The Influence of Foreign Direct Investment (FDI) on the Economic Growth of the Host Economies - Essay Example

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This paper talks about complex relationship between foreign direct investment and economic growth in the host country. This relationship is not as unambiguous as it is believed to be. Positive effects of FDI on economic growth are often taken for granted. In reality this relationship is not simple…
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The Influence of Foreign Direct Investment (FDI) on the Economic Growth of the Host Economies
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Download file to see previous pages ects of FDI on economic growth in host countries greatly depend upon the local conditions and contexts of doing business there: for example, human capital enhances the positive effects of FDI on host economies, while the existing technology gaps make it possible to implement even the simplest foreign direct investment reforms (Wang, Gu, Tse & Yim, 2012). Added to this is the role which market size plays in attracting FDI to host countries, whereas technology-absorptive abilities predetermine host returns from FDI (Li & Liu 2005; Blalock & Gertner 2008). These results have far-reaching implications for policy development and implementation, although all risks and factors changing the nature of FDI inflows to host countries need to be thoroughly considered. Even more interesting are the results of another study conducted in the three major countries-recipients of FDI. These include Malaysia, Chile, and Thailand (Chowdury & Mavrotas 2007). Again, the researchers confirm that the effects of FDI on economic growth are very heterogeneous and primarily depend upon the level of GDP in host countries (Chowdury & Mavrotas 2007). At least in Thailand and Malaysia, the relationship between GDP and FDI is very explicit (Chowdury & Mavrotas 2007). Again, these findings have far-reaching implications for policymaking, since understanding causality between FDI and economic growth is crucial for the creation of policies that encourage the inflow of investments from abroad in the developing world. Both studies confirm the importance of the FDI-economic growth causality but also imply that the nature of this causality and its direction should be placed under professional scrutiny. As long as the effects of FDI on economic growth in host countries are characterized by considerable...
This essay outlines the difficulties in establishing the functional relationships of FDI influence on economic growth in host countries. One of the greatest problems in this respect is the lack of sufficient empirical data. Another difficulty is the lack of organization and poor systematization of the existing knowledge.
Theoretically, FDI promotes economic growth through an increase in investment volumes, leading to increased efficiency of all economic and financial operations. Another theory suggests that economic growth is a direct result of the technological diffusions caused by FDI. Objectively, there is no single explanation to the effects of FDI on economic growth: numerous variables moderate the relationship between FDI and economic growth in host countries, and the current knowledge of financial markets and macro/microeconomics does not allow producing a comprehensive theory of FDI and its impacts on host countries’ economies.
In order to understand how and why FDI impacts host countries’ economic growth, the meaning of both terms needs to be clarified. For the goal of this paper, foreign direct investment is defined as “the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution, and other activities of a firm in another country.
FDI impacts economic growth through structural effects, skill and technology, and size effects. TNC play a huge role in the transfer of capitals and skills from one country to another.
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