Assignment Answers Pdf Of Foreign Direct Investment:MNB1501

Assignment Answers Pdf Of Foreign Direct Investment:MNB1501

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International Business
Students Name
Course name
Institution Affiliation
Date
2
Introduction
Foreign Direct Investment (FDI) has been define …

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1
International Business
Students Name
Course name
Institution Affiliation
Date
2
Introduction
Foreign Direct Investment (FDI) has been defined by Nhamo and Ojah (2011), as
when acountry or company takes interest and they make investments (in terms of finances,
educating, marketing etc.) in another country outside of its borders. As per Nhamo and Ojah
(2011) FDI is acatalyst for enabling international economic systems and encouraging
development of other countries.
This study is set to analyse the involvement of global companies in Africa through a
foreign investment perspective. According to AFR-IX Telecom (2021), as of 2020 the top
five recipients of FDI are the following African countries, ranking from the highest, is Egypt,
receiving contributions worth $56.2 billion. Thereafter are Nigeria ($45.1 billion), South
Africa ($43.1 billion), Mozambique ($37.17 billion), Ghana ($32.5 billion). This study will
be focused on using aspects of the PESTLE framework in analysing the FDI contributions
that Volkswagen, aGerman-born company that has become multinational, has made in the
African country of Ghana.
Headquartered in Wolfsburg, Germany, Volkswagen has many manufacturing
facilities scattered across the world in Europe, America, Asia and Africa (Volkswagen Group
Services, 2021). According to Volkswagen Group Services (2021), they produce numerous
types of vehicles ranging from trucks, commercial vehicles, motorbikes, passenger cars etc.
all of which fall under the automotive brands such as Audi, Bugatti, Bentley, Ducati, Porsche
and Scania to name afew that exist under the Volkswagen group.
Volkswagen ’sDecision to Invest in Ghana
Volkswagen ’sforeign direct investment in Ghana enables them to be leading in the
automotive industry in West Africa (Mitchell, 2020). As per Mitchell (2020) as of 2018, the
Ghanian government and Volkswagen signed acontract with the aims of setting up avehicle
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assembly plant in Accra, the capital city of Ghana. Since the start of their new vehicle
assembly plant in Accra, the first phase involved the assembly of newer Volkswagen models,
including their internal combustion engines are namely, the Passat, Polo, Amarok and Tiguan
which were all unveiled by Volkswagen in 2020.The first phase of the project consisted of a
financial investment from Volkswagen Germany of $10.5 million, moving forward into the
next phases of the project. As part of its TRANSFORM 2025+ brand strategy, Volkswagen is
concentrating on emerging markets (Nieri and Giuliani, 2018). Despite the fact that African
automobile markets are now modest, the Sub-Saharan area has enormous development
potential in the future. Multinational corporations should not be the main beneficiaries of
Ghana’s automotive development agenda. Solar Taxi, aGhanaian company, is using the new,
cheaper tariffs to construct electric motorbikes from imported assembly kits (Baffoe, 2020).
Ghana has surplus energy producing capacity, hence the country has alot of room to develop
electric cars.
The government of Ghana has provided incentives that come inform of direct
financial help such as the tariff arrangements and afive-year tax holiday. The government of
Ghana has asupportive relationship with the Volkswagen group and ithas welcomed the
company to come and stay (Ayelazuno, 2019). Furthermore, Ghana ’sgovernment has
approved anew automotive policy that is aimed at encouraging carmakers to invest in local
production. This policy will ensure reduction and eventual phase out of used cars. In Ghana,
second-hand automobiles account for the vast bulk of vehicle sales. A popular category was
salvaged autos. Importers brought in accident-damaged automobiles, repaired them, and
resold them in Ghana at more consumer-friendly costs. Ghana has officially prohibited the
import of wrecked automobiles as part of its efforts to boost the local assembly sector
(Husmann and Kubik, 2019). Used automobiles would be subject to a64 percent effective
import tax in Ghana, whilst enterprises importing semi-complete knocked down kits will be
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subject to a5percent effective tax. They will also get afive-year tax break. Used car prices
will rise as aresult of these actions, making new locally built automobiles more competitive.
