Indirect FDI - kozminski.edu.pl · indirect FDI is not necessarily negative; however it varies by the key types of indirect FDI (del-egation of power to regional headquarters, nearshoring,

The Journal of World Investment & Trade 13 (2012) 542–555

© Koninklijke Brill NV, Leiden, 2012 DOI 10.1163/221190012X649841

brill.nl/jwit

The Journal of

World Investment & Trade

Law Economics Politics

Indirect FDI

Kálmán Kalotay * Economic Afffairs Offfĳicer, United Nations Conference on Trade and Development (UNCTAD),

Geneva, Switzerland [email protected]

Abstract This article analyses indirect FDI, denoting investment projects, in which the ultimate owner is diffferent from the immediate investor. Reasons for the existence of this type of investment projects can be mostly corporate strategies and tax considerations. The development impact of indirect FDI is not necessarily negative; however it varies by the key types of indirect FDI (del-egation of power to regional headquarters, nearshoring, concealed investment, and round trip-ping). It also depends on how the project money is transhipped: through an afffĳiliate abroad, or through a special purpose entity. Government polices may influence largely the extent and development impact of indirect FDI, especially through tax policies. The phenomenon deserves more attention in the future, as currently indirect FDI is an under-researched topic.

Keywords indirect FDI ; transhipped FDI ; round tripping ; special purpose entities ; ultimate owner ; taxation

JEL Classification F23 ; H25 ; K33

1. Introduction

This article reviews the phenomenon of indirect FDI. The meaning of this term can be best understood through an example: When in 1998 the car manufacturer Adam Opel AG invested in assembly operations in the Polish town of Gliwice, the National Bank of Poland registered this project as a German investment in its balance-of-payments statistics because the Opel is

*) Economic Afffairs Offfĳicer, United Nations Conference on Trade and Development (UNCTAD), Geneva, Switzerland. The author is grateful to Christian Bellak, Gábor Hunya, Andreja Jaklic, Magdolna Sass and Karl P. Sauvant for their comments on a previous version of this manu-script. All remaining errors are the sole responsibility of the author. The views are those of the author and do not necessarily reflect the opinion of the United Nations. The author may be contacted at: [email protected].

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headquartered in, and managed from, Rüsselsheim, Germany. However it has been fully owned by General Motors (United States) since 1931. The dilemma is that there are both substantive arguments for registering it as a German and as a United States investment. The immediate investor (in this case Adam Opel AG) has a strong link with the project; but so does the ultimate benefĳicial owner (in this case General Motors).

This article also looks at the dilemma triggered by indirect FDI for both the statistician who wishes to know which project comes from where in order to have a correct picture, and for the policy maker who wishes to take its decisions on the basis of full information about the economy it is supposed to regulate. Which information is more correct? Which information is more rel-evant? The one on the ultimate owner? Or on the immediate investor? Or both?

The problem of policy makers and statisticians with indirect FDI has been with us for some time. The trend of FDI being directed towards “indirect” forms is not really new (although one can ask if it gaining in importance over time). It was already well documented in the late 1990s (Altzinger and Bellak, 1999), in the early 2000s (Altzinger et al ., 2003), as well as most recent times (Anand and Mahajan, 2009; Rugrafff, 2010). It is a phenomenon that is spread across the globe, afffecting a large number of countries.

This article does not aim at providing a full analysis of all aspects of indirect FDI but rather point at key issues surrounding it. It looks at conceptual issues, the problems of measurement, implications for development, and policy options for Governments. A disproportionate amount of examples are derived from the European continent, and economies in transition, in particular, areas with which this author is more familiar with. However, it is not too far-fetched to hypothesize that key problems related to indirect FDI are fairly similar across diffferent regions of the world.

The analysis of this article aims at directing the spotlight on the questions and concerns of host (target) countries. This is a relative novelty in the litera-ture as the ground-breaking studies (Altzinger and Bellak, 1999; Altzinger et al ., 2003) have rather emphasized the gains that countries of origin (home econo-mies) and their multinational enterprises (MNEs) can derive from indirect FDI, especially in terms of access to foreign markets and creation and preser-vation of jobs at home. It is also a relative novelty to raise the questions what policy makers in host countries can and have to do, and if there is an impera-tive and a possibility to do so.

