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Foreign Direct Investment - Assignment Example

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In the paper “Foreign Direct Investment” the author analyzes foreign direct investment as one of the most essential of all factors that assist in economic development of a nation. The author associates FDI with some costs and benefits both for the host and the source economy…
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Foreign Direct Investment
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Foreign Direct Investment

Download file to see previous pages... In other words, FDI inflows might supplement the limited financial resources which retard the growth of an economy. Moreover, FDI inflows could assist in technology transfers that could prove to be more efficient in terms of production and thus, be of high assistance to the developing economies especially in case of LDCs (Assadourian, 2005). On the other hand, too much dependence upon FDIs for economic development, from a particular host nation might turn detrimental in case that the latter exploits the former on such grounds. In addition, the recipient country also suffers if FDI inflows invigorate production processes which ultimately injure the environment. Moreover, in case the benefits of FDI inflows trickle down to any particular segment of the economy only, possibilities of social uprisings grow intense among those who are not directly benefitted out of the same (OECD, 2002). FDI outflows could be turn to be beneficial for the source economy through boosting its current account position in terms of profit returns from sales made in the host economy. Moreover, prospects of rise in employment are also multiplied in the source economy when the raw materials produced in the host nation are brought in for manufacture of final goods. Lastly, technology and skill from the host nation are also passed into the home country, thus benefitting the latter. One of the highest costs incurred in FDI outflows is that of capital account deficits owing to a massive outflow in the initial phase. Secondly, the home country suffers from a current account deficit if the purpose of FDI outflow is to import low-cost raw materials (Vaidya, 2006). Determinants of FDI The primary factors which determine the flow of...
The primary factors which determine the flow of FDI within an economy are –
• At the face of competition, the foreign investors often consider foreign investment to be beneficial for their long run growths against their rivals. Such a measure could help them in securing their foothold in a non-domestic market.
• Such measures are often adopted in order to maintain a long term relationship which might prove to be profitable in the future, either in terms of a sustained flow of cost efficient inputs or technology. Moreover, a long term commitment could be advantageous at times of bargain as well.
• In addition, involvement in new product in a foreign market is associated with economies of moving in first (Moosa, 2002).
Answer to Question 2
The association between openness to trade and economic growth of an economy is a highly debatable topic. There exist theories as well as empirical evidences supporting and opposing the facts, so that the applicability of any one of them cannot be asserted in the true sense of the term. One robust theory which could be raised in support of the hypothesis is that lower the degree of trade restrictions in an economy, higher will be the inflow of export revenues in the nation which in turn boosts the national income of the economy. Moreover, abolition of restrictions over trade such as import tariffs or export quotas could help in extracting the benefits of comparative advantage which is beneficial in lowering the cost of production. ...Download file to see next pagesRead More
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