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Foreign Direct Investment - Essay Example

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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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Foreign Direct Investment

Download file to see previous pages... 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 ...Download file to see next pagesRead More
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