Estimating and Measuring Foreign Direct Investment - Essay Example

? Estimating and Measuring Foreign Direct Investment (FDI) Contents page Boreinsztein, E. 1998. How does foreign direct investment affect economic growth? Journal of International Economics 45, pp. 115–135. Contessi, S. 2009. Foreign Direct Investment, Productivity, and Country Growth: An Overview. Federal Reserve Bank of St. Louis Review 91(2), pp. 61-78. Dimelis, S. and Louri, H. Foreign Direct Investment and Technology Spillovers: Which Firms Really Benefit? [Online]. Available at: http://www.aueb.gr/imop/papers/DP149.pdf [Accessed on: 04 January 2013]. Francis, C. 2010. International Business: Text and Cases. US: PHI Learning Pvt. Ltd. Girma, S. 2001. Who benefits from Foreign Direct Investments in the UK. Scottish Journal of Political Economy, 48(2). Hanson, G.H. 1997. Foreign direct investment and relative wages: Evidence from Mexico’s maquiladoras. Journal of International Economics 42, pp. 371–393. Javorick, B.S. 2004. Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages. The American Economic Review 94(3), pp. 605- 625. Reinert, K.A., Rajan, R.S., Glass, A.J. and Davis, L.S. 2008. The Princeton Encyclopedia of the World Economy. NY: Princeton University Press. Teng, N.T. 2009. Estimating the Domestic Determinants of Foreign Direct Investment Flows in Malaysia: Evidence from cointegration and error connection model. Jurnal Pengurusan 28, pp. 2-22. Wu, Y. 2000. Measuring the performance of foreign direct investment: a case study of China. Elsevier 66, pp. 143–150. Introduction The main focus of the following report is to design an intellectual piece which will be helpful in providing high class of information in the context of foreign direct investment. The foreign direct investment is controversial issue, and has been able to gain the interest of the developed, developing and underdeveloped countries. It becomes essential to highlight that the foreign direct investment helps in boosting the speed of economic development of the countries. For the purpose of getting detailed information about the concept, its estimation and measurement the scholarly articles, research paper and excerpts from the books have been taken into consideration. The main intention is to get throw light on estimation and measurement of foreign direct investment. The report is based on 10 journal articles which have been selected in order to get the most accurate information in the context of the research. In the report, the articles have been thoroughly reviewed in order to collect the most valuable and adequate information in the context of research question which relates to estimation and measurement of foreign direct investment. In order to maintain the proper flow of the paper the concept of foreign direct investment is explained in detail which is further continued by explaining the types of foreign direct investment. Along with this the paper will also throw light on the importance and contribution of FDI in strengthening the working and functioning of the economy of the country. The paper is further directed towards the steps which are undertaken for estimating foreign direct investment in the country. Along with this there is detailed discussion about the measurement techniques and tools which are used in relation with this concept. Further the major points of the discussion have been clubbed in the conclusion section of the paper. Foreign Direct Investment Foreign direct investment refers to the investment which is made as a direct investment into production or business in a country by a company which is typically situated in some another country. This is done by buying a company and it shares or by undertaking expansion strategies of an existing business in the country. It is quite different from other indirect investment such as portfolio flows, which require an investment by the overseas institution in equities listed on the stock exchange of the nation (Francis 2010). The path of direct investment is chosen because there is a need to have a direct degree of influence and control over the company in which the investment is being made. The economies which have skilled workforce and show good prospects of development are generally able to attract larger amount of foreign direct investment (Francis 2010). The main examples of foreign direct investment would be such in which an American company taken a major share in the company of china. Also Canadian company setting up a joint venture for developing a mineral deposit in Chile is also an example of foreign direct investment. Types of foreign direct investment There are many types of foreign direct investment which are undertaken by the companies. The major types of foreign direct investment include horizontal and vertical types of foreign direct investments. The foreign direct investment might enter into the country from the medium of horizontal or vertical manner but the estimation and measurement of FDI makes it easier to ascertain the accumulated wealth that is coming in the country from foreign investors. Horizontal foreign direct investment refers to the FDI which is undertaken by the company in which the organization is presently operating in the home country (Reinert, Rajan, Glass, and Davis, 2008). An example in this context may be the investment made by Cemex in Venezuela. Cemex which is largest manufacturer of Mexico embarked for its international expansion strategy by undertaking established cement