British Virgin Islands
The British Virgin Islands simply the Virgin Islands, are a British Overseas Territory in the Caribbean, to the east of Puerto Rico. The islands are geographically part of the Virgin Islands archipelago and are located in the Leeward Islands of the Lesser Antilles; the British Virgin Islands consist of the main islands of Tortola, Virgin Gorda and Jost Van Dyke, along with over 50 other smaller islands and cays. About 15 of the islands are inhabited; the capital, Road Town, is on Tortola, the largest island, about 20 km long and 5 km wide. The islands had a population of about 28,000 at the 2010 Census, of whom 23,500 lived on Tortola. For the islands, the latest United Nations estimate is 30,661. British Virgin Islanders are British Overseas Territories citizens and since 2002 are British citizens as well. Although the territory is not part of the European Union and not directly subject to EU law, British Virgin Islanders are deemed to be citizens of the EU by virtue of their British citizenship.
The official name of the territory is still the "Virgin Islands", but the prefix "British" is used. This is believed to distinguish it from the neighbouring American territory which changed its name from the "Danish West Indies" to "Virgin Islands of the United States" in 1917. However, local historians have disputed this, pointing to a variety of publications and public records dating from between 21 February 1857 and 12 September 1919 where the Territory is referred to as the British Virgin Islands. British Virgin Islands government publications continue to begin with the name "The territory of the Virgin Islands", the territory's passports refer to the "Virgin Islands", all laws begin with the words "Virgin Islands". Moreover, the territory's Constitutional Commission has expressed the view that "every effort should be made" to encourage the use of the name "Virgin Islands", but various public and quasi-public bodies continue to use the name "British Virgin Islands" or "BVI", including BVI Finance, BVI Electricity Corporation, BVI Tourist Board, BVI Athletic Association, BVI Bar Association and others.
In 1968 the British Government issued a memorandum requiring that the postage stamps in the territory should say "British Virgin Islands", a practice, still followed today. This was to prevent confusion following on from the adoption of US currency in the Territory in 1959, the references to US currency on the stamps of the Territory; the Virgin Islands were first settled by the Arawak from South America around 100 BC. The Arawaks inhabited the islands until the 15th century when they were displaced by the more aggressive Caribs, a tribe from the Lesser Antilles islands, after whom the Caribbean Sea is named; the first European sighting of the Virgin Islands was by the Spanish expedition of Christopher Columbus in 1493 on his second voyage to the Americas. Columbus gave them the fanciful name Santa Ursula y las Once Mil Vírgenes, shortened to Las Vírgenes, after the legend of Saint Ursula; the Spanish Empire claimed the islands by discovery in the early 16th century, but never settled them, subsequent years saw the English, French and Danish all jostling for control of the region, which became a notorious haunt for pirates.
There is no record of any native Amerindian population in the British Virgin Islands during this period, although most of the native population on nearby Saint Croix was killed or dispersed. The Dutch established a permanent settlement on the island of Tortola by 1648. In 1672, the English captured Tortola from the Dutch, the English annexation of Anegada and Virgin Gorda followed in 1680. Meanwhile, over the period 1672–1733, the Danish gained control of the nearby islands of Saint Thomas, Saint John and Saint Croix; the British islands were considered principally a strategic possession, but were planted when economic conditions were favourable. The British introduced sugar cane, to become the main crop and source of foreign trade, slaves were brought from Africa to work on the sugar cane plantations; the islands prospered economically until the middle of the nineteenth century, when a combination of the abolition of slavery in the territory, a series of disastrous hurricanes, the growth in the sugar beet crop in Europe and the United States reduced sugar cane production and led to a period of economic decline.
In 1917, the United States purchased St. John, St. Thomas, St. Croix from Denmark for US$25 million, renaming them the United States Virgin Islands; the British Virgin Islands were administered variously as part of the British Leeward Islands or with St. Kitts and Nevis, with an administrator representing the British Government on the islands; the islands gained separate colony status in 1960 and became autonomous in 1967. Since the 1960s, the islands have diversified away from their traditionally agriculture-based economy towards tourism and financial services, becoming one of the wealthiest areas in the Caribbean; the British Virgin Islands comprise around 60 tropical Caribbean islands, ranging in size from the largest, being 20 km long and 5 km wide, to tiny uninhabited islets, altogether about 150 square kilometres in extent. They are located in the Virgin Islands archipelago, a few miles east of the US Virgin Islands, about 95 km from the Puerto Rican mainland. About 150 km east south-east lies Anguilla.