The rest of the article is structured as follows: Section 2 reviews the defĳini-tions of indirect FDI, with special reference to the problem of how to delimit it correctly. Section 3 presents selected data on the size of the phenomenon. It proves that although statistics are far from being complete, they indicate

544 K. Kalotay / The Journal of World Investment & Trade 13 (2012) 542–555

that indirect FDI is quite sizeable. Section 4 focuses on development implica-tions for host countries and on policy options. It suggests some ways of dealing with eventual negative impacts but cautions against too radical solutions. Section 5 concludes the article, providing some ideas for the future. The dis-cussion follows the methodology of fact-based, descriptive enquiry: a search for main facts is linked with the analysis of main reasons and consequences.

2. Conceptual issues

Indirect FDI means the utilization of afffĳiliates abroad as intermediaries for investment in third countries. As FDI stands for foreign direct investment, the term indirect FDI at fĳirst sight seems to be a contradiction: how can something be direct and indirect at the same time? This contradiction was already sensed in the literature (Altzinger et al ., 2003). There the solution offfered was to talk about direct versus indirect foreign investment. However, that solution was problematic in the sense that it deprived the indirect form from part of its substance, namely the issue of control over enterprises, which is the main characteristic of “direct investment”. To offfer an alternative solution, it is nec-essary to go back to the origin of the problem, that is, a confusion that is cre-ated by English language proper. In the term FDI, the word direct refers to the degree of control over the foreign afffĳiliate. In the term of indirect FDI, indirect denotes the way the fĳinal owners arrive at control, while direct still denotes the degree of control. Therefore we can fully live with the apparent, but not real, oxymoron of indirect FDI.

Indirect FDI can be classifĳied into four main varieties:

1) In the classical case, like Opel in Poland, the process is transparent, and the intermediary (Opel) enjoys a large degree of freedom in managing the project in the ultimate host country.

2) In cases that are closer to nearshoring in their design, the process is still transparent but the influence of the ultimate benefĳicial owner is stronger. For example, when Deutsche Telekom (Germany) used its major ity owned afffĳiliate Magyar Telekom (Hungary) to invest in the former Yugoslav Republic of Macedonia, it made sure that the top manage ment of Makedonski Telekom become German, not Hungarian (Sass and Kalotay, 2010).

3) A third variety is investment by a “ concealed ” (or “hide and seek”) ulti-mate owner, typically from an emerging economy (such as Brazil and the Russian Federation) who wishes to hide its identity to the host coun-try, and use its afffĳiliates in fĳinancial centres (the Cayman Islands, and to a lesser degree the British Virgin Islands and the Bahamas, in that order,


for the Brazilian investors; see Almeida et al ., 2007; and Cyprus for the Russians; see Pelto et al ., 2004) to carry out investment projects in the fĳinal target country. This in turn may provoke frictions with the host Government which may object to the lack of transparency.

4) A special variety of indirect FDI is round tripping . In this case, the ulti-mate owner comes from the same country as the ultimate target com-pany. In between, the investor’s capital is transferred abroad and back. Round tripping has been reported taking place frequently between the Russian Federation and Cyprus (Kalotay, 2006) and between the China and its Hong Kong Special Administrative Region (Xiao, 2001), which has a separate currency, customs territory and legal system, although under Chinese sovereignty. In these cases, investors are motivated by tax and investor protection advantages offfered to foreigners.

There are also at least two basic difffĳiculties with the correct delimitation of indirect FDI. They are linked with the fact that the nationality of an MNE is not always straightforward to defĳine ( cf . Hirsch, 2012):

1) In some cases, the nationality of the MNE is ambiguous. For example, IKEA was established by Swedish shareholders, and still cherishes its Swedish character. However, its headquarters are now located in the Netherlands, and its main shareholder resides in Switzerland. In this case, it is difffĳicult to decide which nationality to attribute to it. And needless to say, the attribution of nationality of the fĳirm has a direct impact on the question of indirect FDI. If we accept the formal criterion and treat IKEA as a Dutch fĳirm, all projects by IKEA Sweden in third countries are indirect FDI. But if we accept as Sweden as real headquar-ters, are transactions initiated from the Netherlands centre become indirect FDI. A similar dilemma may be raised about some transition-economy fĳirms, too. For example, the Hungarian real estate and con-struction fĳirm TriGránit is managed from its Budapest headquarters but is majority-owned by a Cyprus-based holding company owned by a Hungarian private person. In this case, again, whether the company is considered to be Hungarian or Cypriot makes a major diffference in terms of determining the true geography of FDI.