makes of Indonesia. Along with this the company also acquired a southland based company Houston which is large cement country of America in the year 2000, by making a payment of around $2.5 billion. Vertical foreign direct investment refers to the FDI which is made by an organization for the purpose of selling the outputs of the domestic firms. It also includes the investments which are helpful in providing inputs for domestic organization (Reinert, Rajan, Glass, and Davis, 2008). An illustration states the acquisition of Russia’s largest oil company LUKoil by Getty Petroleum of USA in the year 2001, as it provided it with a retail network of about 1300 gasoline stations. Role of FDI for a country and its positive effects Dimelis and Louri in their paper have stated about the important role of FDI for a country and its spillover positive effects. The two main issues which dominate the discussion include the efficiency benefits that are bound to come along with FDI which might also lead to an increase in local productivity and also be helpful in making indirect improvements in domestic performance of the country (Dimelis and Louri). The second major issue is the costs which are incurred by the domestic firms because of entry of the rivals in the market. It might also result in reducing the production output as it pushes the domestic firms above their average cost curves and as a result decrease their productivity. The well developed local conditions of a country like openness of the economy, institutional framework, technological development high degree of competition, skilled level of workforce, etc. make it possible for the company to gain maximum benefits from the FDI coming to their country (Dimelis and Louri). FDI plays a vital role in the development of any country, with the increase in the inflow of investments in any country the development of the country increases. FDI provides capital to the target market which is missing the required capital and brings in growth and development in that target market. With the high inflow of foreign direct investments long term capital helps the country for all round development. Foreign investors become able to finance their investments in a better and cheaper manner. It is quite evident that FDI has a crucial role to play in the faster development of economies. The developing economies have higher demands and it becomes essential for these economies to adopt such working patterns and regulations which can facilitate and help in attracting higher FDI. Over the years, the demand for the FDI in countries has increased which has dynamically reflected in their initiatives taken for luring foreign investors in the countries. It can also be said that FDI plays a crucial role in the development of any economy as it provides the required capital for the development of the economy which is unless missing from it. FDI also helps the economies to create new work places and greater working opportunities which aids the economy grow with pace. Source: Positive Impact of Rules on FDI Foreign direct investment has been one of the most dynamic phenomena in the contemporary scenario of globalisation. As identified and graphed by the World Investment Report and the United Nations World Trade Data Base, the outward flow of foreign direct investment stocked up to 1.5 times faster and higher than the exports even faster than the flow of exports of the intermediate goods (Contessi 2009). From the past scenario, the theory of international trade and multinational corporations has given enough attention to the phenomenon of the estimation of foreign direct investment regarding the international firms and organisations across international borders. The estimation implies that the effects of third party plays an important role in lending effective support for the presence and flow of the complex nature of foreign direct investments. It shows that if the nature of foreign direct investments remain complex this will result in limiting the opportunities and scope of liberalising the investment policies and training programs and other policies that attract increasing number of foreign direct investments in the developing countries (Contessi 2009). Source: (Contessi 2009) As per the statements of estimation it has been suggested that the policies that attract increasing number of foreign direct investments can only be effective for a country when the country is close to the large base of foreign consumers (Girma 2001). If this is not the condition then the prevalence of low production costs in such developing countries may outweigh the high rate of costs of trade, which will ultimately create a hindrance in providing a platform for exporting goods to the third countries or to the parent company. Mostly the trend shows that foreign direct investment takes place between the developed market economies and thus leads to the stimulation of growth in the economy of developing as well as developed countries. As revealed by the estimates the gains that are resulted from foreign direct investments are significant in the long run. This leads to a positive effect on the productivity of the economy of the country (Girma 2001). Thus, the importance lies in keeping the country attractive to generate increasing number of foreign direct investments in the economy of the country. This shows that increasing number of foreign direct investments results to be positive and significant in the long run in various countries. These