The North Atlantic Ocean lies to the east of the islands, the Caribbean Sea lies to the
International Business Companies Act
The International Business Companies Act, 1984 was a statute of the British Virgin Islands which permitted the incorporation of International Business Companies within the Territory. The Act played in a huge role in the economic and financial development of the Territory in the 1990s, it has been called "the most important piece of legislation in BVI history since the emancipation". The original Act was copied by other offshore financial centres; the Act was drafted principally by five people: Lewis Hunte, the Attorney General of the British Virgin Islands. S. law firm of Shearman & Sterling. The Act was subsequently amended several times, but most in 1990; the Act was passed in a partial response to the cancellation by the U. S. government of a double taxation relief treaty between the British Virgin Islands and the United States. The British Virgin Islands was not alone in this regard. Despite the British Virgin Islands being an English common law jurisdiction, the Act drew upon elements of Delaware corporate law.
This reflected the market for British Virgin Islands companies prior to the repeal of the double-tax treaty. The essence of the Act was that a company incorporated under that legislation was prohibited from conducting business with people resident within the Territory, in exchange the company was exempt from all forms of British Virgin Islands taxation and stamp duty. Parts of the Act were quite radical for the time; the Act abolished the concept of ultra vires for companies restricted the requirement for corporate benefit, it permitted companies to change their corporate domicile from one jurisdiction to another, it allowed "true merger" of two different corporate entities, introduced the concept of voting trusts to the jurisdiction. The Act was passed into law by the Territory's legislature on 15 August 1984 where Chief Minister Cyril Romney hailed it as the most important legislation of the decade. Market response to the legislation was slow, but by 1988 a steady core of incorporation work was evident.
However, in 1990 the U. S. invaded arrested General Manuel Noriega. At the time, Panama had been one of the market leaders in the provision of offshore companies. However, the invasion badly shook investor confidence in Panama, incorporations in the British Virgin Islands under the Act soared from 1991 onwards. From 1991 the Act was remarkably successful generating large numbers of incorporations; the Companies Registry in the Territory had to be expanded twice to cope with the volume of incorporations. The Act was copied by other Caribbean offshore financial centres. Despite its American focus, the key market for IBCs incorporated within the Territory developed in Hong Kong. Use of British Virgin Islands IBCs became so ubiquitous in Hong Kong, that in commercial jargon offshore companies were generically referred to there as "BVIs". In 2000, KPMG were commissioned by the British Government to produce a report on the offshore financial industry and the report indicated that 45% of the offshore companies in the world were formed in the British Virgin Islands, making the British Virgin Islands one of the world's leading offshore financial centres.
As a direct result the Territory has one of the highest incomes per capita in the Caribbean. Source: British Virgin Islands Financial Services Commission In 1999, a series of international initiatives were commenced against tax havens by supra-national bodies such as the OECD, including an initiative against what was termed "unfair tax competition". One of the concerns of the OECD was that jurisdictions such as the British Virgin Islands had a "ring fenced" tax regime, whereby companies could be incorporated under the International Business Companies Act which could not trade in the Territory, but would be exempt from most British Virgin Islands taxes. After a series of discussions, the British Virgin Islands government agreed to repeal the ring-fencing provisions in its tax legislation; because of the sheer volume of companies involved, the transition to a new legislative framework was accomplished over a two-year transition period. To protect the offshore business, the British Virgin Islands abolished both income tax and stamp duty on all transactions except those relating to land in the Territory.
The government enacted the BVI Business Companies Act. The cumbersome name was designed to reflect the name of the earlier statute and cash-in on the "IBC brand" which had grown under the former legislation. From 1 January 2005 to 31 December 2005 the two Acts ran in parallel, it was possible to incorporate a company under either form of legislation. From 1 January 2006 until 31 December 2006, one could no longer incorporate a company under the International Business Companies Act, all new incorporations had to be conducted under the BVI Business Companies Act. During 2006 detailed transitional provisions were enacted to allow companies formed under the old legislation to adapt to the new legislation without having to amend their constitutional documents; the International Business Companies Act was finally repealed in full on 31 December 2006. A special arrangement between the BVI government and one of the key trust companies in the Territory meant that the last company incorporated under the Act was named "The Last IBC Limited".