2) In other cases, it is difffĳicult to decide which company is the ultimate benefĳicial owner at the end of a chain of control. It is particularly true in the case of fĳirms whose majority of shares are controlled by foreign port-folio investors. In those MNEs, the company is owned from abroad; therefore its outward FDI has to be treated as indirect. However, because the number of portfolio investors is large, and none of them controls at least 10% of votes, it is impossible to attribute the ultimate ownership to


any single one among them. For that reason, the efffect of foreign portfo-lio investors has to be ignored when determining the ultimate owner-ship of the fĳirm. Therefore, unlike the early literature (Altzinger et al ., 2003), fĳirms falling under this category are not to be considered as intermediaries of indirect FDI ( cf . Sass and Kalotay, 2010). At best, they can be called “virtually foreign-controlled”. A well-known case is the Hungarian oil fĳirm MOL (Kalotay, 2010). In MOL, the management is Hungarian, and all decisions are taken in Hungary. The bank OTP, the pharmaceutical fĳirm Richter and the information technology fĳirm Synergon from the same country also fall into this category (Sass and Kalotay, 2010).

The method of fĳinancing indirect FDI is called transhipment. Transhipment can be undertaken through permanently established foreign afffĳiliates in third countries, but it can also take place through more transient construc-tions such as special purpose entities (SPEs). The SPE is a separate legal person (separate from its fĳinal owner, typically the parent company of the MNE), established to pursue specifĳic, temporary objectives such as the fĳinancing of an afffĳiliate abroad. In diffference from ordinary fĳinancing, it allows limiting the risk of the transaction to the value of the SPE, while saving taxes. For SPEs cer-tain jurisdictions serve as hubs: Luxembourg among developed countries (UNCTAD, 2003, p. 69), or Austria (Altzinger and Bellak, 1999) and Hungary (Koroknai and Lénárt-Odorán, 2011) for transition economies etc. These coun-tries have emerged as hubs on account of their earlier tradition of hosting offf-shore fĳirms, transformed into SPEs in order to comply with European Union rules.

Companies undertake indirect FDI for various reasons. The most important is corporate strategy delegating decisions on investment in third countries. In addition, indirect FDI also offfers so-called soft advantages for investors. When they target small niche markets, ultimate owners may consider the use of geographically closer afffĳiliates (such as in the case of Deutsche Telekom/Magyar Telekom in South-East Europe) more benefĳicial by way of better under-standing the local ways of doing business. This strategy is particularly frequent on the highly fragmented European continent, covered by 41–51 internation-ally recognized States (depending on the defĳinition of the continents’ bounda-ries). Of these countries, 12–16 gained independence in 1991 or later; in these countries, old economic and cultural links are still very strong.

The use of Slovene afffĳiliates to serve the Balkan markets is probably the best documented case of corporate strategies based on MNEs delegating power to culturally close afffĳiliates (Jaklic, 2003; Jaklic, 2011). Another salient case is the transhipment of banking investment destined to Latvia and Lithuania through Estonia (Roolaht and Varblane, 2009). In this case again, the three countries


shared common statehood for a long period of time, and show cultural similarities.

There are also cases of indirect FDI in which the country of the immediate investor is culturally similar to the target country but has not shared statehood in recent times for specifĳic historical reasons. This is for example the case of indirect FDI targeting the Republic of Moldova transited through Romania. Romania is an attractive transit point because while very close to the Republic of Moldova, it is member of the European Union, offfering all advantages of such membership to MNEs.

Tax advantages are another main consideration ( cf . Overesch and Wamser, 2009). Transhipment through fĳinancial centres results in lower taxes, so does investment through countries that have favourable double taxation treaties (DTTs) with the target country (see also section 4). Taxation matters also for round tripping: a company that is registered as foreign can benefĳit from tar-geted incentives, and can also invoke the DTT signed with the country of tran-shipment. Some fĳirms, especially those undertaking capital-intensive and risky projects, go for indirect FDI to get protected by the bilateral investment treaty (BIT) of the transit country. As indicated, there are also fĳirms that wish to con-ceal their origins as much as possible in order to avoid scrutiny by the host country. For round tripping, in addition to tax advantages and treaty protec-tion, motives include escape from potential uncertainties in the country of origin, too.

3. Measurement issues

The exact size of indirect FDI is not known because of the difffĳiculties of quan-tifĳication. Policy makers nevertheless can tell that this is an important issue for them, because MNEs of diffferent nationalities follow diffferent management strategies and can potentially have diffferent development impact in the host country ( cf . Hirsch, 2012). In variation from this need, most countries collect data on FDI based on the nationality of the immediate investor ( cf . UNCTAD, 2009, 86–91). This is so because tracing back the ownership of fĳirms requires resources, and raises legal issues about the confĳidentiality of information. It is also challenging for international cooperation between statistical services of dissimilar traditions. Quick change may be expected in terms of more scrutiny of individual cases, less in overall statistics. One exception is data on cross-border mergers and acquisitions in which the distinction between immediate investors and ultimate owners is possible. This is so because mergers and acquisitions are under the scrutiny of merger control; hence fĳirms are obliged to reveal the identity of buyers in detail and individually.