foreign direct investments are estimated to be expanded in order to achieve economic growth and long run welfare of the country and its business economy (Hanson 1997). Hence it shows that foreign direct investments are favourable and beneficial for those countries, which have appropriate and supportive conditions of the internal environment. FDI also helps in bringing new opportunities which are usually not available in the economy. Foreign organizations also helps the economy t have greater access to the foreign markets and helps the economy to grow with pace and bring in all round development. Source: (Francis 2010) Foreign direct investments act as an important window that can help the firms in avoiding high costs of production in the home country and identify attractive markets across international boundaries. Mostly developing countries hardly have appropriate resources for appropriate economic development. For this purpose, foreign direct investments are considered to be an important vehicle and an indicator of the level of economic globalisation of the country as well as its integration into the world economy (Teng 2009). Foreign direct investments as a non-debt creating financial commitments Foreign direct investments are considered to be non-debt creating financial commitments that are preferred for the financing of external deficits of current account especially in the developing countries. These foreign direct investments have a positive impact on the economy of the country as they help in reducing the costs of research and development. This is beneficial by the way of initiating innovation in the host country economy (Teng 2009). These external investments are important for bringing change in the technology, and make a positive contribution towards growth that is greater than domestic investment. In this manner, foreign direct investments have a positive impact on the domestic employment. Along with this, it provides higher rates of human capital accumulation and provides opportunities for future growth processes and accelerated modification of technology. It has been estimated that foreign direct investments acts as an important channel and source for bringing transfer of knowledge in technology, skills of management and international contracts between various countries (Wu 2000). The flows of foreign investments help in improving the skills of domestic manpower and helps in improving the level of productivity. Foreign direct investments provide leads to acceleration and diffusion of technology. It also promotes transfer of technology to domestic firms and the labour force, productivity spill-over and improved competition. Foreign direct investments have been of prime importance in order to increase the productivity and performance of the country. In this manner, foreign direct investments have been helpful in increasing the corporate profits across the world and raise the value of cross border mergers and result in high rate in the flow of foreign direct investments (Wu 2000). Thus, the basic underlying fact regarding foreign direct investment aims at providing a base to the domestic consumer market. It is identified that trade dependence of a company determines the flow of foreign direct investments for a country. The grater trade dependence a country has the more open the country is to the flow of foreign direct investments in the long run. Importance of the measurement of foreign direct investments in any country Along with estimation, measurement of foreign direct investments plays an important role in determining the flow of FDI in a country. This investment is defined as direct investments that are received across international boundaries. This investment is initiated by the residents of one country who aim at achieving the objectives of interests in an enterprise that is a resident of another country. Foreign direct investment capital provides majority owned subsidiaries and branches (Javorick 2004). Foreign direct investment flows include the nominal value and the stock value of flows that are exchanged between various countries. Foreign direct investment acts as an important factor input in the labour and domestic capital. It is one of the main forces that drives and initiates economic growth in the less developed and developing the countries. Foreign direct investment is a major source of technology and know-how for the developing countries. It is a different form of investment as it involves transfer of not only production knows how but also technical, managerial and marketing skills. Foreign direct investment is termed as a major factor input and its performance is measured in terms of the framework of production functions (Boreinsztein 1998). This measurement helps in determining the performance level of foreign direct investments. The measurement of foreign direct investment aims at serving two broad purposes. The first purpose relates to a traditional aspect that views foreign direct investment as a financial flow. This function implies the ways through which countries use their surplus savings. For the recipients foreign direct investments acts as source with the help of which their capital formation or acquisition of assets can be financed in an appropriate manner. By the measurement of foreign direct investments the activities of multinational firms, determinants of the activities and their impact on the home and the host countries are measured in an effective manner (Boreinsztein 1998). Foreign