Impact of FDI on Industrial Policy in Developing Countries - Thesis Proposal Example

Impact of FDI on Industrial Policy in Developing Countries INTRODUCTION With the effect of globalization, the trend of ‘Foreign Direct Investment’ has grown significantly. The concept of foreign direct investment signifies transfer of capital from one country to another country due to expansion of business activities. During the year 1980s, when the effect of globalization was observed among the developed and developing countries, during that phase this cross border expenditure concept had started flowing all around the world. Within a decade, during 1990s it had been observed that number of global countries had become involved in foreign direct investment. In this regard, it can be stated that Japan as well as the United States have become the world’s largest net international borrower during this stage. Moreover, it has also been revealed that the trend of foreign direct investment have also rapidly increased among the emerging European countries. With regards to determining the positive impacts of foreign direct investment on an economy, it is highly essential to identify the favorable factors, which may affect the political and financial conditions and growth of the economy in terms of encouraging more investments (Drezner 53-78; Markey and Ravenswood 1-26). However, the trend of foreign direct investment has completely changed during the early 21st century. In this regard, it can be asserted that foreign direct investment has improved the opportunities for larger organizations as well as multinational enterprises in terms of its scale and scope. At the same time, it can also be claimed that increased tendency of foreign direct investment has initiated competitive advantage among the global players. Moreover, it has also assisted multinational enterprises to perform their extensive and cross border business operations effectively in the global market (Drezner 53-78; Markey and Ravenswood 1-26). THESIS STATEMENT In this assignment, the objective is to identify the impact of the foreign direct investment on receiving countries in terms of positive and negative aspect. At the same time, the study will try to identify the effect of the foreign direct investment on the global multinational enterprises. Moreover, the study will also help in recognizing the performance of the economy in terms of micro as well as macroeconomics. DISCUSSION Foreign direct investment has assisted developing countries’ to improve their economic performance in the global market context by improving trade. In this regard, it has been perceived that foreign direct investment has influenced the performance of the multinational corporations and it has also assisted developing countries to grow their economic performance more adequately. It is quite difficult to measure the accurate contribution of the foreign direct investment on the entire world’s economy over the last couple of decades. In this context, in order to identify the high involvement on the foreign direct investment, it has been revealed that China, Japan, the United States and the United Kingdom has taken more initiative with the aim of ensuring the flow of capital investment particularly on the developing countries. In this regard, as a positive effect of the foreign direct investment, it has been revealed that economic growth has enhanced the effectiveness particularly on the target countries. Simultaneously, along with the economic growth due to high flow of foreign direct investment the overall tax incentives, import duty exemptions and infrastructure subsidies among others have been also increased in case of developing countries (Drezner 53-78; Markey and Ravenswood 1-26). It has also been indicated that foreign direct investment is a major source of getting funds for investment in developing countries (United Nations, 2) The Evidence of Foreign Direct Investment. In order to highlight the evidence of the foreign direct investment, it can be asserted that the trend of foreign direct investment has positively improved the economic performance of the developing countries in the recent years. In this regard, it can be claimed that foreign direct investment has improved the flow of productivity and it has also enhanced involvement of technology for the developing countries in order to enhance the economic performance. It was also indicated that FDI upsurge efficiency of resources and increases factor productivity in the host country (OECD) .At the same time, it has also been witnessed that the foreign direct investment trend has introduced a new processes, skills and techniques in the business process. Moreover, due to the appearances of foreign direct investment policy the overall structure of the business process, training and development trend has also been improved in the entire global context hence affecting the economy at a considerable extent. Apart from this, it can also be stated that with the increasing trend of foreign direct investment the industrial atmosphere in the global economy, has improved the overall business performances. In this regard, it can be claimed that due to the increasing trend of foreign direct investment, global business relations have improved to a certain extent. This assisted in improving fixed-asset investment as well as enhances the foreign trade policy among the global nations (Drezner 53-78; Markey and Ravenswood 1-26). On the other hand, it can be also claimed that foreign direct investment trend has also initiated certain negative aspect on the global economy. At the same time, the increasing trend of foreign direct investment has also initiated challenges in front of the developing countries regarding trade, fiscal and monetary policies among others. In this regard, it is depicted that due to high involvement of the foreign direct investment the overall consumption of the developing country has increased. Rationally, it can be stated that investment and consumption has a negative relationship between them, which affects the overall growth of the economy in an adverse manner. One of the negative effects is due to the fact that the MNEs can displace the local firms, and reducing their growth (Jones, 1996). Apart from this, it has also been recognized that due to the high involvement of the foreign direct investment, the labour related problems have enhanced in the local market of developing countries, which has initiated larger challenges and also affected the performance of the economic growth of a developing country. Additionally, according to the review of literature it has been revealed that increasing tendency of foreign direct investment has increased the price of the goods and services in the developing countries. This aspect initiated inflation situation among those countries. In addition there is an upsurge of currency instability as more FDI is established in the developing countries (Rogoff and Reinhart 2003). Furthermore, it can be also