Global FDI in the Developing and Developed Nations - Essay Example

? Macro & Micro economics Table of Contents Introduction 3 Flow of global FDI in the developing and developed nations 4 Underlying reasons behind rising FDIs in developing nations and falling FDIs in developed nations 8 Justification for the developing countries to dismantle FDI barriers in the present global economic climate 11 Reference 14 Bibliography 15 Introduction Policy makers and academicians have emphasized on the various forms of capitals flows and FDIs account for the most predominant of them all. This is primarily because of the numerous benefits that it brings to the nations and the world economy at large, against the other forms of capital flows. In the middle of 1990, the degree of foreign direct investment had surpassed the official development assistance (ODA). During the same time the world economy was confronted with severe economic crises, especially in the South East Asian countries and Latin America. Thus’ emerged the various criticisms regarding FDIs in developing and emerging nations. However, there have been concrete evidences about the positive effects of FDIs in countries like Kenya, Tanzania and Uganda. New data from these countries suggest that FDIs have been successful in bringing about benefits to both the host economies as well as the workers in the foreign owned organizations. Africa, has been failing to exploit the advantage of foreign capital in way of not attracting FDIs Also one cannot ignore the fact that FDIs have been increasing worldwide and especially in the developing nations and that these countries have demonstrated greater growth in GDP since then. However, on the contrary the growth rate of developed nations have been comparatively lower than the developing nations abiding by the economic theory that capita accumulation is essential for the development of nations. The various reasons behind the contribution of FDIs in moving the developing economies towards growth would be discussed in this project. This is done by the provision of supporting evidence for the sane. Also in the present economic climate the pros and cons of implementing FDI barriers have also been analyzed in the project. Flow of global FDI in the developing and developed nations The recent economic crisis drew a lot of FDIs in the developing and emerging economies across the world. However, the impacts of FDIs have been different for different countries and regions and sectors. The economic crisis majorly affected the developed nations in the world and the FDI flows into the regions have also suffered a setback due to the sluggish market prospects. However, FDI flows into the developing nations continued to grow since 2008. But the rate had come down since the previous years as well. Researchers have put for the argument for this decline as an outcome of drawback of both the resource seeking and efficiency FDI aimed at being exported to the developed nations which were then going through a depression and the market seeking FDIs which aimed at serving the local markets have receded (UNCTAD, 2009, p.2). Since 1980 and 2000, the world has witnessed tremendous increase in FDI flows in various sectors and regions. According to recent statistics provided by the UNCTAD, the inward stock of FDI in the world was $0.8 trillion in 1990 while the figures were $1.95 trillion and $6.15 trillion in the years 1990 and 2000 respectively. Traditionally FDI was considered to be a phenomenon which was primarily associated with the highly developed economies of the world. Developed nations have always attracted highest shares of the foreign FDIs as compared to the developing nations. However, recently this tradition has undergone change. In recent years FDI flows in the developing nations have been greater than the economically advanced nations. The average annual inflow of FDI in the developing countries was eight times more than the years between 1982 and 1987, and the years between 1994 and 1999. Consequently the developing countries attracted almost one-third of the entire flow of FDI in the world. The main reason for this was capital formation, which was significantly more in the developing nations than the developed nations of the world. In the former, the formation of gross fixed capital was 10% of the FDIs they received and that associated with the developed nations were only 6%. Also the inward FDI stocks in the developing nations accounted for 20% of their gross domestic product as compared to only 12% in the developed nations (Nunnenkamp, 2002, p.10). The regions of East, South and South East Asia have emerged as few of the main FDI hosts among developing nations. These regions have accounted for absorbing more than 50% of the FDI flows into the developing countries in 1990 while leaving behind Latin America However; Latin America has again the main attractor of foreign investments in 1999. The annual average flow of FDI into this region was more than four times as compared to the years between 1988 and 1993 and between the years 1994 and 1999 (Nunnenkamp, 2002, p.11). The share of FDI flows in the developing nations in the world is provided in the following figure. It depicts the increase in FDI flows in the regions. Figure 1: Share of FDI flows in developing nations in the world (in percentage) between 1982 and 1999 (Source: Nunnenkamp, 2002, p.11) The following figure will depict the regional distribution of FDIs in the developed nations of the world. It reflects a reduction in FDI flows in most of the developed regions. Figure 2: Regional distribution of the flow if FDI into the developed countries (in percentage) between 1982 and 1999 (Source: Nunnenkamp, 2002, p.12) Underlying reasons behind rising FDIs in developing nations and falling FDIs in developed nations