Economic Stability Effect on International Business - Research Proposal Example

Economic stability effect on international business Introduction Economic stability can be defined as an economy that experiences low inflation rates and constant growth over a period of time. The advantages of economic stability are that it leads to low unemployment, increased productivity and improved efficiencies. Foreign Direct Investment (FDI) is investment of foreign assets into domestic organizations and structures. Foreign direct investments are more tailored for the long term impact on a country unlike investments in equity that can be easily reversed. The relationship between economic growth and FDI has been a matter of interest to researchers in the recent past. Significant research shows the effect of FDI on economic growth and vice versa. It is generally agreed that the effect of FDI on economic growth of a region is positive, but the causality between the two factors is a subject that is still controversial. The direction of causality between the two variables is important so that governments can put in place proper guidelines for future economic policies. Economic stability has a major impact on international business. Businesses have a core mission of making profits, therefore multi national companies are inclined to invest in a region that is economically stable so as to guarantee returns (Carkevic and Larverne, 2002). It has been argued that economic stability is a requisite factor to allow for more investment such as foreign direct investment, and hence the economic growth prospects of the host countries. Hansen and Rand (2004) have argued that countries with export promoting policies that encourage transparency have a greater benefit from FDI compared to countries that have import substitution policy. This implies that economic stability and FDI have a synergetic relationship and hence, a country has to put in place policies that support both to ensure sustained growth. As already pointed out, FDI can have a direct impact on economic growth of a country since it leads to capital accumulation and transfer of technology to the recipient nation. According to the neo-classical economic theory, FDI can only have a short run impact on economic growth. This is because this theory postulates that capital has diminishing returns in the long run. However, the endogenous theory of economics states that FDI can influence the economy of a country through permanent knowledge transfer. Buckley et al. (2002) argue that this permanent knowledge transfer covers for the diminishing returns on capital, hence creating a long term impact on the recipient nation’s economic stability. The determinant factor of the duration of impact on the economy by FDI is the level of complementarity and substitution between the domestic investment and FDI. Therefore, it is important for the recipient country to have a conducive economic and social environment to reap the maximum benefits from FDI. It is important to note that FDI may have negative impacts on economic growth of the host country if they result in significant reverse flows in form of profit and dividend remittances (De Mello, 1999). This paper aims to investigate the impact of economic stability on international trade. The research considers two countries that are part of the ASEAN. The research focuses on the historical and recent aspects of economic stability in these countries and the impact it has had on their economic growth through international trade. Globalization has made economies of countries to be dependent on each other, hence giving international trade more prominence. The other factor that is also investigated in this research is the relationship between the economic stability of these countries vis-a-vis the amount of Foreign Direct Investment (FDI) received by the recipient nations. Methodology The methodology of this study is the use of secondary research. The paper uses materials collected from various sources such as government agencies and international finance bodies. The sources of the information used in this research include the World Bank, The Bank of Thailand, Asian Development Bank and other sources. This paper analyzes the impact of economic stability and its relationship to international trade. The paper also investigates the relationship between the aspect of economic stability as well as the amount of Foreign Direct Investment. The data collected was that of the ASEAN countries, specifically Thailand and Philippines. These countries were selected as they have faired in remarkably different ways economically and in terms of Foreign Direct Investment, although they started off on fairly similar grounds. The data collected included the historical amount of FDI channeled into these countries and the rate of growth or decline over the decades. The information collected was analyzed to investigate the relationship between the economic stability and amount of Foreign Direct Investments (FDI). Overview of Philippines According to World Bank statistics, Philippines started off well in the 1960s. The economic growth of the country averaged at seven percent per annum. This rate of growth was considerably high in those times and compared favorably with that of other countries in South East Asia. The high growth rate was further fuelled by sensible government policies that favored increased trade. The manufacturing sector registered the highest growth rate peaking twelve percent per annum. Political stability also provided a conducive environment for business to thrive. As a result, Philippines advanced rapidly and it was on track to become one of the first Asian giants. However, the period of 1970s marked the downturn of the economy of the country. The country adopted policies that became detrimental to the economy. One of the policies that the government of the day implemented was the import substitution. This policy was intended to act as a response to balance of payments’ pressure. As illustrated by Meyers (2009), import substitution measures are very harmful to the economy in the long run. The impact of this policy was that the growth rate of manufacturing fell by almost half to stand at seven point seven percent per annum and there was a subsequent fall in the Gross National Product to 4.9 percent. Import demand also rose to exceed the export level. In the wake of this crisis, the government enacted policies that were not adequate to solve the problem. For instance, the allocation of foreign exchange was subject to intense corruption levels. The devaluation of the currency also impacted negatively the general economy of the country. Other sectors of the economy such as agriculture and mining also dropped significantly to low levels. The impact on the economy was disastrous as it led to an unprecedented rise in the levels of environment. The political unrest in the 1980s was the straw that broke the camel’s back. Political instability led to large capital outflows. The foreign companies that had invested in the country withdrew their investments because of the