International Economy and Finance - Implications of Foreign Direct Investment to Developing Countries - Essay Example

International Economy and Finance Name: Institution: One of the economic trends in the recent times is the globalization of developing countries. In the globalization of developing countries, there are some fundamental aspects of capital flows that highly significant to developing countries. Of great significance in relation to developing countries, is the Foreign Direct Investment (FDI). Foreign Direct Investment, as a form of capital flow, has various contributions to the countries involved. The significance of Foreign Direct Investment to the recipient countries is both positive and negative. This is especially true with the developing countries as the recipients of such capital flow. This paper, through considering various articles and literature materials, consider looking at the implications, both positive and negative, of Foreign Direct Investment (FDI) to the recipient countries and puts more concentration on the developing countries as the recipient countries. It is no doubt that Foreign Direct Investment depends on a number of factors such as technological innovations, technological spillage, rise in trade in goods, growing labour mobility and liberalisation of domestic markets. In this connection, therefore, the connection between developing and developed countries through the links of liberations of the international financial markets together with the policies put in place due to changes in the developing countries act as the primary forces driving or accelerating the Foreign Direct Investments (kyaw, 2006, p5). Developing countries associated with open economies have liberalised capital accounts. This is a significant aspect of promoting foreign direct investments flows if compared to other countries, which associate with closed economies. Kyaw, (2006, p3) indicates, “Openness to international capital flows and foreign direct investment in particular had a positive impact on the level of foreign direct investment flows”. Implications of FDI to developing countries Increase in economic development. Various researches continue to recognize that foreign direct investment flows has a significant contribution to the economic development of recipient countries. Since developing countries form the majority of recipient countries of these foreign direct investments, they experience increase in economic development from such investments. Developing countries show significant concern with having economic transformation and acceleration of growth. These are the main roles of foreign direct investment (Zilinske, 2010, p333). Therefore, most of the developing countries welcome FDIs as an accelerator to the development efforts. Another reason why foreign direct investment leads to increasing economic developments of the recipient countries is because; FDIs act as a basis of private, external finance to the recipient countries. There are two main ways that foreign direct investment increases growth in the recipient countries. Because of foreign direct investment, more technological advances together with the human capital increase within the recipient countries since advanced technology flows to the host countries. Foreign direct investment in the recipient countries ensures that there are higher attraction levels of domestic investments and thus increasing the investments in this host country (Kinda, 2010, p456). It is thus, evident that the recipient countries experience an increase in productivity growth through foreign direct investment. However, it is crucial to note that the most contribution towards this is the increased market transactions like licensing, goods trade, and joint ventures. Productivity growth is also through the increased access to technology that comes with the foreign direct investment. Production transfers and a boost to domestic investments There are some key aspects of production that change with the presence of foreign direct investments in the recipient countries. Above list is the transfer of skills, innovative capacity, production technology, and managerial and organizational practices together with the creation of an access to the international market networks. More significantly, foreign direct investments boost domestic investments (Kinda, 2010, p455). Foreign direct investment introduces significant corporations that create a high level of competition within the recipient’s market. This forces the local firms to accelerate their productivity and adopt more methods that are efficient in order to survive within the industry. They are, therefore, likely to turn to investing in physical capital or human capital since the multinational firms’ technological advancement, advertising expertise and large size enable investment in industries with entry barriers like trade restrictions and large capital requirements. The existence of the foreign multinational corporations generates essential benefits to the domestic firms. This is because there is an overall increment in excess to and knowledge of advanced technology by improvements of overall skills through significant training opportunities to the workers in general (Zilinske, 2010, p333). The foreign firms also increase the demand of products and supplies of inputs of the domestic firms. The transfer in technology into the recipient countries can easily result to technological spill over to the domestic firms of the host economy. This can significantly create a positive impact through capital account liberalization. As new technological advancements gets to the firms of industrialised countries, foreign direct investment acts as the key channel of transfer of such skills to the recipient developing countries. A highly educated workforce, as a measure of absorptive capacity, plays an essential role in letting local firms exploit the spill over of foreign direct investment. Boost to exports and imports (trade) and human capital enhancement Foreign direct investments, especially from larger corporations of industrialised countries usually create a link between the industrialised countries and the recipient countries. Trade within these two countries is recognizable. Trade deals within local firms and the multinational corporations can create access to the foreign markets. This results to the creation of opportunities of imports from the industrialised countries (Kinda, 2010, p454). In addition, foreign direct investment results to a boost in the recipient country’s exports. Multinational corporations investing in recipient countries come with advanced means of developed a process an export of produced raw materials through the various aspects of superior technology, marketing skills, and general experience and expertise on the international markets. Foreign direct investment