Developing countries have always been the main attractor of FDIs for the growth of their economy and infrastructures. The main reasons for this the prevailing low labor costs and attempts to strengthen their economies and give it a boost to for the creation of new jobs. These are the few reasons why the China has attracted high FDIs from the United States and the European Union. However, there has been a changing trend of the sectors which have so far attracted high FDIs. An example is China itself. China has been changing its preference for FDIs from the low end manufacturing sectors to those sectors which would stimulate the economy towards progress and growth. Some of these sectors include services, new energies, high tech as well as high end manufacturing (Qingfen, 2011). The situation depicts that in some sectors FDIs have been low in the developing countries, but other sectors have increased attractions for the same. Moreover the overall FDI structure has been quite high in the developing nations despite the shift of focus of the same. US investments in China fell by 23.05% in the year 2011 with a side by side increase in FDI from EU by 0.29% and an overall surge of FDIs by 13.15% in the economy. However the gloomy economic situation is one of the main reasons for low FDIs in the developed nations of the world, one of the most prominent examples being the United States. The nation has been trying to strengthen and offering preferential policies for encouraging investors to make investments in its own country. In fact it has been trying to make investors bring back their factories from overseas nations to the home nation (Qingfen, 2011). Globerman and Shapiro (2002), have presented the use if six governance indicators for estimating and assessing the assess the impacts of the quality of governance on both the inflow and outflow of FDI on a wide sample of countries consisting of both developed countries as well as developing countries between the years 1995 and 1997 (Kirkpatrick, Parker & Zhang, 2006, p.9). These indices describe the numerous governance structures, such as political instabilities, graft, rule of law, political freedom and voice, graft and regulatory burden. Researchers have considered the attractiveness of foreign investments in a country as a main determinant of the degree or extent of FDIs in them. Some of the variables are the level of taxes levied on foreign investment activities, infrastructure and human capital quality. Additionally the governance variables also have statistical significance to confirm that the quality of institutions has a positive impact on FDIs (Kirkpatrick, Parker & Zhang, 2006, p.9). Economic globalization increased at the same pace at which FDIs grew in the developing countries, which consequently attracted rising share of FDIs in the world in the 1990s. In most of the developing countries FDIs were seen to have made more prominent roles as compared to the developed nations of the world. Moreover the chances of investments opportunities for FDIs are more in the developing nations than the developed nations which is why they have been more successful in attracting the same (Nunnenkamp, 2002, p.31). In certain aspects the developed countries are faced with the challenge or competition of attracting FDIs with the developed countries. It is true that the developed nations have the advantage of using tax incentives for attracting FDIs as compared to the developing nations, however, researchers are of the opinion that they would do better if they recognized the benefits of cooperation more in particular respects. The challenge which the developing countries are confronted with is in recognizing the increasing need of cooperation against the information to deal with the ever increasing financial and services sector, the crucial issue of handling transfer pricing and most importantly money laundering. The expectation of the developed countries is more towards helping the developing countries to administer and monitor taxes as the developing countries are lacking expertise of monitoring transactions considerably (Goodspeed, 2004, p.12-14). The developed countries have shown greater performance requirements for FDIs. This is especially true for the United States. This included particular questions with regards to the use of performance requirements. The performance requirements are much lower in the developing countries as compared to the developed countries. The number of these requirements was seen to be particularly high for specific industries such as transportation equipments and automobiles, electrical, non electrical machineries, chemicals and some of the major industries like petroleum and mining. Surveys have shown that the use of performance requirements have been much reduced in the developing countries which is why they have been successful in attracting high FDIs lately, however, the picture is completely different for the developed nations. High performance requirements have kept investors from investing in the regions. High restrictive FDI policies have gone against equipping these countries from attracting FDIs. In fact some of the developing countries have relaxed restrictions for the entry of FDIs to such extent that the once highly restrictive industries like finance which were initially restricted from opening to FDIs were also relaxed which was a high boost for the guest countries to invest (United Nations conference on trade and development, 2003, p.11). Retreating or declining FDIs have caused the developed countries to relax the performance requirements lately but that however does not imply that the developed countries have given up their intentions of influencing the firms’ behaviors. Developed countries have been seen to be using such trade policy measures which have