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Impact of FDI in Developing Countries

Question:

Discuss is FDI beneficial to the economies in developing countries.

In recent years, the modern policy makers of the developing countries laid emphasis on the concept of federal direct investment (FDI) in uplifting the economic growth of those countries (Koma 2013). It can be stated that foreign direct investment has been successful in creating employment culture within the countries and increasing the technological development thereby improving the economic condition (Wang et al., 2013). Foreign direct investment is a business investment by an individual or company from another country in which the foreign investor has ultimate control over the purchase of the company (Blonigen and Piger 2014). It can be stated that foreign direct investment does not participate in investments across border however foreign direct investments differ from other international investments in various ways.

In this regard it can be stated that the United Nations Conference on Table and Development is the department of the United Nations which is in charge of the development of FDI in developing countries. The UNITAD was established in 1964 in order to integrate the countries that are developing into the world economy by encouraging foreign direct investment (Barkemeyer et al., 2014). The flow of foreign direct investment is generally followed from the industrially developed countries to the developing countries and the developing countries played an important role in determining the inflow of FDI. In this assignment the importance of foreign direct investment in contributing to the economic development of the developing countries has been explained by providing the example of African Countries.


Foreign direct investment can come into action through various forms. It can come into action through the process of merger and acquisition, purchase of land by overseas investors and fixed capital investment. In order to explain the impact of foreign direct investment on the economic development it is important to have an idea regarding the motivation in case of such investment. It is necessary to recognize the bodies that are responsible for regulating FDI both at national and international levels. In this case a multinational enterprise MNE has been identified which controls the operation and income of different assets in more than one country. It can be stated that the main objective of multinational enterprises is profit maximization by reducing costs however the main motivations for the expansion of any multinational enterprises includes- higher profits and higher position in a global market, extending product cycles with the production and marketing of products in new countries, reducing technological barriers in the movement of goods and services and involving the process of merger and acquisition in order to encourage external growth of business (Young and Makhija 2014).

It can be stated that the policy of foreign direct investment from time immemorial has proved to be beneficial for both the host country and the home country. Several scholars have argued regarding the importance of foreign direct investments in the economic development of developing countries (Alfaro and Charlton 2013). It has been stated by modern authors that with the supply of direct capital financing by the FDI can serve as a valuable source of technology and contributed lot by fostering linkages with the local firms (Alfaro and Charlton 2013). The technologically innovative ideas of the multinational enterprises (MNEs) played significant role in uplifting the economic culture of various developing countries and mostly in those areas where MNEs serves as catalyst in increasing the economic growth.

Motivations and Forms of FDI

It was evident from the statement of various authors that financial strengths vests with the multinational enterprises and these MNEs have the capability of investing in large plants (Teece 2014). It was stated by modern authors that it might be difficult for the local investors to invest such huge amount due to lack of huge investment funds (Kurtishi-Kastrati 2013). It was stated by some authors that FDI scarce capital can be made available to some of the developing countries however the transfer of capital by the MNEs can contribute to the formation of domestic capital in countries which are economically backward thereby increasing domestic investment (Gourinchas and Jeanne 2013). It was determined that investments could be better managed under the foreign control because this would reduce the interference of the government. The secretary general of United Nations summarized an important aspect of FDI by stating that the scope of foreign direct investment from the very beginning focused on raising productivity, creating job opportunities and transferring technologies (Alvarez and Marin 2013). It has been observed that foreign direct investment acted significantly in uplifting the economic development of the developing countries in the long run.


It was argued by many scholars regarding the fact that in spite of all the benefits brought down by the FDI, it has also negative impact on the economic development. It has been observed in some cases the multinational enterprises has displaced local firms that could not survive the tough competitive market created by the foreign firms and in such process reduced the growth of local firms. It was emphasized by different authors that FDI can result into flow of capital from the developing countries to the developed countries if proper regulation is not done in the host country (Driffield and Jones 2013). It can be observed that due to some political and economic risks in the developing countries there could be a huge capital flow from the developing countries to the developed countries which can have an adverse effect on the economic structure of the developing countries (Mathur and Singh 2013). It was stated by modern researchers and various environmentalists that FDI can cause environmental degradation to a large extent especially in case of mining sectors however it should be noted that the rate of contribution of FDI in economic development can be measured empirically.

