Examine the impact of inward foreign direct investment on host countries and suggest policy measures for host countries to maximize the net benefit from such investment Foreign Direct Investment (FDI) has seen an increasing trend in recent years; in 2006 alone gross FDI flows were double the amount they were in 2001…
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In essence, FDI gives the investor the power to operate a company in another country for the long term. Developed host countries are not too welcome to the idea on the premise that they fear foreign firms will end up dominating their local firms. In contrast to this, developing countries are more welcome to the idea on the grounds that FDI will bring additional capital, expertise and new technology into their country. (Contessi & Weinberger, 2009). Host countries record FDI flows as liabilities along with similar items in their balance of payments. In host countries like these FDI flows make up a large percentage of the total investment in the economy as compared to more developed countries; the effects of FDI on these countries differ as well, with developing countries showing a steady growth trend as compared to developed countries who showed boom and bust cycles as a result of engaging in FDI. (Contessi & Weinberger, 2009). Growth is normally measured by looking at the trends in per capita GDP growth. Analysts relate FDI to per capita to GDP growth by looking at figures of gross FDI inflows and FDI inflows per capita to see if they have any impact on the economic growth of a country. Research has revealed a positive relationship between FDI levels and growth levels in an economy, in some cases these results have been insignificant as well but these variables have never shared a negative relationship. Extraneous variable have a magnitude changing effect on this relationship. It has been seen that, the more developed a country is, the better and greater positive effect FDI will have on its economic growth. (Contessi & Weinberger, 2009). Most studies that have analyzed the impact of FDI on the economic growth of the host country have found the results to be pretty elusive. Most established relationships are based specifically on the host country’s own specific economic characteristics. Thus it is difficult to generalize these effects and apply them to other countries as the findings of a study. However, the probable effects are not completely elusive, as the endogenous growth theory provides framework for the positive linkage between growth and FDI inflows. (Johnson, 2005). A study found that FDI can have a positive effect on growth, given that the host country promotes exports simultaneously. (Balasubramanyam et al, 1996). Another study showed that FDI had a positive impact on growth, but this effect was to be directly proportional to the host country’s level and quality of human capital. (Borensztein et al, 1998). A further study conducted on 50 developed and developing countries also found FDI to be positively impacting host country’s growth rate. (Olofsdotter, 1998). Research revealed that FDI and growth have a positive relationship, the magnitude of which depends on the specific economic conditions of the country in question. (Zhang, 2001). Another study based on research on Latin American countries also had similar findings. (Bengoa & Sanchez-Robles, 2003). Some studies on the other hand, found a weak link between FDI and economic growth based on research done on a mix of developed and developing countries. (De Mello, 1999). Other studies, like the one which conducted research on a mix of 72 developing and developed countries found that FDI
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Research studies indicate that there is direct relationship between FDI and financial markets. According to the research studies, structural changes in financial markets have been used in attracting FDI. The general view is that stock markets have been established with the main reason of intermediating funds towards investment projects (Hui and Margarida 210).
FDI can also be defined as an investment of a company in a foreign country by building a factory within the host country. It is through a company’s direct investment in machinery, building and equipment in another country that foreign direct investment is made possible.
The closer linkage between and among global powers has precipitated more interdependence and better business opportunities among countries, but when economic crises strike more seriously than expected countries suffer economic losses, which sometimes cannot be solved by the International Financial Institutions (IFIs).
The growth experienced by many countries in Asia Pacific region provide an ample empirical evidence as to the effectiveness and impact of foreign direct investment on economic growth.
Foreign Direct Investment provide many benefits such as transfer of capital and technology to the country where the intended investment is made besides stimulating domestic growth as well as providing an opportunity for implementing best practices.
Some of these countries became full European Union (EU) members in May 2004. They also experienced a significant increase in foreign direct investment (FDI). As a consequence, the ratio of inward FDI stock to the 12 CEE countries studied here in total world inward FDI stock increased more than three-fold, from 0.81% in 1994 to 2.89% in 2004.
Indirect effects take place through movement of trained labor from foreign firms to other sectors as well as through the increase of employment in domestic subcontractors. Moreover, the integration of foreign direct investment (FDI) into a local economy results often in a deep social change.
In 2005 the price rose by 72%. Australia benefits the most since it is the world's biggest exporter of iron ore. The output from Rio Tinto's mines in the Pilbara, in north-west Australia, has increased by an average of 15% a year since 1999. Between now and 2013 it plans to triple its output.
(Wikipedia, 2006). After the 1960's, foreign direct investments (FDI) have increased at a steady rate, with FDI stocks making up twenty percent of the world's Gross Domestic Product (GDP). Currently, China leads the world in foreign direct investments.
The author states that a multinational firm in a developed country may face higher labor costs and higher production costs when locating its subsidiaries in its own home country, while a shift overseas may involve a larger initial investment but is economically beneficial in the long run because the margin of profits are higher.
rategies that enable entities to diversify its assets and risk across diverse countries by engaging in contractual agreements with multiple potential partners. Companies may find it advantageous by producing in foreign countries compared to exporting to those countries based on
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