argued that increasing trend of foreign direct investment has initiated natural resources depletion amid the developing countries (Drezner 53-78; Markey and Ravenswood 1-26). Impact of the Foreign Direct Investment. In order to identify the impact of globalization it can be stated that foreign direct investment has expressed the suspicion of trade in case of developing countries. In relation to this context, it can be asserted that foreign direct investment has improved the overall business performance of the U.S. and the country has reached $2.7 trillion of the national income during the end of 2011-2012 financial years. In this regard, it has been recognised that China has been one of the key players of foreign direct investment. The government of the China has invested larger portion of capital on the overseas market with a conscious policy. According to the report of 2012 financial year, it has been revealed that China’s flow of foreign direct investment has reduced 14% during the year 2012, whereas the US had increased its flow of foreign direct investment in the overseas market approximately 16% (Drezner 53-78; Markey and Ravenswood 1-26). Thus, it can be evidently claimed that foreign direct investment is one of the most important aspect through which a country can develop its external financial status or situation in the global market. In order to identify the history of the foreign direct investment it has been revealed that during the 1970s the global role of foreign direct investment was very low. Even after that during the 1980s, it was perceived that the overall performance of the foreign direct investment had reduced further. Then, during the 1990s, it was depicted that several developing countries had put back their effort with the aim of establishing a positive economic environment in the global market. In this context, it has been revealed that global banks have also taken their initiative with the aim of enhancing the overall economic performance of the global economy. During this phase, the initial aim was to improve the external financial condition of the underdeveloped and developing countries for greater effectiveness. Moreover, the aim was to reduce the economic crises of the emerging countries through ensuring investment flow and official capital flow. According to the observation, it has also been recognized that before 1980s, the flow of foreign direct investment was below 30%, whereas recently after the year 2000, the flow of foreign direct investment had become approximately around 60% (Drezner 53-78; Markey and Ravenswood 1-26). In this regard, in order to highlight the positive impact of the foreign direct investment it can be stated that in relation to economic aspect the foreign direct investment has influenced and attracted the global market with the aim of enhancing the economic output in terms of productivity. At the same time, it has also influenced industrialization to enhance their contribution towards the society in terms of goods and services. In this regard, it is depicted that several rich as well as poor countries have been highly benefited due to the high flow of foreign direct investment. As a consequence, it has been recognised that several business sectors have expanded their business operations around the global market. Simultaneously, it has also been revealed that the high flow of foreign direct investment has increased the opportunity of employment for the people throughout the global market. Simultaneously, it has also increased the involvement of advanced technology in case of business operations (Drezner 53-78; Markey and Ravenswood 1-26). At the same time, it has also been revealed that during the early 21st century most of the emerging economic countries among the world improved their stability in terms of economic point of view. Apart from this, those countries have also improved their political situation, which has assisted the countries to enhance dynamic business relations with the foreign countries. Moreover, it is also depicted that most of the emerging countries have also improved the level of education towards the favorable situation, which has indirectly reduced poverty and gave rise to a better global economy. Additionally, it can be claimed that foreign direct investment has also maximized the profitability with high return on investment (Drezner 53-78; Markey and Ravenswood 1-26). Similarly, according to the observation it has been revealed that foreign direct investment has also brought several difficulties for the host country. In this regard, it can be claimed that due to the high flow of investment in the capital market, the overall price index of the country usually increases, which may cause inflation in case of a host country. At the same time, it can also be claimed that due to high outflow of foreign direct investment, the overall duties and tax rates can be increased in a country, which may initiate larger difficulties for a country. In this regard, it can be asserted flow of foreign direct investment leads to increase in the import cost for a developing country. In this context, it can be stated that deficit can be witnessed in case of a current account of a country due to the effect of high import cost, which may lead to several economic difficulties for a country (Drezner 53-78; Markey and Ravenswood 1-26). Effect of the Foreign Direct Investment on the Global Multinational Enterprises. In order to highlight the effect of foreign direct investment on the multinational enterprises it can be stated that during the early 21st century, the effect of foreign direct investment had been observed on the multinational enterprises. In this regard, it can be stated that increasing diversity and high industrial involvement has been highly observed in case of multinational enterprises. In this regard, it can be claimed that several multinational enterprises, who have particularly associated with telecommunications, electricity as well as water services sector has initiated their appearance in the wide range of global market with the assistance of foreign direct investment. Moreover, it has been also revealed that those multinational enterprises have also witnessed growth in the foreign market place with the restrictions of foreign ownership. In this regard, it has also been witnessed that the United Kingdom has become the preferred location in terms of ‘location intensity’. At the same time, several other countries such as the United States, China, Germany and Netherland have become the top countries in terms of ‘location intensity’ (Drezner 53-78; Markey and Ravenswood 1-26). A graphical representation is depicted below with the aim of understanding the above stated concept. Fig. 1: The Involvement of Host Countries in terms of Location Force (Source: Markey and Ravenswood 1-26) Moreover, in order to identify the positive aspects of the foreign direct investment, it can be claimed that foreign direct investment has initiated employment position