Indirect FDI distorts global FDI statistics, although reflects well corporate fĳinancial strategies. Statistics by immediate investors provide a misleading


Economy By immediate investor

By ultimate beneficial owner

Difference

Bermuda 5.1 124.8 119.7United Kingdom 432.5 497.5 65.0Germany 212.9 257.2 44.3Canada 206.1 238.1 31.9 United States – 31.6 31.6 Ireland 30.6 61.7 31.1France 184.8 209.7 24.9Mexico 12.6 34.0 21.4Brazil 1.1 15.5 14.4United Arab Emirates 0.6 13.3 12.7Israel 7.2 19.5 12.2Belgium 43.2 52.2 9.0Netherlands Antilles 3.7 12.4 8.7Hong Kong Special Admin. Region of China

4.3 11.6 7.3

Italy 15.7 23.0 7.3Japan 257.3 263.2 6.0Norway 10.4 14.4 4.1India 3.3 7.1 3.8Spain 40.7 44.2 3.5Finland 6.6 10.0 3.5Australia 49.5 52.9 3.4New Zealand 0.6 3.3 2.7China 3.2 5.8 2.7South Africa 0.7 2.2 1.5Republic of Korea 15.2 16.6 1.4Kuwait 0.3 1.5 1.1Taiwan Province of China 5.2 6.0 0.8Malaysia 0.4 1.0 0.6Denmark 9.3 9.9 0.6Bolivarian Republic of Venezuela

2.9 3.1 0.3

Bahamas 0.1 0.2 0.1 Total difference (+) - - 477.7Singapore 21.8 21.3 -0.5Panama 1.5 0.8 -0.7Austria 4.4 2.5 -1.8Sweden 40.8 36.0 -4.7

Table 1. Inward FDI Stock of the United States from Selected Economies of Origin, by Immediate Investor and Ultimate Benefĳicial Owner, 2010

(Billions of dollars)

(Continued)


picture of the geography of FDI, and certain parts of indirect FDI, such as round tripping, inflate the numbers. This does not mean however that statis-tics not revealing indirect FDI separately would contain completely erroneous or useless information. The case is rather that they can be correctly interpreted if they can be immediately compared with data series based on ultimate ownership.

However FDI by ultimate owners is reported by a handful of countries only. In one of them, the United States, the diffference between immediate and ultimate owners amounted to 18% of the 2010 inward stock (of which 1.3% was round-tripping) ( table 1 ). It is noticeable that even these data presented by the United States sufffer from weaknesses in terms of identifying the real ultimate owners at the end of the ownership chain. This can explain why FDI by ultimate owners from certain fĳinancial centres (most notably from Bermuda 1 and to some extent from the Netherlands Antilles) is larger than data by the immediate investors, while logically the diffference should be the way round.

UNCTAD data indicate that other countries provide less perfect proxies of the extent of indirect FDI. For example, in 2008, 60% of the outward FDI stock of Brazil was registered in the three Caribbean offfshore centres mentioned above (Bahamas, British Virgin Islands, Cayman Islands), to be transhipped to

1) This discrepancy may be due to Jardine Matheson Holdings, which is incorporated in Bermuda but operates from the Hong Kong Special Administrative Region of China (in case Bermuda is counted as the location of the ultimate benefĳiciary owner). However due to rules of confĳidentiality binding balance-of-payments data collection, it can not be fully confĳirmed.

Economy By immediate investor

By ultimate beneficial owner

Difference

Caribbean United Kingdom Islands a

31.2 0.8 -30.3

Netherlands 217.1 118.2 -98.8Switzerland 192.2 61.6 -130.6Luxembourg 181.2 24.4 -156.8Total difference (-) – – -424.4All economies 2 342.8 2 342.8 –

Table 1. (Cont.)