To make automobiles more accessible for consumers, the Automotive Development Policy
would develop an asset-based vehicle finance program for locally built vehicles (Yakubu,
2020). This political aspect of the government of Ghana has favoured the establishment and
growth of the Volkswagen company in Ghana.
Another factor is cost, availability and skills of the local labour force. The rate
of unemployment in Ghana is very high among the young people thus the Volkswagen will
find iteasier to recruit suitable staff from alarge pool of labour (Schoch, 2021). The
company will focus on the fusion of wage levels and productivity levels that determine the
total wage costs per unit. The high levels of unemployed youth in Ghana will therefore
provide cheap labour to the company and thus making more revenue in the country. On the
positive side, the consumer spending has increased in most parts of Ghana. This means that
people are more willing than ever before to buy consumer products like cars. Consumer
spending is especially essential for automakers in disadvantaged areas, where buyers may
have never purchased acar before (Mitchell, 2020) In rich areas, more consumer spending is
beneficial since itleads to more expensive model selections and the purchase of extra
accessories.
Companies considering FDI are searching for asuitable environment in which to do
business in the future. The environment of ahost nation should be conducive to investment,
or in other words, make doing business easier. A simplified investment climate is abig draw
for overseas investors. Facilitative tactics include investment marketing, monetary incentives,
post-investment services, and attempts to minimize foreign investor irritation costs (Opata, et
al., 2019) Social considerations like bilingual schools for Expat families and current quality
of life in respect to the host country should also be considered. Existing investors are urged to
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reinvest, with post-investment services assisting them. Fiscal or financial incentives can also
be used to encourage investment, although they are often utilized after investors have made
their site selections and the most important attributes, or economic drivers, have been
determined.
Impacts of Continental Free Trade Area
Many African countries benefit from acompetitive edge in terms of biological
diversity and richness because Africa is one of the world’s most biodiverse regions.
Furthermore, despite the fact that natural capital represents for 30 to 50 percent of most
African countries’ overall revenue, the majority of Africa’s people are directly reliant on
biodiversity and ecosystem services for food and livelihoods (Val Obi, 2018). The entry into
force of the African Continental Free Commerce Area (ACFTA) Agreement, which provides
enormous opportunities for growing intra-African trade and supporting environmentally,
socially, and economically sustainable development (Maliszewska and Ruta, 2020). Ghana,
one of the African countries that signed the pact, recently hosted the Africa Continent Free
Trade Area Secretariat and has been trading under the ACFTA agreement for many months.
Working under this agreement has anumber of positive implications and effects for Ghana,
which is now well-positioned to capitalize on global market growth opportunities.
The agreement is expected to benefit African citizens and businesses in anumber of
ways. Additionally, ithas the potential to make asizable contribution to the continent’s much
needed job creation, particularly in the industrial sector. According to UNECA, the accord is
projected to benefit industrial exports the most. 60% of the continent’s population was under
the age of 24 in 2018, yet only 3million jobs were created to meet the 10 million to 12
million young Africans who enter the labor market each year (Abubakar, onimisi Abaukaka
and Momoh, 2021). To further social and economic prosperity, more jobs and higher
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employment rates are critical. The ACFTA has the ability to expand the manufacturing sector
by creating between 13 and 16 million new jobs and closing the employment gap.
The presentation of Ghana as abrand by revealing its key actuators or attributes is one
of the most significant findings. Ghana’s political situation is stable. Divergent viewpoints
exist on the importance of this trait in attracting FDI. While some feel that political stability
has apositive relationship with inbound FDI, and that itis the most important aspect in some
cases, others argue that itis irrelevant (Ayelazuno, 2019). The Ghana Investment Promotion
Center (GIPC) clearly believes in the former, as seen by their inclusion of this as abrand
attribute. Because Africa is seen as inherently hazardous, this helps to set the country apart.