It can be stated that GDP (Gross domestic product) is the actual parameter of measuring the economic growth of a particular country as GDP includes all the production information within the country for a particular period (Kubiszewski et al., 2013). It can be stated that many researchers have concentrated on the topic of the contribution of FDI in uplifting economic growth and the outcomes were positive. It was stated that out of the three sources of capital flow- portfolio investment, primary bank loans and FDI, the foreign direct investment proved to be beneficial in recovering the economic condition during the global financial crisis in the developing countries. It has been observed by various authors that countries which are economically stable can attract FDI better than the countries which are economically backward (Kubiszewski et al., 2013). In this regard it can be stated that even though FDI contributes to the economic growth of countries, the level of FDI is influenced by the rate of economic growth in that country.

Regulatory Bodies for FDI


In this context it is noteworthy to mention that the contribution of FDI to economic growth could be negative at times. In a recent study based on African countries it was stated that in a globally challenged market African countries are trying to cope up with the situation by attracting FDI in order to improve its economy (Boly et al., 2015). It was stated by some authors that the policy of tax holidays and incentives adopted by most of the African countries in order to attract foreign direct investment failed considerably and caused economic degradation (Amendolagine et al., 2013). It can be stated that in the process of adopting the policy of FDI by the developing countries it has lead to serious consequences where it was observed that incentives was more than capital gains from the foreign investment. It has been conducted by researchers that there is no evidence on the fact that FDI brings positive outcome to the economic condition of developing countries

It can be mentioned that the developing countries was not aware of the policy of foreign direct investment and ere comfortable with the local investors due to lack of influence of the western world. It can be stated that after many decades with the advent of various international events helped in re-shaping the attitude of the developing countries towards FDI. In modern scenario every countries wants to adopt foreign direct investment in order to supplement local business by increasing the activities of MNEs in most of developing countries. According to modern economists, the influence of FDI in uplifting the world economic growth cannot be underestimated (Davaakhuu, Sharma and Bandara 2014). It was stated that the concept of FDI was adopted by most of the developing countries during 1980s due to the bad shape of the economy and the debt crisis faced by such countries.

It can be stated that some authors were of the view that the increase of the flow of FDI has been possible to the developing countries due to adoption of favorable policies by the developing countries towards MNEs (Zehri and Abdelbaki 2013). The governments of the developing countries have facilitated the growth of FDI with the help of positive policies and efforts have been made by the multinational enterprises in order to utilize the opportunities created by the favorable prices. It was argued by modern economists regarding the fact that MNEs are likely to attract cheaper labor in the developing countries which would be beneficial in reducing the total cost of production (Dedrick, Kraemer and Shih 2013). According to a report, the United Nations that with the advent of new competitors in the developed countries various multinational companies have been implementing ways by exploring global opportunities in order to improve their competition. In order to improve the competition of the developed countries operations have been expanded to the developing countries by rationalizing production activities and by lowering the cost of production.

It can be stated that African countries like any other developing countries from the beginning was not aware of the concept of FDI however with the advent of modern world these countries are trying to attract the concept of FDI in their economy. According to modern economists there were various other reasons behind the adoption of FDI by the developing countries for instance in order to overcome the scarcity of resources which included entrepreneurship, capital, employment creation, technological development and innovation, efficient managerial practices and access to foreign markets (Omri and Sassi-Tmar 2015). It can be noted that such benefits of FDI to the African countries would be difficult to access however this may differ from one sector to another depending on the size of the firm, the capabilities of the labors and the level of competition among domestic firms.

Positive and Negative Impacts of FDI


In recent trend it can be seen that most African countries have investment promotion agencies (IPAs). The investment promotion agencies have been successful in attracting FDI and protecting the business operations of the MNEs (Omri and Sassi-Tmar 2015). It can be stated that if such agencies are given the right operating tool then these would be successful in increasing the inflow of FDI in developing countries by creating good market conditions for countries by attracting international investors. It can be stated that in spite of the efforts made by different policymakers in Africa, the continent was not successful in attracting FDI to a large extent. According to a report of the United Nations, the oil and gas sector of Africa is the main channel which formed a major part of the foreign investment and it can be noted that strong investment in this sector has been possible due to high prices of oil and gas which would be beneficial in increasing the investor’s profitability in future (Omri and Sassi-Tmar 2015). According to some authors, the political instabilities and inconsistent policies in African countries has limited the share of FDI in world economy.