It was company number 690583. Video: The Story of the IBC Act
Taxation in the British Virgin Islands
Taxation in the British Virgin Islands is simple by comparative standards. Taxation in the British Virgin Islands is notable for what is not subject to taxation; the British Virgin Islands has: no capital gains tax, no gift tax, no sales tax or value added tax, no profit tax, no inheritance tax or estate duty, no corporation tax. There is technically still income tax assessed in the British Virgin Islands for companies and individuals, but the rate of taxation has been set at zero. However, individuals are subject to a payroll deduction made of up to 8% for employees with 12% paid by employers, in relation to all salaries over US$10,000 per annum; the absence of most major forms of taxation in the Territory has led to the country being included on most recognised lists of tax havens, although the jurisdiction prefers to style itself as a modern offshore financial centre. There are a number of forms of taxation and revenue collection in the British Virgin Islands, but the majority of the Government's revenues are obtained directly from annual licence fees for offshore companies incorporated in the jurisdiction.
In 2005 the British Virgin Islands introduced a payroll tax in relation to employment and "deemed employment" within the British Virgin Islands. The legislation was brought in at the same time; the numbers were not in fact a perfect balance, the Government reduced the amount of tax revenue it received by moving to the payroll tax system. The tax is paid at a graduated rate depending upon the size of the employer; the current rates are 14 % for larger employers. 8% of the total remuneration is deduction from the employee, the remainder of the liability is met by the employer. The first US$10,000 of remuneration are free from payroll tax. Certain limited transactions in the British Virgin Islands are still subject to stamp duty; the main application of the stamp duty legislation relates to transfers of real estate, or transfers of shares in companies which own real estate. The rate of stamp duty on such transactions varies according to the status of the transferee; the legislation includes a number of "rump" taxes that were imposed many years ago and subsist only due to a lack of attention in relation to updating legislation.
For example, charterparties are technically subject to stamp duty at a rate of 50¢ in the British Virgin Islands, but despite the flourishing bareboat charter industry stamp duty is if paid by charterers. Separately, the British Virgin Islands imposes various documentary duties which are described as being distinct from stamp duty on various classes of instrument: Cheque duty is assessed at 10¢ on each negotiable instrument presented for payment within the Territory. Trust instruments are assessed with trust duty of US$200; the reason for not referring to these documentary taxes as stamp duty was that under the old International Business Companies Act, companies incorporated under that Act were exempt from stamp duty, so to retain the payment obligations for those companies, they were referred to as'cheque duty' and'trust duty' respectively. Real estate in the British Virgin Islands is subject to nominal taxation; because the amounts payable are so small, it is not uncommon for householders to not pay the tax at all, discharge all back taxes and penalties when they come to sell their property.
The total tax on residential properties exceeds US$100 per annum. The tax costs more to collect. During the Territory's last review of taxation, considerations were made to amend the law to reduce the amount of taxation collection due to a perception that it penalised second home owners; as with stamp duty, land tax rates are higher for foreigners than for Belongers. Belongers pay annually: US$10.00 for the first acre, or part thereof, US$3.00 for each subsequent acre, or part thereof. Non-Belongers pay annually: US$50 for the first half acre, or part thereof, US$150 for the second half acre, or part thereof, US$50 for each subsequent half acre. House tax is paid at the same rate for all persons, is it assessed at 1.5% of the annual rental value of the house. There is a general perception that rental values for owner-occupied homes tend to be assessed as being lower than their actual true market rental value. Imports into the British Virgin Islands are, subject to certain limited exceptions, subject to import duty.