in the entire global market. In this regard, it can be asserted that during the year 2006-07, when the entire global economy faced uncertain economic situation, several multinational corporations still operated their organisation in the global market, which has maintained the overall balance of the global employment. In order to analyse more critically, it can be claimed that with the effect of globalization, multinational organizations have increased their operations in the global market. As a positive consequence, it has been revealed that the demand of the goods and services have increased among consumer, which has influenced the employment opportunity in a positive manner. Thus, it can be regarded as a positive aspect, which assists multinational corporations to enhance their business performance in the global market (Drezner 53-78; Markey and Ravenswood 1-26). Similarly, it has been revealed that foreign direct investment has initiated ‘equality of opportunity’ as well as ‘equal treatment’ among the entire global market place. Moreover, it has also revealed that foreign direct investment has reduced the legal repercussions of unfair practices among the global countries. In this regard, it has been recognized that several multinational organizations have treated their employees in an equal aspect, which has motivated employees to contribute their efforts towards the organisational goal. At the same time, it has also assisted employees to maintain their work life balance. Thus, in this regard, it can be claimed that foreign direct investment has indirectly assisted multinational organizations to maintain their stability of growth in the global market context (Drezner 53-78; Markey and Ravenswood 1-26). At the same time, it has been perceived that through the assistance of foreign direct investment, multinational organizations have able to enhance the job security aspects. Simultaneously, foreign direct investment has increased the opportunity for the multinational organizations to enhance the skill and efficiency of their employees, which has directly enhanced the quality of the products and services. Thus, it can be claimed that foreign direct investment has assisted multinational organizations to enhance their level of performance as well as it has also increased the sustainability in the competitive global market place. Additionally, it can be claimed that foreign direct investment has also enhanced the industrial relation and trade relation among the global countries (Drezner 53-78; Markey and Ravenswood 1-26). On the contrary, in order to identify the impact of the foreign direct investment on multinational organizations it has been identified that certain aspects, which have not changed instead of the high flow of foreign direct investment such as minimum wages, labour related problems and certain unemployment among others. In this regard, it has been revealed that even after the high flow of foreign direct investment child labour and minimum wages related problems can be observed in the multinational organizations. In this regard, specifically it can be claimed that child labour and minimum wages related problems can highly observed among the underdeveloped as well as developing countries. Whereas according to the review of literature it has been identified that developed countries does not have similar kind of problems (Drezner 53-78; Markey and Ravenswood 1-26). Similarly, in context of uncertain employment, it can be asserted that due to high financial crisis, several multinational organizations have tried to reduce their cost through incorporating an approach of reducing their number of employees, which has highly affected the overall performance of global economy. At the same time, it has also been revealed that even after the high flow of foreign direct investment, several multinational organizations have been still witnessing labour related problems in the global market, which has directly and indirectly affected the overall economic performance of the country as well as it has also affected the performance of the operative industry (Drezner 53-78; Markey and Ravenswood 1-26). CONCLUSION Based on the above discussion, it has been revealed that foreign direct investment is one of the emerging trends in modern economy, which has the ability of ensuring economic growth in a positive manner through contributing its efficiency towards the country’s gross domestic product. At the same time, it can also derive faster economic growth through ensuring the overall employment in a country. Moreover, foreign direct investment can enhance technological stability of a country through ensuring high level of productivity. On the other hand, it may also improve the overall industry situation of country through ensuring high flow of capital into the capital market as well as in the industry interface. On the country, in order to identify the threats of the high of foreign direct investment it can be stated that it may affect the stability of global economy through influencing an inflation situation in the market place. Moreover, it may also enhance the level of tax rate and import duty of a country, which can cause higher negative consequences in case of an economy of a nation. However, according to the above discussion it has been revealed that several multinational organisations have highly benefited due to the presence of foreign direct investment. In this regard, it has been revealed that most number of multinational organisations has able to enhance their trading performance due to high capital accusation and it has also assisted multinational organizations to grow in the global market context. Apart from this, due to the high flow of foreign direct investment multinationals have also able to maintain their growth and sustainability in the competitive market context. On the other hand, based on the discussion it has also been revealed that instead of high flow of foreign direct investment, several multinational organizations have not been able to ensure their mark in the global market. As a consequence, several difficulties remained unchanged for those multinational organizations in the contemporary era. Works Cited Drezner, Daniel. D. “Globalisation and Policy Convergence.” International Studies Association (2001): 53-78. Print. Markey, Raymond and Katherine Ravenswood. “The Effects of Foreign Direct Investment and Multinational Enterprises on the areas covered by the 1977 MNE Declaration of the ILO.” A Global Holistic Scan (2009): 1-26. Print. OECD Foreign direct investment for development: Maximising benefit Organisation for Economic Co-operation and Development. Paris (2002). Print Rogoff K. and Rienhart C. ‘‘FDI to Africa: The role of price and stability and currency instability’’ Working paper. International Monetary Fund (IMF) (2003). Print. United Nation. Economic development in Africa, rethinking the role of Foreign Direct Investment United Nation, New York and Geneva (2005) Vol 2. Print. Read More