Source : The author's calculations, based on U.S. Bureau of Economic Analysis data. a Consists of Anguilla, the British Virgin Islands, the Cayman Islands, Montserrat and the Turks and Caicos Islands (status of British Overseas Territory). Note : Data for various economies have been suppressed; therefore the total value of diffferences (+) and (-) difffer.


third countries. In the Russian Federation, over the period 2007–September 2011, Cyprus accounted for 30% of the outflows and 22% of the inflows, repre-senting both transhipped and round-tripped FDI. In the Hong Kong Special Administrative Region, the People’s Republic of China accounted for 37% of the inward and 42% of the outward stock in 2010.

In the universe of SPEs, the combined FDI stocks of Austria, Hungary and Luxembourg in that form topped $1.7–1.8 trillion in 2010 (a value slightly lower in the outward side than in the inward one) ( table 2 ). The ratio of SPEs in these three economies to global inward FDI stock reached almost 10% in that year, and the ratio of those selected SPEs to global outward FDI stock exceeded 8%. If the ratio of the SPEs of these three selected economies to global FDI is already so elevated, it can be deducted that the ratio of the world’s total SPEs to global FDI should be really substantial. (It is more appropriate to talk about ratios, and not shares, because most, although not necessarily all, FDI statistics exclude SPEs.) The ratio of SPE to non-SPE FDI in these special centres of tran-shipment was consistently high, exceeding 500% in Luxembourg’s inward stock, and 600% in Hungary’s outward stock ( table 2 ).

4. Development implications and policy options

Indirect FDI matters for host countries for various reasons. It seems that in a large number of cases fĳirm engaged in this form are more market seeking

Table 2. SPE- and non-SPE-related FDI stocks of Austria, Hungary and Luxembourg, 2010

(Stocks in billions of dollars and shares in per cent)

Source : The author's calculations, based on UNCTAD, FDI / TNC database, and national statistics. a Global FDI stock data usually exclude SPEs.

Inward FDI Outward FDI Country Through

SPE s Excluding

SPE s Ratio of SPE to

non- SPE (%)

Through SPE s

Excluding SPE s

Ratio of SPE to

non- SPE (%)

Austria 170 103 166 177 98 180Hungary 120 89 134 122 20 623Luxembourg 1579 287 551 1403 499 281Total 1869 479 390 1702 617 276Memorandum item:Ratio to world FDI stock (%) a

9.77 8.34


(Altzinger et al ., 2003) than “ordinary” MNEs. Therefore policy makers should know that fĳirms using this strategy will be less inclined for example to engage in efffĳiciency-seeking projects. This is logical as efffĳiciency-seeking projects are usually of strategic importance for MNEs, and hence parent fĳirms tend to con-trol them directly (unless there is a specifĳic production mandate given to regional headquarters, such as in the case of Adam Opel AG). Indirect FDI is reinforced by the increasingly network-type strategies of MNEs ( cf . Castells, 2010), as opposed to their traditional hierarchical structure. If the parent fĳirm is the coordinator of a loose confederation of afffĳiliates, it increases the possi-bility for the latter to engage in autonomous actions, including engagement in investment projects in third countries (the classical case of indirect FDI men-tioned in section 2). It is also reinforced by the growing power of fĳinancial management and/or corporate treasury in investment decisions (Stonehill and Mofffett, 1993), pushing the MNE to give absolute priority to revenue maxi-mization and tax minimization. In other words, the division line between direct and portfolio investment is becoming blurred (Dunning and Dilyard, 1999) as MNEs use both these techniques as part of a single package of corpo-rate fĳinancial management.

In theory, indirect FDI could bring about the same, or similar, development benefĳits for host economies as ordinary FDI. It can result in new fĳinancial resources and investment (perhaps with the exception of round tripping), enhanced technological capabilities and technology transfer, stronger export competitiveness, more employment, better skills, and more environmentally friendly technologies (UNCTAD, 1999). However, as research in this area is in a nascent stage, these are now mostly hypotheses to be confĳirmed. It is also to be noted that in general, like in the case of ordinary FDI, the realization of bene-fĳits for host economies are far from being automatic, and often hinge on gov-ernment policies.

There are also areas in which the development impact is particularly ambig-uous. For example, in various instances, indirect FDI may be feared to use as a technique to limit possible positive developmental impact, for example, in the area of corporate social responsibility (especially in case 3 – i.e. concealed investors – mentioned in section 2). Finally there are areas in which indirect FDI can serve as a potential tool of redistributing revenues from host countries to either other countries, or to the ultimate owner MNEs.

