Arguments for and against Foreign Direct Investment In Developing Countries - Essay Example

? Arguments for and against Foreign Direct Investment (FDI) In Developing Countries Foreign direct investment (FDI) is direct venture into business in a country by a company from another country. This can be either by buying a company in the intended country or by increasing operations of an open business in that country. In actual practice, FDI attraction may be  different in various countries. In this respect, technology, market access, growth, poverty reduction and the FDI outcomes of a country are extremely significant. Other aspects such as damages to the environment, regions and local capabilities are considered to be negative in a countries economy. For the last two decades, increased technological and liberalization advances have resulted into increased growth in the flow of FDI. This means that FDI gained in share of domestic investment and GDP in many countries. It is done for numerous reasons that involve taking advantage of low cost wages or for exceptional investment privileges like rewards to obtain a link that is tariff-free towards the countries markets or the regional market through the use of tax holidays granted to the company. Foreign direct investment is the submissiveness in security investments of various countries such that it comes in the form of securities and other investments being contrast with portfolio investments. The national accounts of a country, that relate to the equation of national income (Y=C+I+G+(X-M)) where I is investment plus foreign investment, The inflow minus outflow that amount to Net inflows of investment, is at least 10% or more of voting stash in an enterprise operating in an economy apart from that of the investor. It is the sum of other long-term capital, short-term capital and owners’ capital as frequently shown in the balance of payment. Transfer of technology & expertise, management involvement and joint venture are means used. The FDI may be both inward and outward, resulting in a net inflow that is positive or negative and "stock of foreign direct investment" that sums up the number for a given period. International factor investment is one example of FDI. Perspective FDI is the form of FDI that arises whenever a company ensures that its country-based income is duplicated using the similar stage chain in the hosting country by use of FDI. Podium FDI, and Vertical FDI that arises whenever a firm shifts upstream through FDI and downstream in various chain value through performing activities that adds value in a vertical fashion stage of a host country. The reduction in the international trade is attributed to the horizontal FDI as the most of them is usually move towards the host country while other two types generally act as a stimulus for it. Foreign direct investor gives out the power of voting of an enterprise within an economy by incorporating a wholly owned subsidiary / company anywhere, acquire shares in an associated enterprise, merger or acquire an unrelated enterprise, or participating in an equity joint venture with another financier or enterprise (Borensztein & De Gregorio, 2008). FDI incentives may take the following forms; Low individual income tax & corporation tax rates, tax holidays, preferential tariffs, which could be, a tax on a countries’ exports or imports inside and outside of a country, or a price schedule for services like as train service, buses route, and electricity usage, special economic zones(It involves a geographical region having economic and different laws that encourage the free-market. Export processing zones, bonded warehouses, “Maquiladoras” which is a Mexican name for manufacturing operations within a free trade zone(FTZ), where firms import material and equipment on a duty & tariff- free assembly basis, and manufacturing processing. After this, the assembled export are manufactured, and processed to give out finished products. In other situations, raw materials are send to the origin country. Investment financial subsidies, soft loan or guarantees, free land or subsidies, relocation & expatriation and infrastructure subsidies; all are used to promote FDI. The neoclassical theorists consider tariffs as distortions to the free market system. They consider that tariffs may benefit government and domestic producers thereby leaving the consumers to suffer while the effects of the tariff welfare on the country that is importing would be negative. This may be of benefit to countries that are referred to as developing countries. Judgment hat are normative come about due to an argument that it could be disadvantageous for a region or country to shield its industry artificially from the markets of the world. Different tariff opposition could be part of the principle of free trade; the WTO aims to minimize tariffs and avoid regional discrimination whenever tariff is applied. The measures that Developing countries need to adopt are that host country attractiveness in the eyes of large foreign direct Institutional investors especially Pension funds and sovereign wealth fund. A study pursued by the council of world permission on this topic suggested that perceived political or legal stability concerning medium and over time economic dynamics growth is made up of two determinants. Different economists now argue out that a significant part of Europe is considered to be behind the emerging Asia’s nations notably because the latter adopted policies more auspicious the investments that are long term. Countries that are successful like Indonesia, Singapore and Korea South still perceive the adjustment mechanisms given to them by the World Bank in the 1990s. In the last ten years whatever these countries achieved has made them to invest massively in infrastructure projects, and this pragmatic approach has proved to be very successful. The main result of FDI on the firms in the developing and developed countries is the increments in the local productivity growth that creates the investment policies that are referred to as development-friendliness. For instance, the Equatorial Guinea is a region with a weak law rule hence affecting the countries’ FDI (Battese and Coelli, 2003). Developing nations should advocate for Donors to obtain penalties if they overload the government recipients with a small amount of aid projects. This is because the recipients having the obligations of hosting and giving out the frequent filing. Those nations with a development that is successful in accordance to the FDI need to upgrade their FDI through motivating the affiliates