Benefits of Foreign Direct Investment - Research Proposal Example

Benefits of Foreign Direct Investment Introduction Foreign Direct Investment or FDI has rapidly increased during the last few decades as the overall network of countries and institutions favoring the FDI have expanded at great pace. (Mody & Ashoka, 2007). Foreign Direct Investment plays a critical role in the development of any country because of its potential impact on economic growth. The growth experienced by many countries in Asia Pacific region provide an ample empirical evidence as to the effectiveness and impact of foreign direct investment on economic growth. Foreign Direct Investment provide many benefits such as transfer of capital and technology to the country where the intended investment is made besides stimulating domestic growth as well as providing an opportunity for implementing best practices. However, despite its economic significance, on political grounds, FDI is a very controversial term as it is marred by controversies and political victimization especially in developing countries. Iran is one such case where FDI has mostly remained a political issue despite the fact that Iran held one of the largest oil reserves in the world. Over the period of time, due to international sanctions, the process of Foreign Direct Investment has remained stagnant due to political hostility towards Iran. However, despite such situation, due to Iran’s strategic oil & gas reserves, many countries such as China, Pakistan, India as well as other European countries made foreign direct investment into the country. This research study shall undertake to study the nature of foreign direct investment into developing countries with special emphasis on Iran. Research Question Jensen (2004) is of the view that institutional lending by supernatural institutions such as IMF has very complex and perplexing impacts on the economic performance of the countries due to institutional interference and policy dictations made by such institutions lower the flow of foreign direct investments into the developing countries. Foreign Direct Investment has multiple consequences for the countries as it not only create an impact on the economic situation of the country but also have consequences on the political as well as social environment of the country.(Kudrle & Bobrow, 1982). The question of foreign direct investment is therefore largely viewed within the perspective of the presence of foreign influence in the country as non-domestic entities tend to control some of the strategic assets of the country. The nature of foreign direct investment into developing countries is therefore largely considered more as a political action rather than an economic impact. This research study therefore will consider following research question “The nature of foreign direct investment key determinants in Iran “ The above research question has been selected keeping in view the diverse impacts of foreign direct investment on the overall economy of the country especially in presence of different institutional arrangements such as economic sanctions, IMF/World Bank lead lending as well as openness to the free market policies adopted by the receiver countries. Aims of the Research Considering the research question, the major aim of this research study would be to analyze the nature of foreign direct investment into Iran and what are the key determinants which determine the level of FDI into the country? Foreign direct investment in Iran has reached more than $7 billion in year 2006(Iranmania.com,2006) suggesting that despite enormous potential country still lags behind the level of foreign direct investment it could have achieved due to lack of institutional infrastructure in the country.(Sarfraz, 2004). This research studies therefore will attempt to achieve following aims: 1. Study and analyze the nature of foreign direct investment into developing countries. 2. Whether the FDI will result into economic growth for Iran? 3. What are the key determinants of FDI in Iran? The context and scope of Research Foreign direct investment allows transnational as well as multinational organizations to make investments into the countries and technically control the assets of the country. However, due to their technological superiority as well as implication of best practices, receiver countries often experience economic growth as a result. Developing countries are considered as an ideal ground for making FDI more favorable because on one hand they are not only net suppliers of the essential commodities however they also provide cheap labor to gain cost advantage over others. It is because of this reason that the share of foreign direct investment, over the period of time has greatly increased in developing countries. However, from the perspective of a developing country, foreign direct investment is attractive because it demonstrates the long term commitment of the foreign entities to serve as the major source of private investment funds into the country. Despite such promise, the impacts of foreign direct investment on the economy of the country are supported by “fragmented evidence” (Chandra, 1999) and such as there different determinants which define the nature and level of foreign direct investment into the country. In order to understand the nature of FDI in Iran, three eras can be categorically outlined to analyze the FDI in country. The first era belongs to Shah of Iran which received favorable node from the Western countries and substantial FDI were made into the country. However, with the revolution, the same quantum drastically declined due to political hostility of Western governments towards Iran. Total FDI during 1994 were only $2 million dollars however, post revolution era saw an unprecedented increase in the quantum of foreign direct investment into the country. Last 16 years i.e. from 1993 to 2007 attracted more than $24 billion of foreign direct investment for Iran mainly due to the post-Khomeini relaxation into different laws such as Attraction and Protection of Foreign Investment. (Mehr, 2007). Further, Iran has created “four free zones and 23 special economic zones” in order to facilitate foreign entities to work on profitable basis with little administrative and bureaucratic hurdles.