Economic Manifestation

of Globalization
Lecture: 2

Course: Ekon3065
Lecturer: Mārcis Dzelme
Offshoring vs. Outsourcing
Outsourcing is the act of transferring business activities to an external
organization that has a level of specializations
Offshoring, on the other hand, refers to moving an organization's
business to another country

FE: Call centre offshoring/outsourcing is the strategy of obtaining an external

service provider located outside of the county to operate and manage your call
centre. There are number of pros and cons.

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Structure
• Economic Globalization
• International Trade – Movement of Goods and Services
• International Investments – Movement of Capital
• Migration – Movement of People
• Conclusion

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 Economic
Globalization

Flow of G & S Flow of Capital Flow of People

International Trade International Investments Migration

Increasing interdependence of countries Globalization, 2011, 8:10 min.

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Definitions for International Investments
• Investor a person that allocates capital with the expectation of a future
financial return or to gain an advantage
• Investment an asset or item that is purchased with the hope that it will
generate income or appreciate in value at some point in the future

• International Investment Agreement is a treaty between countries

that addresses issues relevant to cross-border investments, usually
for the purpose of protection, promotion and liberalization of such
investments

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Types of International Investments
• Foreign Direct Investment - FDI
• Foreign Portfolio Investments - FPI

• Government Funds/Aids – Official Flows

• Cross Boarder Loans – Commercial Loans: Cross-border lending by
banks constitute a substantial part of international capital flows

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Types of International Investments 2
• FDI – an investor sets up or buys a company in another country
• FPI – an investor buys shares in, or debt of, a foreign company without
controlling that company

• FDI is an investment from a party in one country into a business or corporation

in another country with the intention of establishing a lasting interest

• Lasting interest differentiates FDI from FPI, where investors passively hold
securities from a foreign country

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How FDI affect household incomes

8
Development of FDI flows
FDI has been on a
downward trajectory since
2015 and is expected to
decline sharply as a
consequence of the
pandemic and the resulting
supply disruptions, demand
contractions, and
pessimistic outlook of
economic actors.

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10
The most important factors for FDI in 2019

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12
FDI Transactions by Type
Greenfield investment Acquisition
a type of FDI where a company a corporate transaction where one
establishes operations in a company purchases a portion or
foreign country. The company all of another company’s shares or
constructs new facilities cross- assets. Acquisitions are typically
made in order to take control of,
border from the ground up. and build on, the target company’s
strengths and capture synergies.

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Advantages
Greenfield Investment Acquisitions
• High level of control over business operations • Reduced entry barriers
• High-quality control over the manufacturing • Market power
and sale of products and/or services
• High control over brand image and staffing • New competencies and resources

• Economies of scale and economies of scope • Access to experts

can be achieved in terms of marketing, • Access to capital
research and development, and production
• Bypassing trade restrictions • Fresh ideas and perspective
• Creating jobs for the economy where the
greenfield investment is taking place

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Disadvantages

Greenfield Investment Acquistions

• High-risk investment – the riskiest form of FDIs • Culture clashes
• Potentially high market entry cost (barriers to • Duplication
• Conflicting objectives
entry)
• Poorly matched businesses
• Government regulations that may prevent FDI
• Pressure on suppliers
• High fixed costs involved in establishing a • Brand damage
greenfield location

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EU FDI in China

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China FDI in EU

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Impact of the pandemic

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Impact of the pandemic on FDI

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21
Conclusions
1. Even before the COVID-19 outbreak, FDI was in decline due to trade policy uncertainty,
rising protectionism, falling rates of return on FDI, and changing forms of international
production.

2. The COVID-19 crisis is presenting a new, unprecedented source of investor risk that is
depressing business confidence to historic lows, resulting in a projected fall in global FDI
by more than 40 percent in 2020.

3. More than two-thirds of multinational investors in developing countries are reporting

disruptions in supply chains, declines in revenues, and falls in production as a result of
COVID-19—and the impacts are projected to worsen in the coming months—based on a
new World Bank survey on the impact of the pandemic.

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Conclusions 2
4. FDI can alleviate the impact of the COVID-19 crisis and boost countries’ economic
resilience by providing a critical source of external capital for financing public debt and
continuing to create more and better-paid jobs, lift people out of poverty, and boost
productivity.

5. Foreign acquisitions of local firms in developing countries have doubled as a share of FDI
over the past decade, and they have made the acquired companies more export oriented,
productive, and diversified in their product offering.

6. The possible adverse effects of FDI on income inequality and on lower- skilled workers
emphasize the critical mitigating role of labor market and education policies.

7. An extensive survey of more than 2,400 global business executives in 10 large middle-
income countries conducted in 2019 shows that government policies can influence FDI
location decisions.
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Conclusions 3
8. Government actions—such as reducing investor risk and increasing policy predictability—
can rebuild investor confidence, based on the report’s new global database of regulatory
risk.