similar objectives as that of the performance requirements. Some of the measures identified are screwdriver regulations, rules of origin, anti-dumping measures as well as voluntary export restraints. Subsequently they have become less attractive for attracting FDIs from the foreign countries (United Nations conference on trade and development, 2003, p.12). Justification for the developing countries to dismantle FDI barriers in the present global economic climate Tax incentives have been used as the main source of attraction of FDIs both by the developed and the developing countries. However, it is needless to say that inadequate resources and expertise which are common of the developing countries have put them in disadvantageous positions as compared to the developed countries while competing with tax incentives. Even a small tax holiday incentive can end up giving out revenue without even getting any additional return on investments. Most of the start up companies or ventures which generates losses is also responsible for building the foundation for innovation remain in disadvantageous positions in comparison to the other business ventures. These are some of the aspects which justify the removal of FDI barriers for the developing economies of the world (Goodspeed, 2004, p.13). During the recent times, FDI restrictions have been dramatically reduced by nations resulting from a number of factors. This is because there has been an increase in technological changes, evolution of the globally integrated marketing and production networks, prevalence of the bilateral investment treaties etc. Moreover the drying up of the lending by commercial banks arising out of the debt crisis was the cause for developing countries to change their investment policies for attracting foreign investments and capital because FDIs were considered to be the most attractive inflow of capital as an alternate to bank loans. As a result huge subsidies and incentives were offered to the MNCs for supporting the industrial policies of the developing countries. However, the removal of FDI barriers is not always justified. This is because it does not necessarily increase the welfare of the host country. For example, it is possible that the host country might have a monopoly power of a firm in the world market; increased output arising out of new competition lowers the price of the products to be exported and consequently reduces the terms of trade of the developing country thereby lowering its welfare in the economy. Thus the imposing of FDI barriers are not always justified (Brooks, Fan & Sumulong, 2003, p.11). Under situations of full employment, capital inflows declining relative scarcity of capital and at the same time raising labour productivity in developing countries can result in raising real wages and reducing income disparity in the country too. However factors like gain sharing and distribution needs also to be looked into. Generally FDIs in primary commodity exports had led to expansion of capacity, productivity growth and deterioration of terms of trade of the developing country leading to welfare losses. However there was no spill over to the rest of the country from the primary product, consequently the developed country or the quest country only benefited from the capital inflows which is which does not justify the removal of FDI barriers in the developing countries. Conclusion The study reveals that there has been declining FDIs in the developed nations while the same has been demonstrating ever increasing growth in the developing nations of the world. This is primarily because of the high incentives of potential for growth which developing depict as compared to the latter. They appear to be much more attractive in terms of revenue generation than the developed countries. Moreover, the FDI restrictions are also quite high in the developed countries which keep investors from venturing into the regions. Finally it seen that competition and lack of resources and expertise does not allow developing nations to compete with the developed nations. That is why removal of FDI barriers for them is justified; however, they must ensure that it does not only result in gains for the foreign nations. Reference Brooks, D. H., Fan, E. X. & Sumulong, L R. (2003). Foreign direct investment in developing Asia: trends, effects, and likely issues for the forthcoming WTO negotiations. [Pdf]. Available at: http://www.adb.org/Documents/ERD/Working_Papers/wp038.pdf. [Accessed on December 17, 2011]. Kirkpatrick, C., Parker, D. & Zhang, Y. F. (2009). Foreign direct investment in infrastructure in developing countries: does regulation make a difference?. Transnational Corporations, Vol. 15, No. 1. [Pdf]. Available at: http://www.unctad.org/en/docs/iteiit20061a6_en.pdf. [Accessed on December 17, 2011]. Nunnenkamp, P. (2002). Foreign Direct Investment in Developing Countries: What Economists (Don’t) Know and What Policymakers Should (Not) Do!. [Pdf]. Available at: http://www.cuts-international.org/FDI%20in%20Developing%20Countries-NP.pdf. [Accessed on December 15, 2011]. Qingfen, D. (2011). FDI focus continues to shift. [Online]. Available at: http://www.chinadaily.com.cn/bizchina/2011-12/16/content_14275484.htm. [Accessed on December 17, 2011]. UNCTAD. (2009). Assessing the impact of the current financial and economic crisis on global FDI flows. [Pdf]. Available at: http://www.unctad.org/en/docs/webdiaeia20091_en.pdf. [Accessed on December 15, 2011]. United nations conference on trade and development. (2003). Foreign direct investment and performance requirements: new evidence from selected countries. United Nations publication. [Pdf]. Available at: http://www.unctad.org/en/docs/iteiia20037_en.pdf. [Accessed on December 17, 2011]. 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