Foreign Direct Investment as a Source of Economic Growth - Coursework Example

How important in Foreign Direct Investment (FDI) as a source of economic growth? Introduction Globalization is as a result of several developments and processes that are linked together. These include: (i) the internationalization of financials markets,(ii) the development and diffusion of communication and transport technology (iii) deregulation and liberalization,(iv) privatization of the public sector, (v) the increased coordinating role of the international financial institutions such as the world bank and the International Monetary Fund and most importantly (vi) the growth and relative importance of Foreign Direct Investment which provides a greater role for Multinational Companies (MNCs), who are entering foreign territories in large numbers. Thus, Foreign Direct Investment (FDI) is one of the key catalysts for globalization and the resultant economic growth that is visible in many countries. However, if viewed from other perspective, it appears that globalization and the globalization friendly policies of many countries only pushed the companies to initiate FDIs in various territories. So, when viewed from an overall perspective, it is clear that both, globalization and FDI are correlated, with one acting as the catalyst for other, and vice versa. History of FDIs Globalization during the last few years has been witnessed by a massive jump in the total quantum of FDI. The extent of increase in FDI might be placed in proper perspective when one understands that between the years 1980 and 1995 there was a four-fold increase in the total amount of FDI worldwide. If one examines the geographical origins and destinations of these FDIs, one discovers that most FDI tends to originate in United States, Japan, Germany, the United Kingdom, France, the Netherlands, Sweden and Switzerland. So, a significant benefit of these total annual FDIs is directed at these industrialized countries rather than at the economies of the Third World. (Castells). However, this bias towards industrialized countries have started tilting towards the Third World countries during the first few years of the twenty first century as one learns that in 2004, for instance, FDI inflows into the developing economies represented about 36 percent of aggregate global FDI inflows. (UNCTAD). Thus, a strong trend has been the number of service MNCs’ globalizing their operations through FDI, with major activities in FDI visible at the turn of the century (Dunning 1989). Statistically, ‘the world’s inward stock of services FDI quadrupled between 1990 and 2002, from an estimated $950 billion to over $4 trillion’ (UNCTAD). However, FDIs have not been flowing equitably in all the Third World countries, as 80% of FDI inflow into the Third World countries is directed towards only 20 Third World countries among which China has been the largest Third World recipient of FDI for a number of years. In 2004, FDI inflows into China totaled $60.6 billion, and represented about 26 percent of the aggregate global inflows of FDI into all the developing countries taken together and replaced United States as the worlds leading destination for FDI. (UNCTAD). This trend of FDI flow to emerging and developing economies particularly China continues even in the current times with Figure 1 depicting China’s optimal inward FDI flows. Figure 1: China’s inward FDI flows (% change year-on-year) (Source: OECD) Pros and Success of FDIs To begin with, we will be looking at the constructive effects of FDI and how it can boost economic growth in the FD invested countries as well as how it gives economic benefits to the investing companies as well. The opening up of international trade denotes an increase in economic progress and wealth creation, with developing or emerging economies, in particular, profiting vastly. Among these economies, the ones which are garnering the maximum FDIs are China and India, because of the heightened potential of their economies. Initially, the Chinese Government was conservative regarding issues pertaining to foreign trade and foreign investment policy. However, with the advent of globalization, the government has liberalized these policies. The major laws and regulations of China related to Chinese-Foreign Equity Joint Ventures, Wholly Foreign-Owned Enterprise, Foreign-invested enterprises etc have been implemented to ease the process of foreign investments (China.og.cn). India is also garnering optimal FDI, after the advent of globalization and the actualization of the liberalization regime. India has been pursuing the Mode 1 globalization strategy since the economic reforms began under P.V. Narasimha Rao and Manmohan Singh in 1991. Despite several changes of government and difficulties in implementation, the essential aspects of this international economic strategy have been maintained (Sen). With the governments opening up their economies and