9. Investment promotion agencies can boost their countries’ investment competitiveness by

better aligning their FDI attraction and retention efforts with market signals and changing
investor preferences.

10. Governments can leverage FDI for robust economic recovery from COVID-19 by avoiding
protectionist policies, seizing new opportunities from changing FDI and supply chain
trends, and fostering global cooperation.

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 Homework due on 15.10.
Work with World Investment Report 2020, Chapter II. Regional Trends
Divide in groups of 2-3 and work with one of the 8 themes:
• Africa – Developing Economy
• Developing Asia – Developing Economy
• Latin America and the Caribbean – Developing Economies
• Transition economies
• Developed economies
• Least Developed Countries - Structurally weak, vulnerable and small economies
• Landlocked Developing Countries - Structurally weak, vulnerable and small economies
• Small Island Developing States - Structurally weak, vulnerable and small economies

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The EU and Flow of Capital

Lecture: 2A

Course: Ekon3065
Lecturer: Mārcis Dzelme
The EU and Flow of Capital
• The free movement of capital has the broadest scope of all EU treaty
freedoms

• It is the only freedom that goes beyond the boundaries of the internal
market

• This freedom cannot exist without sensible safeguards and protections.

• EU countries are legally allowed to take precautions to ensure that FI

does not expose them to public security threats

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The EU and Flow of Capital 2
The EU is promoting the free flow of capital internationally,
advocating for lower trade barriers and a level playing field for
investments

The EU promotes these principles through

• international fora and multilateral agreements
• bilateral investment dialogues and trade agreements
• negotiations with EU candidate countries

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Objectives of EU Investment Policy
The EU is one of the most open places to invest. EU investment
policy aims to:
• secure a level playing field so that EU investors abroad are not
discriminated or mistreated
• make it easier to invest by creating a predictable and transparent
business environment
• promote investment that supports sustainable development, respect for
human rights and high labour and environmental standards
• attract international investment into the EU, while protecting the EU’s
essential interests
• preserve the right of home and host countries to regulate their economies
in the public interest
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EU Investment Negotiations
The EU is negotiating or implementing investment rules in trade or
investment agreements. These investment rules cover:
• allowing and facilitating the setting up of enterprises by making sure
investors can access the market and do not face discrimination between
EU and non-EU investors
• creating a favourable regulatory framework, both when the investor enters
the market and when the investor does economic activities in the country
• protecting established investments/investors through commitments to fair
treatment for investors or guarantees of compensation in case of
expropriation

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Investment Facilliation
The EU seeks to encourage the setting up of a more transparent,
efficient and predictable business climate for investors

Investment facilitation contributes to unlocking investment

opportunities notably for SMEs. This should also benefit developing
countries by making it easier for domestic and foreign investors to
invest.
In the WTO, the EU is contributing to the discussions on investment facilitati
on

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Investment Agreements
There are conditions for EU members to modify, negotiate or
conclude investment agreements:
• the agreement is not in conflict with EU law
• the agreement is consistent with the EU’s principles and objectives for external action
• the Commission did not submit or decided to submit a recommendation to open
negotiations with the non-EU country concerned
• the agreement does not create an obstacle to the EU negotiating or concluding bilateral
investment agreements with non-EU countries
Since February 2020, the Commission
publishes its implementing decisions on authorisations granted to
individual EU members for bilateral investment agreements

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EU participation in International Flora
• OECD: Investment Committee
• United Nations Conference on Trade and Development (UNCTA
D)
: World Investment Forum
• WTO:
Committee on Trade-Related Investment Measures (TRIMs)
• United Nations Commission on International Trade Law (UNCIT
RAL)
: Working Group III on Investor-State Dispute Settlement
Reform
• International Centre for Settlement of Investment Disputes,
World Bank Group 33
Comprehensive Agreement on Investment
• EU-China CAI: European companies operating in China do not
benefit from the same levels of transparency and fair
competition as those enjoyed by Chinese companies in the EU
market. The CAI is a key tool to address this lack of balance

• CAI negotiations launched on 2014

• In 2016 agreed that it would go beyond a traditional investment

protection agreement to cover market access for investment
and a number of important disciplines
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CETA, Chapter 8, Investments
• removes barriers to foreign investment, such as foreign equity
caps or performance requirements
• allows EU investors to transfer their capital in Canada back to the
EU, and vice versa
• puts in place transparent, stable and predictable rules governing
investment
• guarantees that the government will treat foreign investors fairly
• sets up a new Investment Court System to enable investors to
resolve investment disputes with governments quickly and fairly

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EU-Singapore FTA & IPA
Seminar Task on 8.10.
• Look at Investment Protection Agreement that is part of EU-Singapore trade
and investment agreements and submit an overview drafted in your own
words
• To draft a profound answer consult international investment fora sites
• Recommended lengths up to 1 A4 pages

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Paldies!