Although this raises a modest amount of government revenue, it tends to be used as a political tool, to prevent excessive competition with local retailers from the nearby U. S. Virgin Islands. In common with most British Overseas Territories, the British Virgin Islands had the EU withholding tax imposed upon it in relation to interest payments in the jurisdiction which are payable to natural persons who are resident within the European Union; the withholding tax was not mandatory. The implication is that the withholding tax is only applied to those who are not properly declaring their income in their home countries. However, payment of the withholding tax does not exempt the income from any applicable income taxes in the home jurisd
Puerto Rico the Commonwealth of Puerto Rico and called Porto Rico, is an unincorporated territory of the United States located in the northeast Caribbean Sea 1,000 miles southeast of Miami, Florida. An archipelago among the Greater Antilles, Puerto Rico includes the eponymous main island and several smaller islands, such as Mona and Vieques; the capital and most populous city is San Juan. The territory's total population is 3.4 million. Spanish and English are the official languages. Populated by the indigenous Taíno people, Puerto Rico was colonized by Spain following the arrival of Christopher Columbus in 1493, it was contested by French and British, but remained a Spanish possession for the next four centuries. The island's cultural and demographic landscapes were shaped by the displacement and assimilation of the native population, the forced migration of African slaves, settlement from the Canary Islands and Andalusia. In the Spanish Empire, Puerto Rico played a secondary but strategic role compared to wealthier colonies like Peru and New Spain.
Spain's distant administrative control continued up to the end of the 19th century, producing a distinctive creole Hispanic culture and language that combined indigenous and European elements. In 1898, following the Spanish–American War, the United States acquired Puerto Rico under the terms of the Treaty of Paris. Puerto Ricans have been citizens of the United States since 1917, enjoy freedom of movement between the island and the mainland; as it is not a state, Puerto Rico does not have a vote in the United States Congress, which governs the territory with full jurisdiction under the Puerto Rico Federal Relations Act of 1950. However, Puerto Rico does have one non-voting member of the House called a Resident Commissioner; as residents of a U. S. territory, American citizens in Puerto Rico are disenfranchised at the national level and do not vote for president and vice president of the United States, nor pay federal income tax on Puerto Rican income. Like other territories and the District of Columbia, Puerto Rico does not have U.
S. senators. Congress approved a local constitution in 1952, allowing U. S. citizens on the territory to elect a governor. Puerto Rico's future political status has been a matter of significant debate. In early 2017, the Puerto Rican government-debt crisis posed serious problems for the government; the outstanding bond debt had climbed to $70 billion at a time with 12.4% unemployment. The debt had been increasing during a decade long recession; this was the second major financial crisis to affect the island after the Great Depression when the U. S. government, in 1935, provided relief efforts through the Puerto Rico Reconstruction Administration. On May 3, 2017, Puerto Rico's financial oversight board in the U. S. District Court for Puerto Rico filed the debt restructuring petition, made under Title III of PROMESA. By early August 2017, the debt was $72 billion with a 45% poverty rate. In late September 2017, Hurricane Maria made landfall in Puerto Rico; the island's electrical grid was destroyed, with repairs expected to take months to complete, provoking the largest power outage in American history.
Recovery efforts were somewhat slow in the first few months, over 200,000 residents had moved to the mainland State of Florida alone by late November 2017. Puerto Rico is Spanish for "rich port". Puerto Ricans call the island Borinquén – a derivation of Borikén, its indigenous Taíno name, which means "Land of the Valiant Lord"; the terms boricua and borincano derive from Borikén and Borinquen and are used to identify someone of Puerto Rican heritage. The island is popularly known in Spanish as la isla del encanto, meaning "the island of enchantment". Columbus named the island San Juan Bautista, in honor of Saint John the Baptist, while the capital city was named Ciudad de Puerto Rico. Traders and other maritime visitors came to refer to the entire island as Puerto Rico, while San Juan became the name used for the main trading/shipping port and the capital city; the island's name was changed to "Porto Rico" by the United States after the Treaty of Paris of 1898. The anglicized name was used by the U.
S. government and private enterprises. The name was changed back to Puerto Rico by a joint resolution in Congress introduced by Félix Córdova Dávila in 1931; the official name of the entity in Spanish is Estado Libre Asociado de Puerto Rico, while its official English name is Commonwealth of Puerto Rico. The ancient history of the archipelago, now Puerto Rico is not well known. Unlike other indigenous cultures in the New World which left behind abundant archeological and physical evidence of their societies, scant artifacts and evidence remain of the Puerto Rico's indigenous population. Scarce archaeological findings and early Spanish accounts from the colonial era constitute all, known about them; the first comprehensive book on the history of Puerto Rico was written by Fray Íñigo Abbad y Lasierra in 1786, nearly three centuries after the first Spaniards landed on the island. The first known settlers were the Ortoiroid people, an Archaic Period culture of Amerindian hunters and fishermen who migrated from the South American mainland.
