Theories of International Trade

and Investment
Part 2
Binod Ghimire

Binod Ghimire Ph.D. Lecturer TU 1

 Contents of slides
• Existing status of global trade- volume and
directions;
• Nepal's foreign trade-an overview;
• Foreign direct investment and portfolio
investment-current status and global trends;
• FDI and multinationals;
• Contemporary issues in international trade,
FDI and multinational companies.
Binod Ghimire Ph.D. Lecturer TU 2
Existing status of global trade- volume
and directions
WTO Annual report (2018)
• The trade volume has grown by 4.7% in 2017
(strongest since 2011) while comparing with 2016, it
was just 1.8%. Trade growth is expected to
remain stronger in 2018.
• China, USA, Germany, Japan, Netherland,
South Korea and Hong-kong of china are the
top 7 countries in the world having the biggest
volume of trade in the world.

Binod Ghimire Ph.D. Lecturer TU 3

• Earlier US had dominant position in the world
trade till 1960s, now the share of world
output had been cut in half.
• Now Japan, Germany, China, South Korea have
emerged as increasing powers in world export
trade.

Binod Ghimire Ph.D. Lecturer TU 4

 Nepal's foreign trade-an overview

• There are many ups and downs in four

decades from 1974/75 (official trade data from this
years onward)
• The export- import ratio in 2017/2018
reached 1:15. It means that Nepal imported
goods worth Rs 15 for each rupee of export.
Up-to-now, this is the biggest trade deficit in
the history.

Binod Ghimire Ph.D. Lecturer TU 5

 Foreign direct investment and portfolio
investment-current status and global trends

• FDI is the act of moving the capital across the

border for the purpose of controlling and holding
ownership of a company in a foreign country.
• There are two modes-
a. Green fields (establishing wholly new industry
or operation in foreign country)
b. Acquisition (Purchasing sufficient share of
other foreign company to obtain significant
mgmt control)
Binod Ghimire Ph.D. Lecturer TU 6
 Portfolio Investment
• Foreign portfolio investment is investment by
individuals, firms or public organizations in
foreign financial instruments such gov. bond,
foreign stock etc.
• It is also known as non-controlling interest as
such investments have no intention to control the
organization but only a goal of earning returns on
investment.
• Companies are interested in portfolio investment
primarily for short term financial gains.
Binod Ghimire Ph.D. Lecturer TU 7
 Current Status and Global Trends of
FDIs
• UNCTAD (United nations conference on trade and
development) 2018 summarizes as
• Stable FDI flow to developing Asian nations
(remain stable at $476 billion)
• FDI flow to Africa falling ( reaching $42 billion,
down 21% from 2016)
• Rising FDI flow to Latin America (reach $151
billion, increase 8%)
• Fragile FDI flow in weak economies ( fell by 17%,
reaching to $26 billion to the least developed
countries.
Binod Ghimire Ph.D. Lecturer TU 8
Current status:
• USA has remained the largest investor as well
as biggest FDI recipient country in the world.
China is closely following up the US.
• The current FDI trend shows that developing
or emerging economies like China, Brazil and
India are emerging in the picture.

Binod Ghimire Ph.D. Lecturer TU 9

 Trends of FDI
a. Fall in global FDI inflows:
According to the World Investment Report, global FDI
inflows recovered after 2010 till 2013. But in 2014, inflows
fell by 16% because of the fragility of the global economy,
policy uncertainity, and increased geo-political risk.
b. Rise in Inward FDIs to developing economies:
Among the top 10 FDI recipients in the world, 5 are
developing economies.
c. Stronger FD investors from developing nations:
Nine of the 20 largest investors countries were from
developing nations.
d. Continuous shift of FDIs to service sector:
Over the past 10 years, FDI shift towards service sector.