particular market areas for FDI, plus offering attractive financial incentives like tax cuts, land at subsidized rates, facilitation fees, etc, foreign organizations are making optimal investments in those foreign countries. This way, the local population got or getting major financial benefits, which in turn runs and boosts the economy. That is, due to these FDIs and the resultant establishment of many industries or offices, local population is getting many employment opportunities with optimal salaries. With good salaries, people’s standard of living will improve and this will accentuate their buying power, which in turn will positively impact many other businesses, leading to economic growth. In addition, the local populace will have access to wide variety of products and services, manufactured by the multinational companies, as part of their FDI plans. As the local population will also purchase these products of foreign companies, it will benefit those MNCs as well as the economy in which those MNCs are based. So, it is a kind of a chain reaction, with FDIs acting as the catalyst, and boosting the economic growth in various countries. The home country gets benefited with good financial returns in form of foreign exchanges, payment of taxes by the foreign companies, etc. The other reason why these FDIs will be encouraged by these countries is that, by boosting their economies, it will minimize or even eliminate poverty. “Despite formidable strides in poverty reduction, China and India still host the largest number of poor in the world. According to World Bank calculations, out of a total 2.3 billion people in China and India, roughly 1.5 billion earn less than US$2 a day. Only rapid economic growth can hit them out of abject poverty” (Islam 3). So, these countries will facilitate flow of more FDIs and that in turn will impact both the developing as well as the developed countries. Developed countries in the sense, the companies making these FDIs will be mainly based in the developed countries. When those companies have access to various markets, make FDIs and garner good profits, it will positively impact those developed countries’ economies as well. For example, Indian Economy including the Indian retail industry is expected to grow manifold and can productively accommodate foreign firms as well. Merrill Lynch, the well known financial management and advisory firm, expects the Indian retail industry to grow to US$300bn by 2010. (The Economist Intelligence Unit Limited). So, it is up to the government to open up organized retail to FDI. There is huge scope for specialists to revolutionize retail in India as only 1.5 per cent of all food and grocery sales in India take place in Western-style supermarkets. (Wade). Even during current global economic downturn, retail sector in India is showing positive growth as it is growing at a yearly rate of about 15 per cent, giving the foreign firms good economic opportunity to invest in India. Thus, it is clear that FDIs can financially benefit multiple stakeholders or parties, starting from the local population, then the investing companies, other businesses and crucially the economies of more than one country. Cons, failures and uncertainties of FDIs FDI is often criticized in both home and host countries. In home countries trade unions criticize FDI as exporting jobs, and on the other hand, in host countries there are complaints that it is hard for local firms to compete with the know-how and financial resources of the MNCs. That is, many companies from developed nations are investing in emerging countries and this is leading to outsourcing opportunities, with many jobs in the Western world being ‘shipped’ to developing or Third World countries. Blue collar and back office jobs have migrated to these countries, resulting in a diminishing number of factory and service sector jobs in developed nations. “Asia has also been a long-time recipient of outsourced American manufacturing. A study by the universities of Cornell and Massachusetts-Amherst found that India alone may be responsible for up to 700,000 outsourced jobs. China has also received hundreds of thousands of outsourced jobs.” (Morley). Because of these job losses in the Western world, FDI is viewed negatively by the prospective employees and also by the public, thus leading to steps being taken by the government to limit outsourcing. When viewed from another perspective also, FDI appears to have other cons as well. That is, opponents of FDI argue that it was only the local employees and people in the developing and outsourcing countries who are suffering, and not the people in the developed countries. That is, they argue, with the actualization of unregulated free trade markets for FDIs, the multinational companies of the Western world are optimally benefiting at the expense of the indigenous or local companies. As the foreign firms are enticing sizable portion of the customer base through