Indirect FDI has a major impact on the distribution of tax revenues among countries, and quite often it is the host country of the project that is on the los-ing side. As referred to above (section 2), DTTs stipulate very diffferent with-holding tax rates on profĳit repatriation for individual partner countries. Therefore it is worth for the MNEs to register the immediate investor of the FDI project under a jurisdiction that has the most favourable DTT with the host economy. Taxation is also afffected heavily in round tripping: a company


that is registered as foreign can benefĳit from specifĳic incentives, and can also gain from DTTs. Indirect FDI also afffects competition, especially when it con-cerns the boundaries of entities in competition and of relevant markets. Finally, in some cases, when there is sensitivity about certain nationalities, the issue of national security can be raised.

If the investment process is transparent, host countries should be able to respond to indirect FDI relatively efffectively. However they have to do so with due respect to the most-favoured nation (MFN) principle, which almost all countries offfer both in national laws and in their bilateral investment treaties (BITs). Policy space for actions curtailing the potential negative impact of indirect FDI is limited in particular by the MFN principle, barring all kinds of discrimination by nationality. This treatment is enshrined in the general investment, or specifĳic FDI, codes of the countries, depending on the situation. It is further reinforced by BITs, which use the MFN principle almost univer-sally. A company can fall outside MFN treatment only in the very exceptional case when the national code does not contain it, the host country does not offfer national treatment, which would be another way to avoid discrimination by nationality (UNCTAD, 2010), and there is no ratifĳied BIT to replace it. This is surely not the case of Opel and General Motors: Poland has BITs with both Germany and the United States, in addition to its full membership in the European Union.

Efffective policy response to eventual negative consequences is often in the hands of host Governments because often one of the root causes is in their own regulatory system, which encourages indirect FDI. They need not fully suppress indirect FDI but rather deal with its negative consequences. Tax laws encouraging indirect FDI leading to excessive beggar-thy-neighbour efffects and welfare losses have to be revised, by preference through interna-tional cooperation of the jurisdictions concerned. However it does not mean the end of reasonable tax competition between countries resulting in welfare gains in terms of jobs, skills and net government revenue. Fiscal authorities should develop sufffĳicient capabilities to diffferentiate between the two types of cases. In the international scene, countries would need to establish clear and fair rules between themselves concerning healthy tax competition. All this needs to be complemented by a reinforcement of international action on transfer pricing.

The role of BITs and DTTs also has to be revaluated. Treaty shopping is dif-fĳicult to contain; legal experts could nevertheless envisage clauses limiting the importation of clauses from other BITs, following the example of exemptions to the MFN clause (UNCTAD, 2010, pp. 46–53). Policy makers could also consider BIT clauses on transparency on ultimate owners. Finally there is room for cooperation of tax authorities of diffferent countries in the area of indirect FDI.


In sum, policy discussion on indirect FDI is at a very nascent stage. Indeed, given the extent and the historical presence of the phenomenon, it is surpris-ing how little attention has been devoted so far to that issue, especially from the point of view of host countries. This article has intended to provide some basic guidelines for future in-depth policy research, including in the area of international investment agreements.

5. Concluding Remarks

The world of foreign direct investment by multinational enterprises is in con-stant change. Certain problems are becoming more prominent over time, oth-ers are retreating. Indirect FDI is defĳinitively one of those complexities that seem to gain importance recently. This is so because the answer to the ques-tion of who, the ultimate benefĳicial owner or the immediate investor, is more important for host countries to know and deal with, is unresolvable. Both of them play an essential role within the general corporate strategy of the MNE in question. And as fĳirm strategies are becoming more and more multifaceted, and value chains require more and more innovative management solutions, indirect FDI is to be expected to continue to play a major role in corporate strategies. In this respect, policy makers have to keep in mind that its develop-ment impact can be good, or can be turned into good, if the right policies are in place. To arrive at such a situation, a right type of policy framework ensuring the right balance of benefĳits for host countries and profĳits for fĳirms is required both in individual countries and internationally.

The future size and composition of indirect FDI will hinge on the policy environment. In that respect, policies aiming at closing regulatory loopholes (e.g. in taxation) can bring the volume of indirect FDI down, and reduce the relative importance of forms based on tax minimizing strategies. In turn, gov-ernment policies can have only limited impact on indirect FDI established by way of following specifĳic corporate strategies. In either case, the phenomenon of indirect FDI remains a major challenge for future policy-oriented research. It is time to examine its contours worldwide, analyse its implications for devel-opment in-depth, and provide sophisticated policy recommendations for pol-icy makers dealing with it.

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Documents

Indirect FDI - kozminski.edu.pl · indirect FDI is not necessarily negative; however it varies by the key types of indirect FDI (del-egation of power to regional headquarters, nearshoring,