Foreign Direct Investment in Developing Countries - Literature review Example

of paper I pledge that I have complied with the [institute's in this work Full number and Semester and year Date of submission ABSTRACT There are now growing number of examples that support the potential role of FDIs in improving the economic situation of poor nations and developing countries. There are some very important examples that have emerged in this regard. These include among other nations, India and Africa. Africa especially is an area of interest since it has shown enormous growth in the recent years due to FDI than any other effort that has been carried out in the past. The paper critically explores the role of FDIs in the improvement of economic conditions of Africa and India as examples of its success. CRITICAL LITERATURE REVIEW ON FOREIGN DIRECT INVESTMENT IN DEVELOPING COUNTRIES The current global climate relies heavily on the existence of Foreign Direct Investment as a determining factor in the economic growth of any region. However, questions remain as to why there are certain pockets of countries where FDI seems to be flourishing, while others are vying for attention in this regard. There are many statistics that point to this (Vaknin, 2007, np). For example, only one third of the developing and poor nations get any forms of FDIs, and these are perhaps the neediest ones. Also, the contribution of the FDIs in the global economy is not even five percent. Then why is it considered as the next wave of development and a ray of light for poor nations' development FDIs have been strongly criticized for seizing the local talent of a country, preventing local growth, and thereby further reducing the economic development. Alongside, the other political, social and legal ramifications are amongst others in the list of problems associated with FDI (Vaknin, 2007, np). These and other such arguments have been raised in the past at the time when FDIs were being introduced for the first time across the world, and many critics still believe that such actions are leading to overall negative impacts in the long run on the poor countries. Foreign Direct Investment is defined as "investment in domestic structures, equipment and organization by foreign private sector or government. FDI does not include foreign portfolio investment in a domestic economy. The latter refers to investment in equity of domestic companies by foreign economic agents" (Kumo, 2009, np). On the other hand, there are many examples showing FDI as a potential source of success in the economy of a developing country. India for example, has become one of the world's favorite in gaining FDIs (Bhaumik et al, 2003, pp 2 and 3). The IT sector is one of the most prominent examples, which have jumpstarted India's GDP to one of the largest in the developing world. These and many such shining examples are now showing that FDIs can play a very important contributory role in improving the economic prosperity of poor nations. The initial skepticism is now giving way to acceptance and even appreciation of FDIs as research results show improved economic outcomes with the introduction of multinational companies and foreign investments over loans. Education is another recently discovered successful area where FDIs are taking place in India. Although critics pose questions about the cons of the education FDI in terms of personal gains instead of the gains for the country, so far, these investments are providing countries with a rope to hang on to, where others are sinking (Bhaumik et al, 2003, pp 4). The number of researches conducted on the beneficial effects of FDIs outnumber those that critic them. FDIs have been so far found to directly improve the financial and educational sectors of a country (Alfaro et al, 2007, pp 7). These countries are termed as the host countries. Researches show that those countries with good links between the final and intermediary industry sectors as well as good human capital are likely to get more FDIs (Alfaro et al, 2007, pp 4). Many critics question why the advantages of FDIs were not so apparent in the first place. The answer lies in the advent of globalization. In the past, globalization was a concept only. Its recent emergence has led to many reforms and changes in the way business and economics are run these days (Kyaw, 2003, pp 1). Globalization paved the way for many novel ideas that were in the past, considered wishful thinking. FDIs were among such concepts, idealized on paper, but not applicable to the real world. International FDIs have proven to be one of the single most supporters of the concept itself, and it has all happened with the emergence of the concept of globalization (Kyaw, 2003, pp 2). The numbers show the extent of developmental success due to FDIs. For example, in India, the FDI flow was as high as 4.28 billion in the year 2001, where as a decade ago, the investment in the same area was not even one billion (Bhaumik et al, 2003, pp 4). Other similar examples also exist. Africa for example, is fast becoming the new potential area for FDI. In the year 2007, for example, the inflow of FDI had shown record high inflows of $53 billion. Africa's economy showed a five percent per annum increase during the same time, which was one of the highest ever in its history (Kumo, 2009, np). Africa has still much to overcome in making itself one of the prime markets, especially in such a competitive global economy (Pigato, 2000, pp 2). Policy factors, such as government and government stability, and social and economical factors are just some of the main areas which decide the right candidate country. Africa has yet to prove that there is much more in terms of labor provision, technical advancement and authority, and country stability that will ensure the investment and growth of the FDIs (Pigato, 2000, pp 2). However, it can still influence the multinational companies owing to the vast natural resources it has in its disposal, which have remained largely untapped (Kumo, 2009, np). Improving situations on the political front in many African countries has also improved the number of FDIs carried out during the recent years. Africa therefore, can be considered a new case study where the true effects of FDI can be studied (Kumo, 