Ghana’s macroeconomic policy is solid. Furthermore, under the Ghana Investment Act,
international investors have the option of varying degrees of ownership and control, including
100 percent ownership of registered enterprises in Ghana. In addition, some state-owned
industries are being privatized, providing corporations who purchase them with immediate
market share as well as the opportunity to grow into other West African countries. Ghana’s
membership in ECOWAS (Economic Community of West African States) may entice
market-seeking foreign direct investment (Shingal and Mendez Parra, 2020). It should be
noted, however, that ECOWAS membership is accessible to all West African countries,
therefore this feature does not provide the country with adistinct advantage.
Benefits and Drawbacks of FDI in Volkswagen
Volkswagen company used the Greenfield investment as the foreign direct investment
strategy. Foreign direct investment (FDI) has contributed significantly to Ghana’s economic
growth by supplying capital, technology, and management knowledge (Yakubu, 2020). When
foreign businesses acquire locally manufactured inputs or offer intermediate inputs to local
enterprises, inbound FDI can encourage local investment by raising domestic investment
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through production chain connections. The entry of foreign capital increases the availability
of cash available for investment, increasing capital formation in the receiving country.
Additionally, inward FDI can help strengthen the host country’s export capacity, resulting in
improved foreign exchange earnings for the developing country. Finally, FDI is linked to the
creation of new jobs and the advancement of knowledge transfer, as well as boosting general
economic growth in host nations.
Despite these advantages, exposing local financial markets to overseas transactions
increases the danger of financial crises or hazards rarely seen in domestic markets, notably
foreign currency rate risks. Furthermore, global corporations may be able to increase their
efficiency while forcing local competitors to exit certain areas (Asiamah, Ofori and Afful,
2019). Lack of transparency in land transfers, poor interaction with local stakeholders,
disregard for their rights, and the enclosing of vast swaths of property are all concerns that
develop as aresult of large-scale land acquisitions.
FDI has helped the company to expand its operations in new markets. This has
allowed VW company to increase its sales and market share across the globe. Also ithas led
to increased employment. The FDI has resulted to the creation of jobs both in Germany and
in Ghana (Husman and Kubik, 2019). This has helped to boost the economies of both
countries and improved the standards of living of the citizens. Lastly the FDI has led
Volkswagen to access new technology. This new technology has helped the company to
improve the quality of its products and stay ahead of the competition. Despite the benefits the
FDI has also attracted drawbacks such as exploitation of workers, and environmental damage.
The company has been accused of causing pollution and paying low wages to workers and
providing poor working conditions.
Recommendations for Volkswagen to Improve Foreign Direct Investment
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 Increase transparency around ownership and control of Volkswagen.
 Articulate aclear and consistent strategy for foreign direct investment that is aligned
with the company ’soverall business strategy (Yakubu and Mikhail, 2019).
 Conduct acomprehensive review of Volkswagen ’sexisting foreign direct investment
portfolio to assess risk and performance.
 Implement policies and procedures to ensure that all foreign direct investment
decisions are made in atransparent and disciplined manner.
 Increase communication and engagement with stakeholders (including governments,
local communities, and employees) around foreign direct investment projects.
Strategic Impacts in terms of Foreign Exchange rates
A sudden increase in Ghana’s inflation rate would have anumber of impacts on the
economy. Firstly, itwould reduce the real value of people’s incomes and savings. This could
lead to areduction in consumer spending, which would in turn lead to aslowdown in
economic growth. Secondly, itwould increase the cost of borrowing for businesses, which
could lead to reduced investment and slower growth. Finally, itcould lead to aloss of
confidence in the economy, which could further reduce investment and growth.
A sudden increase in Ghana’s inflation rate would have anumber of strategic impacts for
Volkswagen. Firstly, itwould cause the price of imported goods to increase, as the cost of
production would increase. This would likely lead to an increase in the price of Volkswagen’s
cars, as the company relies heavily on imported parts. Additionally, itwould reduce the
purchasing power of Ghanaian consumers, as their money would be worth less in real terms
(Nketiah, et al., 2019). This could lead to areduction in demand for Volkswagen’s cars, as
people would be able to afford fewer of them. Finally, itwould also increase the cost of
borrowing for Volkswagen, as the company would have to pay more in interest on its loans.
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