Regional Economic Development - Essay Example

Regional Economic Development Table of Contents Introduction 3 Role of Foreign Direct Investment 4 Impact of disinvestment 5 Conclusion 7 References 8 Introduction Inward investment is one of the most important sources of financing that developing nations can depend upon. In fact many-a-times, developed nations too are found to be highly relying upon the same, especially when they had been subjected to a recessionary phase during the recent past. Economies generally entertain such inward investments from foreign investors renowned in the global arena since, they automatically are featured with an innate power to attract other companies within the host region. In such cases, many transnational companies or organisations follow the footsteps of one pioneer which usually is a renowned brand. An assured advantage of allowing inward investment in an economy is that it ensures economic regeneration through boosting up employment opportunities in the nation directly as well as indirectly. The direct impact is created when the original company absorbs people in itself while an indirect impact is created when others who land up following the footsteps of the former, engage themselves in a similar activity. On the other hand, too much dependence on a single company is bound to throw a negative impact upon the economy, as is the case with that for monopolists. The present case study depicts how Dell emerged as an economic saviour for Ireland back a few years ago, when it decided to build its major European manufacturing plant in the nation. However the nation, or to be precise, the district of Limerick in Ireland, suffered a severe brunt following Dell’s decision to shift its manufacturing unit to Poland, owing to certain economic advantages that the latter comprises of. Such a move turned out to be detrimental for Ireland where many other companies had opened up their branches following Dell’s initial shift. Hence, the effect upon the economic prospects of the nation was multiplied leading many to believe the crucial role of inward investment upon the regeneration of an economy. A similar instance had been that for the case of Bosch, a German manufacturer of automotives that too have had significant impact upon the economy of England. The Welsh province of England actually had benefitted largely owing to the company’s decision to build up a branch in the region, owing to similar grounds as that for Dell. However, like the latter, Bosch too suffered the brunt of its failure so much so that the provincial government had to adopt measures to save it with its ultimate objective being that to save the economy of Wales. Role of Foreign Direct Investment Foreign direct investment is often regarded as one type of capital financing that nations rely upon for an economic boost. Higher the amount of FDI that a nation is capable of attracting, higher are its chances of making it big in the economic front. Many researches have been committed in figuring out the role that FDI inflows play behind the economic growth and development of a region. They have been briefed down in the points underneath. FDI inflows boost up the capital endowments in a region that had originally been deprived of the same. A greater amount of capital automatically implies the availability of higher amount of investible assets and thus, greater prospects of economic growth. Greater the amount of investment in a nation is, higher will be the employment of various factors of production and thus, there will be an eventual reduction to the problem of unemployment in the economy. FDI is usually found to flow in from developed to developing nations or those which belong to the high-income group to the lower-income nations. Usually, those belonging to the higher-income bracket have ample scope of conducting research and development, which is why they are endowed with better technological features than the poorer nations. Thus, FDI flowing in from the former are usually accompanied by better technological applications which might prove advantageous for the developing countries, for their future projects. As better technologies are employed, greater will be the factor productivities which ultimately help to enhance the volume of final products (OECD, 1999, p. 9). Hence, as many researchers have put it, foreign direct investment actually helps in enhancing the economic prospects of a nation through pushing up the capital endowments in the region and facilitating a balanced growth through proper and optimum utilisation of the economies of scale. On the other hand, there are certain areas of concern as well which often require the administrative bodies of nations to assess minutely various features of FDI inflows. One such problem is that when a nation starts depending too much upon one major investor, as had been the case for that of Ireland and South Wales. While the former had been largely dependent upon the giant computer maker, Dell, the latter had relied too much upon Bosch, a huge German organisation dealing with automotives. Their dependence took a toll upon the respective economies when either company decided to shift their bases from those economies to others where they could afford a cost cut without compromising upon their quality. The following section deals with the problem that either economy faced when they had been subjected to inward investment boosts and then been victimised by the same during a latter phase – to be precise, post the recent financial recession. Impact of disinvestment Ireland was highly benefitted when Dell, the world’s second largest manufacturer of computers, decided to open up its European unit in the district of Limerick in the nation. So had been the impact upon the economy of South Wales when Bosch, a giant German automotive company, took a decision to open up a manufacturing unit in the region, around sixty years ago. The influence in the form of economic development, that the regions experienced following the moves, could be summarised under the following heads so as to emphasise upon their economic significance. Diminishing rate of unemployment The decision by Dell had been a critical one for the economy given that many other organisations had followed in the footsteps of the nation thus correcting its long-standing issue of unemployment. The rate of unemployment in Ireland started depreciating post the second quarter of 1996 prior to which it had never achieved a single figure value. The rate of unemployment entered the range below 10% post 1998 since when it had continued at a modest level, primarily due to the production decisions being undertaken by Dell. However, as soon as the organisation announced its shift during January, 2009, the rate of unemployment took an upstart and once again overtook the 10% mark. It is said that almost four to five jobs in Ireland had depends upon the business undertaken by Dell. Given that the organisation had actually created nothing less than 3000 direct jobs in the nation, number