Binod Ghimire Ph.D. Lecturer TU 10

 FDIs and Nepal
• The FDI inflow in Nepal is substantially low compared to
neighboring countries (NRB,2018)
• FDI inflow in Nepal shares only 0.01% of total FDI in the world
while the South Asia received 3.1% of total FDI inflows in 2016.
• Largest portion (45.6%) of FDI to Nepal came from the west
indies( cluster of island countries considered ad tax heaven:
such as Panama, Costa Rica, Belize, Barbados etc.
• India and China are the major investor countries in Nepal after
West Indies.
In Service sector
• West indies – 62.78%
• India----27.25 %
• China----10.84 % Binod Ghimire Ph.D. Lecturer TU 11
 FDI and multinationals

• FDI starts when a firm invests in business in

foreign company. Multinational results from an
FDI or FDIs bring in multi-national into the
country.
Types of MNCs
A. On the basis of Organization Purpose
• Raw material seeker
• Market seeker
• Cost minimizer

Binod Ghimire Ph.D. Lecturer TU 12

B. On the basis of Management Orientation
• Ethno-centric (feels superior of home country’s
system and culture so applies in overseas
operations too)
• Regio-centric ( feels superior of regional system
and culture such as Latin America, Arab and apply
respective culture or system)
• Polycentric ( Adopting itself with the host
country’s culture, technology and mgmt system)
• Geocentric (global strategy and mixes both local
and home country system and culture)
Binod Ghimire Ph.D. Lecturer TU 13
Contemporary issues in international trade

a. Free trade, fair trade and protectionist trade

• Trade barriers are either fully removed or at least reduced.
• Protectionist includes tariff, non tariff barrier.
• Fair trade is rule based trade. In fair trade, LDC get special
privileges.
b. Subsidies and Countervailing
Subsidies provided in export (incentive or concession)
provide products cheaper in global market. It distorts free
market competition. Countervailing removes the unwanted
effect of subsidies which is imposed by importing nation
who have enjoyed subsidies from the exporting nation.

Binod Ghimire Ph.D. Lecturer TU 14

c. Transit facility for landlocked nations
It is crucial issues for landlocked nation like Nepal.
WTO system has provision on “Freedom of Transit” in
its Article V. WTO members must provide the routes
most convenient for international transit.
d. Sanitary and Phyto-Sanitary measures (SPS measures)
Concern over the presence of non sanitary and
unhygenic elements in the goods traded between them.
Sanitary issues is related to humans and animals while
phyto-sanitary is concerned with plants.
With the concern of protecting health of people, animals
and plants, countries can adopt measures to protect
themselves from different hazards. Countris often
practice SPS measures when other countries suffered
from bird flu, mad cow disease, swine flu etc. WTO
supports SPS measures.

Binod Ghimire Ph.D. Lecturer TU 15

e. Dumping and Anti Dumping Measures (ADM)
Some nation dump useless product to poor country market at
a very low price even below the production cost. Nepalese
mkt is flooded with this product as more consumers are poor
and price sensitive. But they suffer because of poor quality.
At the same time, it distorts the competition of market. ADM
can be applied according to the WTO rules, if there is
material injury to domestic industry.
f. Voluntary Export Restraints (VER)
It is a type of import quota imposed by the exporting nation
typically at the request of the importing country’s
governments. In 1981 Japanese automobile producers put
limitation on their automobile exports to the US as the US
govt. had requested Japan to do so.
Binod Ghimire Ph.D. Lecturer TU 16
 Contemporary issues in FDI and
multinational companies.
• Barriers to inward and outward FDIs.
(Most common are ownership restraint and
performance requirement.
• Framework of WTO and other organization
(Regional trading blocs like SAARC, BIMSTEC have
developed their framework to promote business)
• Continuous fall in global FDI flows
• Stronger FD investors from developing nations
• Continuous shift of FDIs to service sector.

Binod Ghimire Ph.D. Lecturer TU 17

 Assignment
• You are the international manager of a U.S. business that
has just developed a revolutionary new personal computer
that can perform the same functions as existing PCs but
costs only half as much to manufacture. Several patents
protect the unique design of this computer. Your CEO has
asked you to formulate a recommendation for how to
expand into Western Europe. Your options are
(a) to export from the United States,
(b) to license a European firm to manufacture and market the
computer in Europe, or
(c) to set up a wholly owned subsidiary in Europe.
Evaluate the pros and cons of each alternative and
suggest a course of action to your CEO.

Binod Ghimire Ph.D. Lecturer TU 18

Binod Ghimire Ph.D. Lecturer TU 19