of multinational towards the establishment of a strategic independence. This can also be done by giving targets to the required FDI. Existence of the WTO rules has limited the domestic policies showing out that the local capabilities development is vital in obtaining its benefits from FDI. The linkages encouragement among suppliers in the local country and multinationals that are foreign could be vital in establishing the local firms. Foreign multinationals are different from local firms as multinationals are required to overcome the high costs of operating in various circumstances, in different countries (Blonigen, 2005). This deviation is referred to as the advantage of ownership as shown in tangible (technology) or intangible (brand names) assets (Battese, 2008). The studies advanced in this field reports that multinationals that are foreign could be extremely productive and may give out high wages than the local firms. The distinctiveness and superiority of multinationals can provide benefits countries that are developing. In this case, FDI possesses many assets including long-term finance, e.g. for the current account new technologies, skills and management and market access. A government would like to maximize the tapping of these assets to the benefit of the indigenous industry. In this respect, the returns are automatic especially in terms of the development of the economy. This is considered to be the role of a policy known as complementary. There are a number problems encountered in finding indicators of FDI conducive to economic development (Billington, 2009). It has often been suggested that the FDI share entering a country or region provides a good measure of successfully attracting FDI, however, FDI flows vary considerably from one year to the next and need to be related to the size of a country (China will undoubtedly receive more FDI flows than Vietnam). Perhaps a better measure is the stock of inward FDI as a per cent of GDP. The investment component is built on a checklist of several questions. The level of productivity of the investor is also a factor while everything else equal; the higher level of productivity and wages of the foreign investor, the higher the average level of wages in the economy, and the higher level of justifiable subsidies. Hanson also finds these pre-conditions are unlikely to be, and hence incentives seem unjustified in many instances (Bengoa and Sanchez-Robles, 2003). When measured closely at how FDI could link into a country’s development strategy. Once a government’s progress strategy and objectives are defined it can decide whether FDI is a proficient way. FDI policies can be part of a wider development strategy. Targeting FDI is not a strategy in itself, nor is the maximization of benefits of FDI as such. A country has to ensure that using FDI is more efficient than taking part in a strategy that is different without utility of FDI. Once you decide to allow FDI and target FDI, there is a host of policies by which you can maximize benefits and minimize costs. There are a variety of FDI strategies implying different degrees of interfering policies (Balasubramanyam, 2006). Conclusively, there is no single best-practice FDI policy or strategy. There is no unique execution of all the possible policies. The FDI strategy, within which FDI policies are framed, depends partly on pre-conditions. For instance, a large country with few local capabilities and weak trading road and rail network is unlikely to benefit significantly from attracting high-tech FDI. Countries with adequate government wealth and capabilities could use FDI more advantageously and bear the danger of e.g. developing key sectors, spending on FDI promotion and preparing industrial estates while those without may want to develop local capabilities first. The magnitude of certain policies may also vary with the type of FDI (Alfaro, 2003). Hence, there is a different effect on competition and the formulation and effective achievement of a competition policy deserves priority. Once the country has embarked upon a enlargement strategy that uses FDI it is also important to think about all policy options that are open, and maybe follow with action (Battese, 2005). For instance, if a country decides it needs FDI in the electronics sector, it may not be enough to open to FDI as such, or to promote the reflection of the country with investors in general, but perhaps it should target electronics firms abroad. Perhaps it should also link foreign electronic multinationals with local suppliers, and give confidence the upgrading of existing FDI or the targeting of new, higher value added electronic firms, once wages have risen. The message here is simple. FDI policies should be part of expansion strategy to achieve pre-defined objectives. Using FDI in this strategy in the first place should be based on the decision whether FDI is an efficient way to achieve the targets. The approach can be not to allow FDI, but also to allow FDI, or to actively promote FDI. Depending on the strategy, the government should think of a number of policies that can be used in their local countries (Aigner, 2007). References Aigner, D., 2007. Formulation and Estimation of Stochastic Frontier Production Function Models, Journal of Econometrics (6), pp. 21–37. Alfaro, L., 2003. Foreign Direct Investment and Growth: Does the Sector Matter. London: Harvard Business School. Balasubramanyam, V., 2006. Foreign direct investment and growth in EP and IS countries, The Economic Journal, 106, 92–105. Battese, E., 2008. Prediction of Firm-Level Technical Efficiencies with a Generalised Frontier Production Function and Panel Data, Journal of Econometrics (38), pp. 387–399. Battese, E., and Coelli, J., 2003. A Stochastic Frontier Production Function Incorporating a Model for Technical Inefficiency Effects. Armidale: University of New England. Battese, E., 2005. A Model for Technical Inefficiency Effects in a Stochastic Frontier Production Function for Panel Data’, Empirical Economics (20), pp. 325–332. Billington, N., 2009. The location of foreign direct investment: an empirical analysis, Applied Economics, 31(1), pp.65–76. Blonigen, B., 2005. Review of the Empirical Literature of FDI Determinants. New York: Oxford Publishers. Bengoa, M., and Sanchez-Robles, B., 2003. Foreign direct investment, economic freedom and growth: new evidence from Latin America, European Journal of Political Economy, 19, 529–545. Borensztein, E., & De Gregorio, J., 2008. How does foreign direct investment affect economic growth?, Journal of International Economics, 45, 115–135. Read More