of new job opportunities opened up owing to them had been above 10,000. These 10,000 jobs had been created by a large number of sub-supply companies of Dell. Hence, there is a clear indication that Dell succeeded in resurrecting the employment situation in the economy by a large extent. The German automotive company Bosch on the other hand, employs 900 among the South Welsh population. However, rumours about the closure of the particular production unit, has raised fears for the provincial government of the region. Nonetheless, the impact upon the South Wales government has not been quite immense as it had been for the government of Limerick, Ireland since the former had not been able to attract as many companies in the region as Dell, being the second largest maker of computers, had been able to. Boost in trade volumes and national income Manufactured units by Dell account for 5.5% of Irish exports and comprise of 2% of the nation’s total income. Dell thus helped to initiate a rise in the level of income of the nation. This rise in income had primarily been due to the decision made by Dell to set up its manufacturing unit in the nation that led to a rise in the rate of employment in the economy. The fundamental reason behind Dell’s decision to invest in Ireland had been the nation’s low minimum wage benchmark compared to that of other regions in Europe. As reported by officials of the organisation, the primary reasons behind the shift had been the availability of lower costs of transport as well as factors of production in Poland than those prevailing in Ireland. The company after being subjected or being a victim of the global financial recession, had been determined to curtail its costs of production by a large extent; to put it in numbers, Dell had fixed upon slashing down US$ 3 billion of its expenditures by the end of 2011. To realise its target, the company had but no option to move its base to a place which offered factors of production at rates cheaper than that in its present one. Furthermore, it had also been said of the government of Poland, or rather the provincial government of Lodz, that it had offered an aid of €54.5 million to the company as a part of its strategy to attract the same. Such a plan adopted by the Polish government proved out to be detrimental for the Irish province which too had been economically drained out post the recession and had pinned up a considerable hope upon Dell that had been treated as nothing less than a pillar to the economy. In fact, the brunt of Dell’s decision had not remained restricted within the company deciding to move its base to Poland. Many other companies which had set up their businesses in the Polish region too were anticipated to decide about disinvestment in the region. Hence, the national government expected a large-scale loss of capital within 12 to 18 months of Dell’s move, implying further economic losses and an equally worse toll upon the employment figures in the economy. This drift had been a reversal of the Irish story a few decades ago when immigrants landed up in the nation in search of jobs in heavy works factories. Dell’s decision had been followed by a fall in the number of immigrations in the nation and emigration of many nationals as well. This could perhaps be regarded as the only positive impact that Dell’s decision had – to lessen the burden of increased immigrations, for the Irish government (Barker, 2009). On the other hand, Lodz province in Poland when got a proposal from Dell to build up its factory in the region could not help some exhilaration given that the region too, like Limerick, had badly been affected by the financial crisis. However, the economy splurged at the very decision taken by Dell which was followed by an immediate employment of 1700 workers in the region. This move benefited the Polish economy by a large extent not only through providing them with direct employment but also indirectly, in a similar fashion that Ireland was deprived of the same. Many companies which were subsidiaries to Dell opened up their branches in the region thus opening up many job opportunities. Similarly, as reported by Bosch, production in South Wales could not be conducted at commercially viable costs anymore, though it had been reported as one capable of being conducted at feasible costs in Hungary. Bosch reported a loss of 45% in its sales figures by the end of 2010, which is presumed to rise to 65% by the end of 2011 (Williams, 2009). Conclusion Foreign direct investment is one of the most significant advantages that economic liberalisation has allowed for various economies around the world. Globalisation has opened up trade barriers facilitating capital to move from one region to another, so that none of them are as much deprived as they had been even three decades ago. Liberalisation that is automatically corresponded by FDI inflows helps to carry on a balanced economic growth in almost every conceivable front in a nation. The fact that the decision taken by one large company to establish their units of production in one backward region helps to attract many others as well, is one that provides a multiplicative effect of FDI inflows or rather inward investment. However, concerns arise when a particular company becomes too much dependent upon the proceedings made by one particular company. Such is the case when one single large and renowned company is the first mover in a region while others are sheer followers of footsteps of the former. As the situation had been with Limerick in Ireland and South Wales in England, when such companies decided to move out of those regions, their respective governments had no option remaining open in front of them. Given their already economically deprived situations, the nations could not recuperate easily from their respective brunt. On the other hand, the nations of Poland and Hungary had been benefited immensely by the decisions of the respective companies, especially given the fact that each pair of nations had been equally drained out economically. However, the point is that even these nations would have their reasons to lament upon in case that no other big name lands up in them post the move by the initial ones. This is because like their predecessors, if these companies figure out the economic situation in some other economy to be far more feasible than those in the present ones, they might make their moves in a similar fashion. References Barker, C. (January 8, 2009). “Dells Ireland plant to shed 1,900 jobs”. CNET News. Available at http://news.cnet.com/8301-1001_3-10136439-92.html (Accessed: January 1, 2011). Organisation for Economic Co-operation and Development. (1999). Foreign direct investment, development and corporate responsibility. OECD Publishing. Williams, K. (October 16, 2009). “Bosch future in jeopardy again as more talks start”. Western Mail. Available at http://www.walesonline.co.uk/news/wales-news/2009/10/16/bosch-future-in-jeopardy-again-as-more-talks-start-91466-24943211/ (Accessed: January 1, 2011). Read More