See Head & Ries 1996).
For example, the special economic zones in China, where foreign direct investment is heavily incentivized and promoted, exert significant competitive pressure on other Chinese cities. These cities, such as Taiwan, must keep up, so to speak, to not be left behind in the relevant market. (See Head & Ries 1996)
One of the major theories behind foreign direct investments is market imperfections. A perfect market is one where operations are at peak efficiency, implying considerable profits at minimal costs while retaining consumer-friendly prices, and where products and services are readily and easily accessible (Hill 2005, 211). However, perfect markets appear once in a blue moon. They are very rare, and seldom do they manifest in relevant markets.
A market imperfection is where a market is operating not at peak efficiency due to some elements, reasons, or factors contributing to such inefficiency. According to the market imperfection theory, when a company operates less efficiently than it should be, the company undertakes to attract foreign direct investments. (Hill 2005, 211)
These foreign direct investments, in turn, contribute to a process called internalization---a sort of method in coping and smoothing out such imperfection in operations and thus returning its efficiency to peak levels. There are two attention-worthy market imperfections: trade barriers and specialized knowledge (Hill 2005, 211).
Trade barriers come in the form of tariffs or import/export taxes. Tariffs are often explicitly imposed on a particular classification or group of products, for example, import products coming into the United States that are not from Canada or Mexico. While trade barriers and tariffs operate to promote local trade and regional neighborhood import and export, they also drive companies not falling under such exemption from taxes to investment in subsidiary companies or other enterprises located within the exempted countries. Suppos...