unfriendly environment. The amount of new Foreign Direct Investment declined to negligible levels averaging at about two hundred million US dollars per annum. Due to this, the economy growth of the country dropped to record lows. However, since the 1990s the country has reformed its political landscape and the economy has picked up. The average FDI in the period 1999-2009 averaged at US $ 1.4 billion per annum. Overview of Thailand Thailand is also one of the founding members of the Association of South Eastern Nations (ASEAN). The story of economic growth in Thailand has been phenomenal to say the least, rising through years to become one of the emerging Asian economic giants. Thailand has had a sustainable economic growth over the decades and it is one of the most prosperous countries in the Asian continent. The economic stability and growth of Thailand can be analyzed in four stages that marked milestones. In the period between 1950 and1973, Thailand laid the foundations for the rapid economic growth that was to be experienced in the subsequent years. During this period, the country set up proper mechanisms on issues of governance and trade management. In the period of 1974-1985, macroeconomic uncertainties led to hardships and difficulty adjustments. The period was marked by low growth. The decade of extra ordinary growth, between 1986 and1996, averaged at ten percent per annum. The Asian economic crisis that began in 1997 led to the slowing down of the economic growth of this country. However, the country picked up as from the year two thousand and the economy has been growing ever since. The economic stability of Thailand has greatly improved its international trade outlook. The factors that are attributed to the high rate of economic growth are the boom in the tourism sector and the increase in the Foreign Direct Investments. In 1988, the Foreign Direct Investments infused into the economy were US $ 1.25 billion and this amount doubled in 1990 to hit two billion. The country also reformed its economy from agriculture-dependent to industry-dependent. In the 1960s, agriculture contributed almost eighty percent of the Gross Domestic product. By the 1990s, it was less than half as important as the manufacturing sector. The economy of Thailand is largely export based. Foreign Direct Investments have also played a key role in the economic stability of Thailand. Electronic products, especially computer parts and integrated circuits, make up over a third of the exports of the country. Multinational enterprises have invested significantly in this sector and as a result, Thailand has become the twenty second country worldwide in terms of Foreign Direct Investments (FDI) inflows. The foreign investments in Thailand helped to bridge the gap created by the absence of sufficient savings to be used in investments locally. The leading country in Foreign Direct Investments to Thailand is Japan followed by the United States of America, accounting for thirty percent and seventeen percent respectively. During the Asian economic crisis, the amount of foreign direct investments did not decrease. This shows that the underlying economic frameworks of Thailand are solid and could inspire increased investments even in the wake of economic crisis. Key Findings From the analysis of the data that was collected, it was found out that economic stability and Foreign Direct Investments (FDI) were related. The information collected showed that Thailand attracted a lot of Foreign Direct investment due to a number of reasons. Although usually overlooked, political stability is the foundation for any development to occur. It was realized that Thailand faired on well compared to the Philippines due to a relatively calm political environment in Thailand. The major reason for the stalling in economic growth in Philippines was due to the political turmoil experienced in the 1980s. Foreign investors are very sensitive to political issues since they fear that their investment may be lost in unstable political areas. Thus, although Philippines finally recovered from the political setbacks, it was very difficult to win back the confidence of the investors who had already fled from the country. The other important finding from this research is that sound economic principles are essential for the long term economic stability. Philippines’ model of import substitution led to the decline in economic growth. Also, it has been observed that although the financial crisis hit the entire Asian countries, the impact on Foreign Direct Investment for Thailand was minimal. Contrary to conventional wisdom, the foreign investors did not flee from the country. The government had sound policies in place and the foreign investors had confidence that the country would recover. This is the reason why the country was one of the first to come out of the Asian recession since it had sufficient capital investments. The international trade arena is a dynamic environment that changes rapidly and the economic effects in one country may have adverse impacts on others. This means a country has to put in place strategies that are sustainable in the long run. Conclusion The paper was dedicated to study the effects of economic stability on international trade. Also, the paper focused on the impact of economic stability on the Foreign Direct Investments to a recipient nation, and two countries, Philippines and Thailand, were analyzed. It was realized that economic stability had a positive impact on international trade. Also, the research showed that there is a relationship between economic stability and Foreign Direct Investments. Economic stability encourages Foreign Direct Investments to a country and an increase in Foreign Direct Investments leads to further economic growth. Despite the notion that FDI may not have a long-term impact on the economy of the recipient nation, some research has shown that the permanent aspect of knowledge transfer actually has a long term effect on economic stability of the host nation. The analysis of the two ASEAN countries showed that economic stability can only be possible in a politically stable country. The analysis also implied that FDI is important for economic growth in a country; a case in hand being Thailand. Finally, the research showed that economic stability requires sound economic policies so as to be sustainable in the future. Bibliography ASEAN., 2011. ASEAN investment report. Association of South Eastern Nations. Thailand. Barro, R. J. and Martin, K., 2008. Economic growth. New York: McGraw-Hill. De Mello, L. and Larvene, W., 2009. International business analysis. London: Sage Publishers. Hansen M. and Rand, T., 2004. Foreign direct investments: impact on the global economy. New York. Pearson. Meyers, H.K., 2009. The future of foreign direct investments. New York: McGraw-Hill Peterson, J.L., 2009. Political risk, institutions and foreign direct investments. European Journal of Political Economy, 56. World Bank, 2010. World development report. A Better Investment Climate for Everyone. Washington D. C.: The World Bank. Read More