Some scholars suggest their settlement dates back about 4,000 years. An archeological dig in 1990 on the island of Vieques found the remains of a man, designated as the "Puerto Ferro Man", dated to around 2000 BC; the Ortoiroid were displaced
A tax haven is defined as a country or place with low "effective" rates of taxation for foreigners. In some traditional definitions, a tax haven offers financial secrecy. However, while countries with high levels of secrecy but high rates of taxation, can feature in some tax haven lists, they are not universally considered as tax havens. In contrast, countries with lower levels of secrecy but low "effective" rates of taxation, appear in most § Tax haven lists; the consensus around effective tax rates has led academics to note that the term "tax haven" and "offshore financial centre" are synonymous. Traditional tax havens, like Jersey, are open about zero rates of taxation, but as a consequence have limited bilateral tax treaties. Modern corporate tax havens have non-zero "headline" rates of taxation and high levels of OECD–compliance, thus have large networks of bilateral tax treaties. However, their base erosion and profit shifting tools enable corporates to achieve "effective" tax rates closer to zero, not just in the haven but in all countries with which the haven has tax treaties.
According to modern studies, the § Top 10 tax havens include corporate-focused havens like Ireland, the Netherlands and the U. K. while Switzerland, Hong Kong, the Caribbean, feature as both major traditional tax havens and major corporate tax havens. Corporate tax havens serve as "conduits" to traditional tax havens. Use of tax havens results in a loss of tax revenues to countries. Estimates of the § Financial scale of taxes avoided vary, but the most credible have a range of US$100–250 billion per annum. In addition, capital held in tax havens can permanently leave the tax base. Estimates of capital held in tax havens vary: the most credible estimates are between US$7–10 trillion; the harm of traditional and corporate tax havens has been noted in developing nations, where the tax revenues are needed to build infrastructure. Over 15% of countries are tax havens. Tax havens are successful and well-governed economies, being a haven has brought prosperity; the top 10–15 GDP-per-capita countries, excluding oil and gas exporters, are tax havens.
Because of § Inflated GDP-per-capita, havens are prone to over-leverage. This can lead to severe credit cycles and/or property/banking crises when international capital flows are repriced. Ireland's Celtic Tiger, the subsequent financial crisis in 2009–13, is an example. Jersey is another. Research shows the § U. S. as the largest beneficiary, use of tax havens by U. S corporates maximised long-term U. S. exchequer receipts. The rise of OECD-compliant corporate tax havens, whose BEPS tools are responsible for most of the lost taxes, has led to criticism of this approach, versus actual taxes paid. Higher-tax jurisdictions, such as the United States and many member states of the European Union, departed from the OECD BEPS Project in 2017–18, to introduce anti-BEPS tax regimes, targeted raising net taxes paid by corporations in corporate tax havens. There is no established consensus regarding a specific definition for; this is the conclusion from non-governmental organisations, such as the Tax Justice Network in 2018, from the 2008 investigation by the U.
S. Government Accountability Office, from the 2015 investigation by the U. S. Congressional Research Service, from the 2017 investigation by the European Parliament, from leading academic researchers of tax havens; the issue, however, is material, as being labelled a "tax haven" has consequences for a country seeking to develop and trade under bilateral tax treaties. When Ireland was "blacklisted" by G20 member Brazil in 2016, bilateral trade declined, it is more onerous for corporate tax havens, whose foreign multinationals rely on the haven's extensive network of bilateral tax treaties, through which the foreign multinationals execute BEPS transactions, re-routing global untaxed income to the haven. One of the first § Important papers on tax havens, was the 1994 Hines–Rice paper by James R. Hines Jr, it is the most cited paper on tax haven research in late 2017, Hines is the most cited author on tax haven research. As well as offering insights into tax havens, it took the view that the diversity of countries that become tax havens was so great that detailed definitions were inappropriate.
