Impact of Global Foreign Direct Investment - Coursework Example

IMPACT OF GLOBAL FDI By 09 January Impact of global FDI Foreign direct investment refers to flow of capitaland other resources between two or more countries. Apart from the capital, it also includes human resources and technology. In this case study, we are expected to outlook other benefits other than improved productivity and innovation that have taken the better part of the day. Foreign Direct Investments leads to globalization and development of economies in the world. Foreign investment into a country improves and accelerates the level of innovation in local firms into an economy (Mauro, 2005). This is where spill over theory comes in as a component of financial direct investment. Spill over mostly concerns transfer of technology between the countries involved. However, direct foreign investment has declined over time due to global financial crisis and the global recession that has affected most countries in the world (Salomon & Jin, 2008). The paper will discuss the impact of inward direct foreign investment. This includes both positive and negative impacts that come with it to all the parties that are involved. Apart from transfer of technology and increase in productivity, direct foreign investment leads to increase in the gross domestic product to the country where they investment has been pumped to. This is because it comes with a multiplier effect to the economy where the investment is being invested upon (Kline, 2012). This leads to increase in earning to the nation, as it is an injection to the economy. Further, it leads to the creation of job creation. Through the companies and factories that are established from the funds that are pumped into the economy (Garcia, Byungchae & Salomon, 2013). Most countries in the world are faced with the issue of unemployment and hence, starting new projects helps in creating jobs for the locals in those countries. This has a positive impact to the national income and to the gross domestic product of a country. Thirdly, inward direct foreign investment also leads to increase in the production capacity of an economy. For instance, Spain, which as a developing country received substantial amounts of capital to develop its manufacturing industry and the levels of innovation and productivity in the country. Innovation is a great component that positively contributes to the development of the economies in the world (Eduardo, Gregorio & Lee, 1998). Another component, that we must consider, is that producers, who invest in those economies, have the advantage of getting the best and the latest technology from abroad. This greatly helps in bringing out the best in terms of production to the countries where the investments that are being built upon to by the investors (Jin, Garcia & Salomon, 2013). Additionally, the countries that are recipients of direct foreign investments import less from other economies. This is because they can now be able to produce the products that they were formerly importing from other countries. Foreign direct investment also has a positive effect on the capital account of the receiving economy. This is an inflow to the economy to the capital account, which replicates to be an injection into the economy. Moreover, it spurs and leads to economic development in the receiving countries. Foreign direct investment acts as a way of compensating the absence of internal or local domestic investment into a country. In most cases, these funds are used to kick-start numerous projects in the country which leads to economic development and hence improvements in the gross national product of an economy. However, foreign direct investment also has costs and challenges that come in hand with it. For instance, it faces the challenge of fluctuation of the monetary conditions, which highly depends on the prevailing economic conditions in a country. This directly affects both the investor and the recipient on the investment decisions. However, the monetary policy of the recipient economy can encourage and again discourage investors into their economy through the terms and conditions, which come hand in hand with them. Secondly, changes in the cycle of trade also affect the sequence and the level of direct foreign investments in a given economy (Barry & Susan, 1999). An economy, that exhibits a sustained, and continuous economic growth attracts investors, unlike economies that are consequently hit and affected by the global recession in the world. Further, changes in business regulations also affect foreign direct investments. The domestic regulations, that are set by the recipient countries to these investments can either deter or encourage the level of investments (Lipsey, 2001). To be precise, we are referring to the general steps and requirements that must be followed for one to establish a successful business in that specific country. Additionally, it also concerns the amount of documentation that is required and issues of tax administration in that country. A good example of countries where the process of starting new business is the first process in the world today could be the United States of America, United Kingdom, Singapore and New Zealand among others. Another factor, which affects foreign direct investment, is the level and the amounts of business taxes in the recipient countries. This is because it can either attract investors or repel them into an economy (Martin, 2000). For instance, in this century, the government of Ireland imposed low taxes to attract and lure investors form large and numerous companies from the United States of America into investing in their economy. These corporations include the Apple Company and Microsoft. This investment amounted to approximately $ 166 billion into the Ireland economy. This was termed to be the largest investment as compared to other countries such as China and Asia. Another