2009, np). Other parts of the world have also shown very promising results for FDIs. the levels noted for FDIs in the year 2007 alone amounted to $1,833.3 billion, which was a 155 percent growth rate in the last four years alone (Kumo, 2009, np). Of this growth, the Asian market had remained the largest beneficiary, followed by Latin America, Caribbean and finally Africa. But although Africa received one of the smallest proportions when compared to the rest of the world, it still was able to benefit by some growth (Kumo, 2009, np). Numerous challenges exist for FDIs to be implemented with many factors identified. As stated "attracting FDI increasingly depends on the ability to provide a favorable FDI regime and competitive factors of production" (Pigato, 2000, pp 1). Other determining factors include "adaptable labor skills, sophisticated supplier networks, flexible institutions, tax incentives, stability and safety in the country among others" (Pigato, 2000, pp 1). There are also challenges in changing the perceptions about FDIs in many organizations and countries. Previous views of FDI stated that it was a method to drain the resources of the poor nations for the benefit of the certain few in power. Such perception still remains in many countries; however, this view is fast changing. This is mainly because there are many examples that are promising better development for those countries that are getting FDIs rather than those who are not. Also, comparison with countries which are currently relying on loans given by international organizations such as the IMF have failed to show any reasonable development or improvement in any sector. On the other hand, the FDI investment countries are showing signs of movement, despite small, in a better direction (Nunenkamp, 2002, pp 4 and 9). Previous myths about the instability of the FDIs have been largely overthrown, with acknowledgement of its role in external financing (Nunenkamp, 2002, pp 12) (Nunenkamp, 2002, pp 18) A recent perspective of looking at FDIs may illustrate its acknowledgment in the recent years. The current researches have found correlations between the improvement in the quality of life of children in the poor nations with the introduction of FDIs in that region (Ogadhoh, 2004, np).This may be attributed to the various efforts that are carried out by these multinational companies to gain trust and confidence among the country people, and the variety of programs that are carried out for the betterment of local societies. The UN reports have repeatedly shown women and children to be the most vulnerable in the economic sectors. Therefore, any investments and efforts that are carried out by the MNCs in these two particularly vulnerable results are likely to result in very positive outcomes (Ogadhoh, 2004, np). The above table also illustrates how FDIs can help in increasing the GDP levels of a country. There is a fine line however, between helping children becoming more independent and contributing members of the society economically, to being exploited by these companies as a source of cheap labor. Here it becomes the government's responsibility to ensure that its people get the right benefits from such reforms and actions (Ogadhoh, 2004, np). Current trends now also point out the possible role of FDIs in the prevention of financial crisis. It may help buffer the effects of loss in capital investment and jobs that take place as a result of these. It also allows for some margin of recovery from other parts of the world, should one part face such drastic events. The ripple or domino effect therefore, is slowed down considerably (Kumo, 2009, np). In conclusion, FDIs have shown tremendous potential in creating new job oppurtunities and business enterprises in countries which have limited resources to support themselves. These methods have shown better outcomes than other similar monetary support ventures such as loans. FDI's have shown a very strong improvement potential in countries of the African region, and have given some very significant examples of success that can be used for further research in this particular economic area. FDIs therefore, should be encouraged and its potential should be further explored. WORKS CITED Alfaro L, Chanda A, Kalemli-Ozcan S, and Sayek S, 2006. 'How Does Foreign Direct Investment Promote Economic Growth Exploring the Effects of Financial Markets on Linkages'. Site last accessed on March 10, 2010 from http://www.hbs.edu/research/pdf/07-013.pdf Bhaumik S K, P L Beena, L Bhandari and S Gokarn, 2003. 'Survey of FDI in India. DRC Working Papers, Foreign Direct Investment in Emerging Markets'. CENTRE FOR NEW AND EMERGING MARKETS. LONDON BUSINESS SCHOOL NO. 6. Site last accessed on March 10th, 2010 from http://www.research4development.info/PDF/Outputs/cnem/drc06_india.pdf Kumo W L, January 7th, 2009. 'Foreign Direct Investment in Africa: Trends, Opportunities and Challenges'. The American Chronicle Site last accessed on March 10, 2010 from http://www.americanchronicle.com/articles/view/87089 Kyaw S, 2003. 'Foreign Direct Investment to Developing Countries in the Globalised World' Paper presented at the DSA Conference 2003. University of Strathclyde, Glasgow, 10-12 September, 2003. Nunenkamp P, 2002. 'To What Extent Can Foreign Direct Investment Help Achieve International Development Goals' Kiel Working Paper No. 1128. Kiel Institute for World Economics Deusternbrooker Weg 120, 24105, Kiel Germany. Ogadhoh K, 2004. 'Is Foreign Direct Investment an Investment in Children' Report adapted with permission from a report by Save the Children UK 2002, Globalization and Children's Rights: What Role for the Private Sector Site last accessed on March 10, 2010 from http://www.globalenvision.org/library/8/636 Pigato M, 2000. 'The Foreign Direct Investment Environment in Africa'. Draft. Site last accessed on March 10th, 2010 from http://www.fias.net/ifcext/fias.nsf/AttachmentsByTitle/The_FDI_Environment_in_Africa.pdf/$FILE/FDI+in+Africa+by+Miria+Pigato.pdf Vaknin S, 2007. 'Foreign Direct Investments (FDI)- Pros and Cons'. Based on a lecture given at the Euro College Student Union Business Forum, Kumanovo, Macedonia, May 3, 2007. Site last accessed on March 10th, 2010 from http://samvak.tripod.com/foreigndirectinvestment-fdi.html Read More