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Macroeconomics - Term Paper Example

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CIRCUMSTANCES UNDER WHICH FDI CREATE A CONDITION FOR A VIRTUOUS CYCLE OF ECONOMIC DEVELOPMENT Name Lecturer Institution Course Date CIRCUMSTANCES UNDER WHICH FDI CREATE A CONDITION FOR A VIRTUOUS CYCLE OF ECONOMIC DEVELOPMENT This paper delineates and discusses the circumstances that Foreign Domestic Investments creates conditions for a virtuous circle of economic development…
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Download file to see previous pages... It is therefore that investment that is made to obtain the lasting interest in a business that operates in an economy as opposed to that of the investor’s voice of having direct influence in the management. According to the United Nations World Investment report, Foreign Direct Investment is defined as an investment that involves relationship and a reflection of control of the foreign direct investor in an enterprise in a foreign affiliate. Long term differentiates FDI’s from the portfolio investments which are on a short term basis with insecurities turnover. It is no doubt that foreign direct investment acts as a catalyst for the economic transformation in a myriad of economies across the globe. One of the major benefits of foreign direct investment is that it provides finance for the acquisition of capital goods. It also facilitates the transfer of technology from relatively more advanced economies to less developed ones. It also results into the positive spillovers to the continental economy through various linkages with the local supplies, imitation, competition. However, it can also result into negative spillovers and therefore deteriorates growth in a country. This will make people fear from investing in the country given that it is possible of loosing. With the benefits stated, there has been an upsurge in the demand especially over the last two decades. Although the demand has increased, there has been a variation between and within regions. Up to 1980, the Caribbean and Latin America were the largest recipients of the FDIs. The situation changed in late 1980’s with the appetite being diverted to the Pacific and Asia countries. UNCTAD 2000) The two regions catered for the 85% of the FDIs injected to the developing countries. By 1998 Pacific received 46.3%, Latin America and the Caribbean 39% Central and Eastern Europe 10.2%, Africa 4.5% and Asia 2% of the total FDIs. A number of factors have influenced the distribution and the volume of FDIs especially in developing economies. Some of these factors includes; political stability, favorable government regulatory policies, low level of corruption, low administrative costs, presence of good business environment, skilled labor force, physical infrastructure, interest rate, productivity and the cost of labor. The below section of the paper will focus on some of the circumstances under which foreign Domestic Investments can lead to a vicious cycle of economic development. Some of these factors are as discussed below; Stability in the financial system The development of a stable financial system of the recipient country is a necessary precondition for any FDI so as to influence growth and development in a country. A financial system which is developed will be more beneficial to the economy as opposed to less developed one. When the financial system is developed then it will be easy technological fusion in the economy. FDIs require enhanced financial system since the composition of inflows of foreign resources which raises domestic savings requires proper systems and therefore easy match in the economy. Finances which are entailed in the injection can also include the purchases which are made by the foreign direct investors, new investment of the profits by the foreign investment enterprises from the parent firm; they may ...Download file to see next pagesRead More
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