important factor, that should be considered when it comes to costs, is the wages. This involves the level of changes in wages and the required minimum wage in that specific economy. This has a direct impact on FDI. For instance, counties like Poland and Slovakia have always attracted huge foreign investments due to the low labour costs in their economies. Additional, inducement of incentives by the recipient country also greatly attracts and helps to retain direct foreign investments from other world large economies (Uri, Dipak & Dilip, 2000). Political stability of the governments in the recipient countries is also a challenge to investors. Changes in governments lead to loose of trust and confidence in investors (Uri, 2000). This will deter their intentions of investing in that particular country because they are not sure of the future and the level of security among other issues in there. Availability of other alternatives may also reduce the flow of investments in a country. A good example could be in China in early 2000’s where the economy attracted investors Eastern Europe into investing into that economy (Rojec, 2001). There are some of the costs and challenges associated with inward direct foreign investments. Foreign investments also come with externalities mostly in the form of technology transfers. This is where the effects of spillovers come in. In order to successfully transform and adopt the latest technology into manufacturing or whichever start-up the investor is considering, a huge cost must be incurred by the end of the day (Assaf & Efraim, 2004). The reason behind this is that technology is one of the scarce resources that we have, and the recipients must be devoted into learning it in order to adapt successfully to the system. Rather, technology has a positive spillover, which depicts that once the recipient country has adopted the technology, it is in a position to enhance the future productive capacity in the domestic firms (Krugman, 1998). Conclusion In my opinion, the cost and benefits that come in hand with foreign direct investment into an economy are largely determined and felt by the recipient country by the end of the day (Garcia, Byungchae & Salomon 2013). This is because the country, which is the recipient, is in a position to control and take hold of all activities and only conquer to the terms and conditions that favour its well being. When both empirical and economic theories are studied carefully, the results suggest that foreign direct investment has a beneficial impact to the host countries. However, potential risks are also evident but they can be resolved through the right channels of authorities and policies. This is the reason as to why the developing countries where there are heavy direct investments, their federal governments are always advised to come up with policy recommendations that will protect the well being and the interest of their economies in general (Rui, 2000). Although direct foreign investment plays an important role in development and improvement of the economies of the developing countries in different continents, the recipient countries should also come up with different rules and regulations that act as policies that should be followed by the investors who are willing to invest into their economies. This was one of the recommendations availed in a report by the World Bank journal in 2001. Through this, both parties will have control of their limited resources such as human resources and technology. In addition, provision of incentives to foreign investors motivates and instils confidence in the host countries. References Assaf, R & Efraim, S, 2004. Forthcoming, Labor, Capital and Finance: International Flows. New York and Cambridge, England: Cambridge University Press. Barry, P. B & Susan M. Collins, 1999. Capital Flows to Developing Economies: Implications for Saving and Investment. Brookings Papers on Economic Activity:1, Brookings Institution, pp. 143-69. Eduardo, B, Gregorio, J & Lee, J, 1998. "How Does Foreign Direct Investment Affect Growth?" Journal of International Economics, Vol. 45, pp. 115-35. Garcia, F., Byungchae, J., & Salomon, R, 2013. "Does inward foreign direct investment improve the innovative performance of local firms?” Research Policy, 231-244. Jin, S., Garcia, F., & Salomon, R, 2013. ‘Do host countries benefit from inward foreign investment?’ Vale Columbia centre on Sustainable International Investment, 1-6. Kline, J, 2012. "Evaluate sustainable FDI to promote sustainable development." Columbia FDI Perspective, 82. Krugman, P, 1998. "Firesale FDI," Working Paper, Massachusetts Institute of Technology. [online] Available at: [Accessed 09 January 2015]. Lipsey, R, 2001. "Foreign Direct Investors in Three Financial Crises." NBER Working Paper No. 8084. Cambridge, Massachusetts: National Bureau of Economic Research. Martin, Feldstein, 2000. "Aspects of Global Economic Integration: Outlook for the Future," NBER Working Paper No. 7899. Cambridge, Massachusetts: National Bureau of Economic Research. Mauro, G. (2005). The Rise of Spanish Multinational: European Business in the Global Economy. Cambridge: Cambridge University Press. Rojec, M, 2001. Foreign direct investment. Slovenian Economic Mirror, 7. Rui, A, 2000. "The Composition of International Capital Flows: Risk Sharing through Foreign Direct Investment," Bradley Policy Research Center Working Paper No. FR 00-08. Rochester, New York: University of Rochester. Salomon, R., & Jin, B, 2008. "Does knowledge spill to leaders or laggards? Exploring Industry heterogenity in learning by exporting." Journal of International Business Studies, 131-150. Uri, Dadush, Dipak Dasgupta, and Dilip Ratha, 2000. "The Role of Short-Term Debt in Recent Crises." Finance & Development, Vol. 37, pp. 54-57. World Bank, 2001. "Coalition Building for Effective Development Finance, in Global Development Finance. Washington Read More