enhances the facilitation of the exportation of local production. This is because the foreign firms help local firms create a distribution network that base on improved quality of production. Therefore, foreign direct investment always account for a higher significant share of the recipient country’s exports (Rausch, 2005, p76). Capital inflows to developing countries because of foreign direct investment ensure that the developing countries are shifting away from continuous bank loans, and change to utilization of portfolio investment and thus act as the external source of finance to these developing countries as recipients. In addition, it is crucial to note that in order for developing countries to ensure that they benefit from foreign direct investment, they have to develop appropriate policies that can boost the investments (Hess, 2008, p90). In this connection, therefore, foreign direct investment contributes to improvement in policymaking and adoption within the recipient countries. Quality, environmental and social implications Foreign direct investment contributes significant benefits to the social and environments of the recipient countries (Rausch, 2005, p34). Though the general contribution of FDI to developing countries as recipients has positive attributions, there are situations where there are concerns due to the negative attributions. Considering environmental implications, the effects of Direct Foreign Investment depends of the environmental policies of the recipient countries. Multinational industries, which invest from developed countries to the developing countries usually, create concerns to the environment (Hess, 2008, p47). This concerns sectors and industries, which cause substantial negative effects to the environment of the developing countries. For such industries, the recipient countries must adopt adequate and appropriate environmental policies that ensure that negative impacts such as pollution are minimal. However, developing countries, the levels of developments are still not as high as in the industrialised countries. This, therefore, creates a pressure of balance between industrializing and curbing negative environmental effects (kyaw, 2006, p4). However, various studies of most of the recipient countries and the industries indicate that these technological developments also contribute positively to the environments of the recipient countries. Although concerns such as pollution are evident, the advancements in technology have created cleaner environments in cases where more technologies that are modern are used (Zilinske, 2010, p335). On the other hand, cases have also evolved where some of the equipments and machineries deemed suitable for the environment have been taken to the developing countries, and these in the end, results to more environmental degradation. Another aspect within the developing countries that feel the effects of foreign direct investment is in poverty reduction. It is with no doubt that foreign direct investment significantly aids in poverty reduction. There is empirical evidence that, through improvement of social conditions of the recipient countries, foreign direct investment leads to poverty reduction. Presence of industries ensures that there is the creation of job opportunities within the recipient countries (Moran, 2011, p76). The technological advancements that come with foreign direct investment, coupled with significant contributions of educational emphasis and morale developed in these recipient countries result to poverty reduction. Research indicates that the implications on poverty reduction are more evident when foreign direct investment is used as a tool in developing labour-intensive industries. This incorporates the adherence to labour laws. Asymmetry in bargaining power Although the aspect of asymmetry in bargaining power might be viewed as a less significant implication, its effects essential affect the recipient countries. Various researches indicate that governments of developing countries usually encounter problems especially in managing foreign investments to their advantage. This is majorly due to the existence of a large asymmetry in the bargaining power between the host governments and the core countries investors (kyaw, 2006, p4). Developing countries with the urge to achieve industrial developments through foreign direct investments, in some cases reach a dilemma where they fail to put proper strategies or actions effectively to ensure growth. Analysts argue that such governments with high urge to attract foreign direct investments end up introducing tax breaks and subsidies in order to encourage more investments (Rausch, 2005, p89). However, such countries usually suffer from insufficient returns and through government revenues. If this could be done properly then, the additional revenues can be used in other aspects of developments such is in improving education and infrastructure. It is thus evident that Foreign Direct Investment, especially to the developing countries as recipients, contributes highly to the developments of these countries. The implications of foreign direct investment to the recipient countries as shown above have both negative and positive attributes (Moran, 2011, p98). However, as indicated, the positive attributes especially to the economic developments and to the domestic investment are essential to the recipient countries. The negative attributes discussed are only applicable t industries, which to some extent, are easily noticeable. The negative implications of foreign direct investment to these countries only occur when such countries do not have proper mechanisms such as policies to control foreign investments. However, the paper also indicates that developing countries should not be on the rush to foreign direct investments since this can result to low returns. Therefore, proper mechanisms must be present to ensure proper utilization of foreign direct investment. References: Zilinske, Asta, 2010, Negative and Positive Effects of Foreign Direct Investment, Economics And Management, 15, 1, pp. 332-336. ISSN: 1822-6515 Kyaw, Sandy, 2006, Foreign Direct Investment to Developing Countries in the Globalised World, eSocialScience, pdf, pp. 1-20. Available at http://econpapers.repec.org/paper/esswpaper/id_3a758.htm Moran, Theodore, 2011, Foreign Direct Investment and Development, Washington: Peterson Institute. Rausch, Sebastian, 2005, Foreign Direct Investment to Developing Countries: Technological Externalities and Welfare Gains, Munich: GRIN Verlag Hess, Michael, 2008, Doorways to Development: Foreign Direct Investment Policies in Developing Countries, Michigan: ProQuest. Kinda, Tidiane, 2010, Investment Climate and FDI in Developing Countries: Firm-Level Evidence, World Development, 38, 4, pp. 498-513. DOI: 10.1016/j.worlddev.2009.12.001 Read More