(Iran News, 2002). However, despite such impressive track record, Iran is still marred by controversies and history of political sanctions from US which resultantly influenced the flow of FDI to the country. It is because of this reason that countries like China, India and some EU countries invested heavily into Iran’s oil and gas sector. (Leng, 2006). This fact suggests that the foreign direct investment into the country is not pre-dominantly driven by US led organizations rather it came from countries that are considered as political rivals of US. This research study shall therefore undertake to study the unique nature of FDI into Iran and what are some of its key determinants which basically contribute towards the quantum of FDI flow into the country. Methodology The methodology involved in this research study would include both quantitative as well as qualitative research approaches. Based on the intended objectives of the research study, following research hypothesis will be tested: Hypothesis 1. H0: The nature of FDI in Iran is driven largely by the political sentiments for and against the country? H1: The nature of FDI in Iran is not driven largely by the political sentiments for and against the country? 2. H0: Natural Resources of the country i.e. Oil and Gas are the main attraction for making FDI into the country? H1: Natural Resources of the country i.e. Oil and Gas are not the main attraction for making FDI into the country? 3. H0: Physical infrastructure in the country is suitable for attracting FDI into country? H1: Physical infrastructure in the country is not suitable for attracting FDI into Iran? 4. H0: Legal and political environment is conducive to foreign entities to make investment into the country? H1: Legal and political environment is not conducive to foreign entities to make investment into the country? 5. H0: Economic environment is supportive of FDI into Iran? H1; Economic Environment is not supportive of FDI into Iran? Research Design Based on the above hypothesis, a qualitative review of the available literature as well as quantitative data collection will be performed. The major focus will therefore be on extracting the theoretical evidence from the plethora of data to present a logical structuring of the evidence to prove the hypothesis. Sampling This research study will pre-dominantly analyze three distinct eras in the history of government therefore there will be qualitative as well as quantitative sampling. Qualitative sampling shall undertake to select the three different political eras in the country i.e. Pre-Revolution, Revolution and Post Revolution era in order to study the historical nature of FDI in the country. In order to prove the 5th Hypothesis specifically, this research study will make selective selection of following economic variables: 1. Interest Rates 2. Foreign Exchange Rates. 3. Foreign Exchange Reserves. 4. Supply of oil & gas Data Collection Data collection will be done in both qualitative as well as quantitative manner. For our sampling purposes, this researcher will collect a data of over 25 years. Data Analysis Data Analysis will be done in two parts. The quantitative assessment of data will be done through Chi Square testing as well as performing regression analysis of key economic variables with the FDI in the country. Whereas the qualitative data analysis will be performed through observation of historical records in order to theoretical assess and validate some of the hypothesis. Limitations Due to the multi-disciplinary nature of the subject, researcher anticipates that there will be natural limitations in accurately designing the research study whereas there may also be errors in accurately interpreting various historical data and records. References 1. Mody& Ashoka (2007). Foreign Direct Investment and the World Economy. London: Taylor & Francis Routledge. 1. 2. Robert T. Kudrle and Davis B. Bobrow. (1982). U.S. Policy Toward Foreign Direct Investment. World Politics. 34 (3), 353-379 3. Nathan M. Jensen. (2004). Crisis, Conditions, and Capital: The Effect of International Monetary Fund Agreements on Foreign Direct Investment Inflows. The Journal of Conflict Resolution. 48 (4), 194-210. 4. Iranmania.com. (2006). The Foreign Direct Investment hits $7b in Iran . Available: http://www.iranmania.com/News/ArticleView/Default.asp?NewsCode=46504&NewsKind=Current%20Affairs. Last accessed 09 January 2009. 5. Sarfaraz, Leyla. (2005). Economic reforms and foreign direct investment in Iran. Discourse. 2 (3), 61-76. 6. Nirmal Kumar Chandra. (1999). FDI and Domestic Economy: Neoliberalism in Chin. Economic and Political Weekly. 34 (45), 3195-3212. 7. Mehr News. (2007). Iran attracted $24.3b foreign capital in 16 years . Available: http://www.payvand.com/news/07/may/1313.html. Last accessed 08 January 2009. 8. Leng, Sunita Sue. (2006). Iran is Open for Business. Available: http://www.atiehbahar.com/InTheNews/Iranisopenforbusiness.pdf. Last accessed 08 January 2009 9. Iran News. (2002). ran willing to attract foreign direct investment: expert . Available: http://www.payvand.com/news/02/oct/1004.html. Last accessed 09 January 2009. Read More