Foreign Direct Investment - Doing our part in the global economy? Or Damaging our own trades industry?

For large corporations Foreign Direct Investments (FDI) seems to be the most sensical approach in maximising shareholder wealth. Foreign markets can provide a more skilled trading workforce at a lower cost. Similarly raw materials are more easily accessible abroad therefore again reducing costs. Acquisitions and mergers through foreign direct investments can also help corporations tap into new market places. This is particularly true of the oil industry where mergers can take place to access mining platforms in overseas waters.

Beyond the obvious financial incentives of FDI exists the bigger picture consequences. A general theme of the blogs I write is how the continuous focus on maximising shareholder wealth can have detrimental effects on a countries own economy and industry. To me for the most part FDI is no exception particularly in the industry sector.

For many years now we have seen a huge increase in overseas supply within many industries but particularly in the clothing industry. China and India among other Far East countries have provided developed countries with astronomically low unit prices. This has led to the birth of the 'throw away fashion' phenomenon across our own high street from the likes of Primark and Asda George among others. It’s not just the lower end retailers who are using such a supply chain - middle end retailers such as next and even high end brands such as Hugo Boss and Ralph Lauren are all choosing to manufacture in the Far East as a means of increasing margins. More over the Far East is now able to provide a more skilled workforce than the UK trade industry along with a better portfolio of up to date machinery and technology. The UK can no longer compete with the Far East from all angles - cost, skill and quality.

The major benefiter of this is that the Chinese economy in booming. Whilst this is great for China, but as a result the UK retailers who have invested so heavily into the Far East trade industry are subsequently seeing an increase in costs. Labour costs in particularly are increasing as a result of the boom again impacting the margins of the retailers.

Furthermore India’s recent export ban on cotton has caused further price increases. Whilst high street favourites like M & S and H & M are tolerating decreased margins, price increases are not optional in today’s heavily price lead market place.

As Chinas stability and industrial strength grows and the UKs clothing industry declines FDI in overseas supplies has effectively led retailers to shoot themselves in the foot. Why? Because we are already reliant on overseas manufacturing meaning that price increases are already becoming out of the control of the retailers. Because the UK industry has fallen so far behind through lack of investment, retailers no longer have that industry to fall back on. Furthermore the loss of UK jobs in the clothing manufacturing industry has also impacted the economy. The trend to outsource to developing countries has led to an increasingly problematic employment issue. Unemployment rates of young people leaving school and university are now higher then the wuropean average. This is simply because there are not enough labour intensive jobs or apprenticeships left as the industry sectors continue to diminish. Young people feel that the main route to employment is through professional qualifications meaning that the level of graduating professionals are greater then the professional jobs available.

If Britain is to recover stakeholder investment is crucial. Manufacturing needs to be promoted within the UK and investment needs to be made from both the government and private sectors to encourage growth. Whilst this all sounds very patriotic it’s not a case of being terribly 'British' but more of a desperate bid to bring back a dying economy within the UK. The UK cannot continue to push cash flows into foreign market places when its own market place so desperately needs boosting. Presently UK companies are doing so for the sake of being ethically correct (boosting developing countries) or for the short term expansion of profits (maximising shareholder wealth), putting their home country’s needs aside. Now that is being terribly British!

http://www.peoplemanagement.co.uk/pm/articles/2009/01/uk-youth-unemployment-rises-above-european-average.htm

http://www.ft.com/cms/s/0/08b600fc-66f0-11e1-9d4e-00144feabdc0.html#axzz1oXNTx46G

http://www.ft.com/cms/s/0/e02d1cd0-690e-11e1-9931-00144feabdc0.html#axzz1oXNTx46G

http://www.ft.com/cms/s/0/97f3f5d4-6076-11e0-9fcb-00144feab49a.html#axzz1oXNTx46G

http://www.ft.com/cms/s/0/355229a4-2d17-11dd-88c6-000077b07658.html#axzz1oXNTx46G