Hines noted that tax havens were: a group of countries with unusually low tax rates. Hines reaffirmed this approach in a 2009 paper with Dhammika Dharmapala. In December 2008, Dharmapala wrote that the OECD process had removed much of the need to include "bank secrecy" in any definition of a tax haven and that it was now "first and foremost, low or zero corporate tax rates", this has become the general "financial dictionary" definition of a tax haven. Hines refined his definition in 2016 to incorporate research on § Incentives for tax havens on governance, broadly accepted in the academic lexicon. Tax havens are small, well-governed states that impose low or zero tax rates on foreign investors. In April 1998, the OE
United States dollar
The United States dollar is the official currency of the United States and its territories per the United States Constitution since 1792. In practice, the dollar is divided into 100 smaller cent units, but is divided into 1000 mills for accounting; the circulating paper money consists of Federal Reserve Notes that are denominated in United States dollars. Since the suspension in 1971 of convertibility of paper U. S. currency into any precious metal, the U. S. dollar is, de facto, fiat money. As it is the most used in international transactions, the U. S. dollar is the world's primary reserve currency. Several countries use it as their official currency, in many others it is the de facto currency. Besides the United States, it is used as the sole currency in two British Overseas Territories in the Caribbean: the British Virgin Islands and Turks and Caicos Islands. A few countries use the Federal Reserve Notes for paper money, while still minting their own coins, or accept U. S. dollar coins. As of June 27, 2018, there are $1.67 trillion in circulation, of which $1.62 trillion is in Federal Reserve notes.
Article I, Section 8 of the U. S. Constitution provides that the Congress has the power "To coin money". Laws implementing this power are codified at 31 U. S. C. § 5112. Section 5112 prescribes the forms; these coins are both designated in Section 5112 as "legal tender" in payment of debts. The Sacagawea dollar is one example of the copper alloy dollar; the pure silver dollar is known as the American Silver Eagle. Section 5112 provides for the minting and issuance of other coins, which have values ranging from one cent to 100 dollars; these other coins are more described in Coins of the United States dollar. The Constitution provides that "a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time"; that provision of the Constitution is made specific by Section 331 of Title 31 of the United States Code. The sums of money reported in the "Statements" are being expressed in U. S. dollars. The U. S. dollar may therefore be described as the unit of account of the United States.
The word "dollar" is one of the words in the first paragraph of Section 9 of Article I of the Constitution. There, "dollars" is a reference to the Spanish milled dollar, a coin that had a monetary value of 8 Spanish units of currency, or reales. In 1792 the U. S. Congress passed a Coinage Act. Section 9 of that act authorized the production of various coins, including "DOLLARS OR UNITS—each to be of the value of a Spanish milled dollar as the same is now current, to contain three hundred and seventy-one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver". Section 20 of the act provided, "That the money of account of the United States shall be expressed in dollars, or units... and that all accounts in the public offices and all proceedings in the courts of the United States shall be kept and had in conformity to this regulation". In other words, this act designated the United States dollar as the unit of currency of the United States. Unlike the Spanish milled dollar, the U.
S. dollar is based upon a decimal system of values. In addition to the dollar the coinage act established monetary units of mill or one-thousandth of a dollar, cent or one-hundredth of a dollar, dime or one-tenth of a dollar, eagle or ten dollars, with prescribed weights and composition of gold, silver, or copper for each, it was proposed in the mid-1800s that one hundred dollars be known as a union, but no union coins were struck and only patterns for the $50 half union exist. However, only cents are in everyday use as divisions of the dollar. XX9 per gallon, e.g. $3.599, more written as $3.599⁄10. When issued in circulating form, denominations equal to or less than a dollar are emitted as U. S. coins while denominations equal to or greater than a dollar are emitted as Federal Reserve notes. Both one-dollar coins and notes are produced today, although the note form is more common. In the past, "paper money" was issued in denominations less than a dollar and gold coins were issued for circulation up to the value of $20.