effective or unethical marketing strategies, there is an argument that they are indirectly wiping out the business of the home grown companies. With the local companies not able to compete with the highly advanced technologies, quality and important high investments of the foreign firms, they are getting marginalized and it is putting the lives of many local employees or people in a peril. The fear that large multinationals would drive small local firms into extinction and cripple domestic entrepreneurship can be clearly seen among the opponents of globalization (Bhagwati). Government bodies for their part are indulging in corrupt practices supporting mainly the MNC, instead of the local companies, further leading to a negative image for FDI. So, although FDI contributes to the growth of the economy in many host countries, it also brings instability and economic distress. FDI is used as means of economic growth but at the cost of minimizing codes of labor and health. Workers in these developing or outsourced countries, because of high FDIs in infrastructure, are being exploited with unhealthy working conditions and poor wages. That is, as companies have been relocating or outsourcing to other countries where there are lower wages, they only provide lower standards to these employees. When compared to their home operations or facilities in their own industries, foreign organizations tend to provide only sub-standard working conditions. With the local governments also not fully enforcing the set standards, the foreign firms without any ethical responsibility are having a free run, even indulging in child labor and forced labor. Because of these problematic issues, there is an increased resistance towards FDIs in many sectors. Personal opinions and conclusions As mentioned above, due to globalization, many multinational companies are entering prospective foreign markets with optimal FDIs. This is leading to major positive effects for the people of the home countries as well as the foreign firms, thus painting a positive picture for economic globalization and FDI. That is, entry of foreign firms has caused increased competition between these firms and the indigenous or local firms. This increased competition carries the effect of better productivity and business efficiencies. When the local firms start to fear the foreign firms, and so want to provide better products and services, thereby compete with them, they will surely optimize its operations to maintain the hold or market share. Thus, it will result in quicker information dissemination, plus steeper learning curve and technological advances for the local firms in various domains. Rivalry in the global economy, apart from producing improvements in products and services, will also lower the prices. Importantly, it will lead to heightened purchasing power among the local population, benefiting other businesses and positively impacting their economies. So, it is clear that FDI by developing infrastructure, creating jobs, enhancing technologies, improving the performance of local companies, giving various products at low prices, optimizing various businesses acts as the important source for economic growth. Works Cited Bhagwati, Jagdish N. In Defense of globalization. New York: Oxford University Press, 2004. Print. Castells, Manuel. End of Millennium. Malden, MA: Blackwell Publishing, 2000. Print. China.og.cn. “Foreign investment policy system in China.” China Internet Information Center, n. d. Web. 17 Nov 2010. Dunning, John H. "Multinational Enterprises and the Growth of Services: Some." The Service Industries Journal. 9. 1(1989): 5. Islam, Shahidul M. (2007). “Achieving Economic Growth In China And India.” Institute of South Asian Studies, 7 Jun 2007. Web. 17 Nov 2010. http://www.energiasportal.com/download/205/ Morley, Robert. “The Death of American Manufacturing.” Trumpet Print Edition, Feb 2006. Web. 17 Nov 2010. OECD. “Investment News.” Organisation for Economic Co-operation and Development, Jun 2009. Web. 17 Nov 2010. http://www.oecd.org/dataoecd/53/24/43143597.pdf. Sen, Chiranjib. “Globalization, India and East Asia.” n. p, 2000. Web. 17 Nov 2010. http://www.india-seminar.com/2000/487/487%20chiranjib%20sen.htm Ebusinessforum.com. India miscellaneous: Should India open its retail sector to foreign investors? The Economist Intelligence Unit Limited, 12 Jul 2005. Web. 17 Nov 2010. http://www.ebusinessforum.com/index.asp?layout=rich_story&doc_id=7485& categoryid=&channelid=&search=mckinsey UNCTAD. World investment report 2004. New York: United Nations Conference on Trade and Development, 2004. Print UNCTAD. World investment report 2005. New York: United Nations Conference on Trade and Development, 2005. Print. Wade, Matt. “Retail players eager to corner Indian market.” The Sydney Morning Herald, 3 Aug 2009. Web. 17 Nov 2010. http://www.smh.com.au/business/retail-players-eager-to-corner-indian-market- 20090802-e5we.html Read More