Economists have discovered that unstable currencies and high inflation are some of the major reasons why Africa has not been successful in attracting FDI Omri and Sassi-Tmar 2015). It can be stated by scholars that apart from the rate of inflation it is the infrastructure of African countries that is creating barrier in the inflow of FDI (Omri and Sassi-Tmar 2015). In this regard it can be stated that multinational enterprises (MNEs) prefers to operate in economies good transportation facilities, uninterrupted power and excellent amenities. It is obvious that the cost of production is usually lower in countries with well developed infrastructure than in countries having poor infrastructure however the affect of poor infrastructure on the flow of FDI in developing countries is relatively lower than the major factors like natural resources and foreign reserves.

It can be observed that based on the above reasons the continent of Africa in order to attract FDI to large extent it is required that it should focus on political and economic stability and in creating good infrastructure. It can be stated that the continent would be successful in the future in attracting FDI if all the above factors operate successfully however it will take considerable time in order to achieve those development in the long run

References:

Alfaro, L. and Charlton, A., 2013. Growth and the Quality of Foreign Direct Investment. In The Industrial Policy Revolution I(pp. 162-204). Palgrave Macmillan UK.

Alvarez, I. and Marin, R., 2013. FDI and technology as levering factors of competitiveness in developing countries. Journal of International Management, 19(3), pp.232-246.

Amendolagine, V., Boly, A., Coniglio, N.D., Prota, F. and Seric, A., 2013. FDI and local linkages in developing countries: Evidence from Sub-Saharan Africa. World Development, 50, pp.41-56.

Barkemeyer, R., Holt, D., Preuss, L. and Tsang, S., 2014. What happened to the ‘development’in sustainable development? Business guidelines two decades after Brundtland. sustainable development, 22(1), pp.15-32.

Blonigen, B.A. and Piger, J., 2014. Determinants of foreign direct investment. Canadian Journal of Economics/Revue canadienne d'économique, 47(3), pp.775-812.

Boly, A., Coniglio, N.D., Prota, F. and Seric, A., 2015. Which domestic firms benefit from FDI? Evidence from selected African countries. Development Policy Review, 33(5), pp.615-636.

Davaakhuu, O., Sharma, K. and Bandara, Y.M., 2014. Foreign direct investment in a transition economy: Lessons from the experience of Mongolia. Global business review, 15(4), pp.663-675.

Dedrick, J., Kraemer, K.L. and Shih, E., 2013. Information technology and productivity in developed and developing countries. Journal of Management Information Systems, 30(1), pp.97-122.

Driffield, N. and Jones, C., 2013. Impact of FDI, ODA and migrant remittances on economic growth in developing countries: A systems approach. The European Journal of Development Research, 25(2), pp.173-196.

Gourinchas, P.O. and Jeanne, O., 2013. Capital flows to developing countries: The allocation puzzle. Review of Economic Studies, 80(4), pp.1484-1515.

Koma, S.B., 2013. The trajectory of economic development policies in South Africa: the case for public policy analysis.

Kubiszewski, I., Costanza, R., Franco, C., Lawn, P., Talberth, J., Jackson, T. and Aylmer, C., 2013. Beyond GDP: Measuring and achieving global genuine progress. Ecological Economics, 93, pp.57-68.

Kurtishi-Kastrati, S., 2013. The effects of foreign direct investments for host country's economy. European Journal of Interdisciplinary Studies, 5(1), p.26.

Mathur, A. and Singh, K., 2013. Foreign direct investment, corruption and democracy. Applied Economics, 45(8), pp.991-1002.

Omri, A. and Sassi-Tmar, A., 2015. Linking FDI inflows to economic growth in North African countries. Journal of the Knowledge Economy, 6(1), pp.90-104.

Teece, D.J., 2014. A dynamic capabilities-based entrepreneurial theory of the multinational enterprise. Journal of International Business Studies, 45(1), pp.8-37.

Wang, D.T., Gu, F.F., David, K.T. and Yim, C.K.B., 2013. When does FDI matter? The roles of local institutions and ethnic origins of FDI. International Business Review, 22(2), pp.450-465.

Young, S.L. and Makhija, M.V., 2014. Firms’ corporate social responsibility behavior: An integration of institutional and profit maximization approaches. Journal of International Business Studies, 45(6), pp.670-698.

Zehri, C. and Abdelbaki, A., 2013. Does adoption of international accounting standards promote economic growth in developing countries. International Open Journal of Economics, 1(1), pp.1-13.

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