The term eagle was used in the Coinage Act of 1792 for the denomination of ten dollars, subsequently was used in naming gold coins. Paper currency less than one dollar in denomination, known as "fractional currency", was sometimes pejoratively referred to as "shinplasters". In 1854, James Guthrie Secretary of the Treasury, proposed creating $100, $50 and $25 gold coins, which were referred to as a "Union", "Half Union", "Quarter Union", thus implying a denomination of 1 Union = $100. Today, USD notes are made from cotton fiber paper, unlike most common paper, made of wood fiber. U. S. coins are produced by the United States Mint. U. S. dollar banknotes are printed by the Bureau of Engraving and Printing and, since 1914, have been issued by t
Foreign direct investment
A foreign direct investment is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control; the origin of the investment does not impact the definition, as an FDI: the investment may be made either "inorganically" by buying a company in the target country or "organically" by expanding the operations of an existing business in that country. Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, intra company loans". In a narrow sense, foreign direct investment refers just to building new facility, a lasting management interest in an enterprise operating in an economy other than that of the investor. FDI is the sum of equity capital, long-term capital, short-term capital as shown in the balance of payments. FDI involves participation in management, joint-venture, transfer of technology and expertise.
Stock of FDI is the net cumulative FDI for any given period. Direct investment excludes investment through purchase of shares. FDI, a subset of international factor movements, is characterized by controlling ownership of a business enterprise in one country by an entity based in another country. Foreign direct investment is distinguished from foreign portfolio investment, a passive investment in the securities of another country such as public stocks and bonds, by the element of "control". According to the Financial Times, "Standard definitions of control use the internationally agreed 10 percent threshold of voting shares, but this is a grey area as a smaller block of shares will give control in held companies. Moreover, control of technology, management crucial inputs can confer de facto control." According to Grazia Ietto-Gillies, prior to Stephen Hymer’s theory regarding direct investment in the 1960s, the reasons behind Foreign Direct Investment and Multinational Corporations were explained by neoclassical economics based on macro economic principles.
These theories were based on the classical theory of trade in which the motive behind trade was a result of the difference in the costs of production of goods between two countries, focusing on the low cost of production as a motive for a firm’s foreign activity. For example, Joe S. Bain only explained the internationalization challenge through three main principles: absolute cost advantages, product differentiation advantages and economies of scale. Furthermore, the neoclassical theories were created under the assumption of the existence of perfect competition. Intrigued by the motivations behind large foreign investments made by corporations from the United States of America, Hymer developed a framework that went beyond the existing theories, explaining why this phenomenon occurred, since he considered that the mentioned theories could not explain foreign investment and its motivations. Facing the challenges of his predecessors, Hymer focused his theory on filling the gaps regarding international investment.
The theory proposed by the author approaches international investment from a different and more firm-specific point of view. As opposed to traditional macroeconomics-based theories of investment, Hymer states that there is a difference between mere capital investment, otherwise known as portfolio investment, direct investment; the difference between the two, which will become the cornerstone of his whole theoretical framework, is the issue of control, meaning that with direct investment firms are able to obtain a greater level of control than with portfolio investment. Furthermore, Hymer proceeds to criticize the neoclassical theories, stating that the theory of capital movements cannot explain international production. Moreover, he clarifies that FDI is not a movement of funds from a home country to a host country, that it is concentrated on particular industries within many countries. In contrast, if interest rates were the main motive for international investment, FDI would include many industries within fewer countries.
Another observation made by Hymer went against what was maintained by the neoclassical theories: foreign direct investment is not limited to investment of excess profits abroad. In fact, foreign direct investment can be financed through loans obtained in the host country, payments in exchange for equity, other methods; the main determinants of FDI is side as well as growth prospectus of the economy of the country when FDI is made. Hymer proposed some more determinants of FDI due to criticisms, along with assuming market and imperfections; these are as follows: Firm-specific advantages: Once domestic investment was exhausted, a firm could exploit its advantages linked to market imperfections, which could provide the firm with market power and competitive advantage. Further studies attempted to explain how firms could monetize these advantages in the form of licenses. Removal of conflicts: conflict arises if a firm is operating in foreign market or looking to expand its operations within the same market.
He proposes that the solution for this hurdle arose in the form of collusion, sharing the market with rivals or attempting to acquire a direct control of production. However, it must be taken into account that a reduction in conflict through acquisition of control of operations will increase the market imperfections. Propensity to formulate an internationalization strategy to mitigate risk: According to his position, firms are characterized with 3 levels of decision making: the day to day supervision, management decision coordination and long term strategy planning and deci