direct investments act as vehicle for the transmission of ideas, technological knowledge, organisational knowledge and business knowledge. This measurement deal in the measurement of trade in good, as the trading of goods involve returns to the intangible assets that are owned by multinational firms and these intangible assets can be moved freely. This also relates to the measurement of national product and within the countries in order to measure the regional output. The only measures that relate to the foreign direct investment those are available in all the countries are the measures of outward and inward flows of foreign direct investments. This flow is received from the balance of payments and the related estimates of outward and inward stock of foreign direct investments (Javorick 2004). Conclusion The above discussed paper has been very beneficial in order to get detail information about the concept of FDI. In the paper the information has been collected from reliable sources. The paper has explored the concept of FDI, its various types and along with this throws light on estimation and measurement of foreign direct investment in the country. The estimation and measurement of FDI is a very complex issue and many countries have been facing difficult in this area. The paper has used reliable journal and scholarly articles for getting inferences about the required research topic. This report will make a dynamic contribution in exploring issues related to international business and it history. The report has highlighted that estimation and measurement of is an essential step for a country. The countries take initiatives for estimating the level of foreign direct investment which ultimately helps the company in undertaking such initiatives which will help in attracting higher investment. The measurement is also important as it helps the countries in estimating the level of contribution of foreign investors in the in economic development of the country. The foreign investors help in boosting the growth of the country. From the overall discussion it can be easily concluded that the foreign direct investment has an important role to play for a country and it estimation and measurement will be essential. Thus, the discussion has helped in deriving the overall result of the research which has been completed with the help of scholarly journals and articles which helps in understanding that FDI has a dynamic role in international business history. References Boreinsztein, E. 1998. How does foreign direct investment affect economic growth? Journal of International Economics 45, pp. 115–135. Contessi, S. 2009. Foreign Direct Investment, Productivity, and Country Growth: An Overview. Federal Reserve Bank of St. Louis Review 91(2), pp. 61-78. Dimelis, S. and Louri, H. Foreign Direct Investment and Technology Spillovers: Which Firms Really Benefit? [Online]. Available at: http://www.aueb.gr/imop/papers/DP149.pdf [Accessed on: 04 January 2013]. Positive Impact of Rules on FDI. [Online]. Available at: http://aguadapark.com/en/uruguay-zonas-francas-beneficios/ [Accessed on: 04 January 2013]. Francis, C. 2010. International Business: Text and Cases. US: PHI Learning Pvt. Ltd. Girma, S. 2001. Who benefits from Foreign Direct Investments in the UK. Scottish Journal of Political Economy, 48(2). Hanson, G.H. 1997. Foreign direct investment and relative wages: Evidence from Mexico’s maquiladoras. Journal of International Economics 42, pp. 371–393. Javorick, B.S. 2004. Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages. The American Economic Review 94(3), pp. 605- 625. Reinert, K.A., Rajan, R.S., Glass, A.J. and Davis, L.S. 2008. The Princeton Encyclopedia of the World Economy. NY: Princeton University Press. Teng, N.T. 2009. Estimating the Domestic Determinants of Foreign Direct Investment Flows in Malaysia: Evidence from cointegration and error connection model. Jurnal Pengurusan 28, pp. 2-22. Wu, Y. 2000. Measuring the performance of foreign direct investment: a case study of China. Elsevier 66, pp. 143–150. References Francis, C. 2010. International Business: Text and Cases. US: PHI Learning Pvt. Ltd. Reinert, K.A., Rajan, R.S., Glass, A.J. and Davis, L.S. 2008. The Princeton Encyclopedia of the World Economy. NY: Princeton University Press. Dimelis, S. and Louri, H. Foreign Direct Investment and Technology Spillovers: Which Firms Really Benefit? [Online]. Available at: http://www.aueb.gr/imop/papers/DP149.pdf [Accessed on: 04 January 2013]. Contessi, S. 2009. Foreign Direct Investment, Productivity, and Country Growth: An Overview. Federal Reserve Bank of St. Louis Review 91(2), pp. 61-78. Teng, N.T. 2009. Estimating the Domestic Determinants of Foreign Direct Investment Flows in Malaysia: Evidence from cointegration and error connection model. Jurnal Pengurusan 28, pp. 2-22. Wu, Y. 2000. Measuring the performance of foreign direct investment: a case study of China. Elsevier 66, pp. 143–150. Boreinsztein, E. 1998. How does foreign direct investment affect economic growth? Journal of International Economics 45, pp. 115–135. Javorick, B.S. 2004. Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages. The American Economic Review 94(3), pp. 605- 625. Hanson, G.H. 1997. Foreign direct investment and relative wages: Evidence from Mexico’s maquiladoras. Journal of International Economics 42, pp. 371–393. Girma, S. 2001. Who benefits from Foreign Direct Investments in the UK. Scottish Journal of Political Economy, 48(2). Read More