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Using examples and case studies, discuss and evaluate the impacts of Foreign
Direct Investment on host country economies.
Abstract
This paper aims to portray the effects of Foreign Direct Investment on host country
economies, as well as the social effects on natives.
Both positive and negative aspects follow a definition of this concept, ending with a
conclusion.
Foreign direct investment is that investment, which is made to serve the business
interests of the investor in a company, which is in a different nation distinct from the
investor's country of origin.
A parent business enterprise and its foreign affiliate are the two sides of the FDI
relationship. Together they comprise an MNC.
Foreign direct investment may be classified as Inward or Outward. FDI which is
inward, is a typical form of what is termed as 'inward investment'. Here, investment of
foreign capital occurs in local resources.
The factors propelling the growth of Inward FDI comprises incentives such as tax
breaks, relaxation of existent regulations, loans on low rates of interest and specific
grants. The idea behind this is that, the long run gains from such a funding far
outweighs the disadvantage of the income loss incurred in the short run. Flow of
Inward FDI may face restrictions from factors like restraint on ownership and
disparity in the performance standard.
The flip side comes in the form of declining market share for the domestic firm and
repatriation of profits made to a foreign country, which if retained within the country
of origin could have led to considerable capital accumulation for the nation.
Multinationals mostly rely on mergers to bring in FDI. Until 1997 mergers and
acquisitions accounted for around 90% of FDI flow to the US economy. FDI flow
through acquisitions does not render any long run advantage to the economy of the
host nation as under Greenfield investments.
The disadvantages of foreign direct investment occur mostly in case of matters related
to operation, distribution of the profits made on the investment and the personnel. One
of the most indirect disadvantages of foreign direct investment is that the
economically backward section of the host country is always inconvenienced when
the stream of foreign direct investment is negatively affected.
The situations in countries like Ireland, Singapore, Chile and China corroborate such
an opinion. It is normally the responsibility of the host country to limit the extent of
impact that may be made by the foreign direct investment. ‘Road maps’ should be
made to make sure that the entities that are making the foreign direct investment in
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their country adhere to the environmental, governance and social regulations that have
been laid down in the country.
The various disadvantages of foreign direct investment are understood where the host
country has some sort of national secret – something that is not meant to be disclosed
to the rest of the world. It has been observed that the defence of a country has faced
risks as a result of the foreign direct investment in the country. This was made quite
apparent when Google was finally allowed to run in China. The host country saw this
as a threat to national security as it was not convinced by the legitimacy of the
information available on the website.
At times it has been observed that certain foreign policies are adopted that are not
appreciated by the workers of the recipient country.
At times it has been observed that the governments of the host country are facing
problems with foreign direct investment. It has less control over the functioning of the
company that is functioning as the wholly owned subsidiary of an overseas company.
In various cases, foreign investors have been accused of exploiting workers in poor
countries and initiating a "race to the bottom" in environmental and labour standards.
The experience comes from countries like Singapore, China, Chile and Ireland which
demonstrate how FDI; with its transfer of technical and organizational innovations
and best practices stimulate rapid growth in incomes for all members of society.
When international flows of capital falter, there is evidence that the poor in
developing countries suffer the most.
In this context World Bank President James D. Wolfensohn predicted that between
20,000 and 40,000 more children may die worldwide and some 10 million more
people may be condemned to live below the poverty line of one dollar a day because
of the global economic aftershocks.
The extent to which foreign investment can help or harm the poor largely depend
upon what governments and firms choose to do. Many multinational companies
voluntarily adopt environmental, social, and governance practices designed precisely
to guard against abuse of the environment and the workforce when they invest in
developing countries.
Foreign direct investment has a major role to play in the economic development of the
host country. Over the years, foreign direct investment has helped the economies of
the host countries to obtain a launching pad from where they can make further
improvements.
This trend has manifested itself in the last twenty years. Any form of foreign direct
investment pumps in a lot of capital knowledge and technological resources into the
economy of a country.
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This helps in taking the particular host economy ahead. The fact that the foreign direct
investors have been able to play an important role vis-à-vis the economic
development of the recipient countries has been due to the fact that these countries
have changed their economic stances and have allowed the foreign direct investors to
come in and improve their economies.
It has been observed that the foreign direct investment has been able to improve the
infrastructural condition of a country. There is ample scope of technological
development of a country as well. The standard of living of the general public of the
host country could be improved as a result of the foreign direct investment made in a
country. The health sector of many a recipient country has been benefited by the
foreign direct investment. Thus it may be said that foreign direct investment plays an
important role in the overall economic and social development of a country.
It has been observed that the private sector companies are not always interested in
undertaking activities that help in improving the infrastructure of the country. This is
because the gains form these infrastructural activities are made only in the long term;
there are no short term benefits as such. This is where the foreign direct investment
can come in handy. It can also assist in helping economically underdeveloped
countries build their own research and development bases that can contribute to the
technological development of the country. This is a very crucial contribution as most
of these countries are not able to perform these functions on their own. These
assistances come in handy, especially in the context of the manufacturing
and services sector of the particular country, that are able to enhance their
productivity and ultimately advance from an economic point of view.
At times foreign direct investment could be provided in form of technology. Else, the
money that comes in a country through the foreign direct investment can be utilized to
buy or import technology from other countries. This is an indirect way in which
foreign direct investment plays an important part in the context of economic
development.
Foreign direct investment can also be helpful in assisting the host countries to set up
mass educational programs that help them to educate the disadvantaged sections of
the society. Such assistance is often provided by the non-governmental organizations
in the form of subsidies.
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possible channels for spillovers of technology between firms. For example, reverse
engineering provides information about the technology used in production. Spillovers
could also occur as a result of a firm hiring an employee from a competing firm that
has knowledge about the technology that is used. The knowledge is embodied in the
employee allowing the hiring firm to use that knowledge.
One of the many areas in which foreign direct investment can benefit a country or any
entity, for that matter, is that of development of infrastructure. It has been observed
over the years, that a lot of countries as well as other recipients of direct investment
from overseas entities have used that money in order to develop the infrastructural
facilities at their disposal.
All the various types of infrastructure that are at the disposal of a country like health
or education, for example, may be benefited by foreign direct investment.
This in turn also plays a very crucial role in the economic development of a country as
this technological advancement assists a country in upgrading its industries and thus
helps them to face the challenges of the contemporary global economy.
Such investment is normally made by the world level organizations in countries that
are economically backward and have no or little medical infrastructure to speak of.
For years, the World Health Organization, as well as the World Bank and the
International Monetary Fund have been providing a number of the economically
backward countries, all over the world and especially in Africa, with money and
medicines in order to eradicate critical diseases or improve the medical infrastructure
in place.
They have also been sponsoring public health awareness programs that make people
aware about critical diseases that need to be eradicated. In India, for example, pulse
polio and HIV prevention measures have been at the center of such activities.
These facilities are used for establishing connections with the remote areas of a
country and for transporting important services to these parts like medicines and aids
at times of floods or other natural disasters. A lot of construction groups are taking
active interest in developing the communicational infrastructure of other countries.
Foreign direct investment is also used for the purpose of educating the unskilled labor
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force that is present in a country. In India during the later stages of 80s and 90s there
was a situation whereby there was a huge labor force but it was mostly unskilled and
was employed in the unorganized sector.
It was possible with the help of the financial assistance from the overseas direct
investors to train these people so that they may be capable of being recruited into the
industry. Foreign direct investment is also useful for executing mass educational
programs that can educate those people who remain out of the bounds of conventional
and institutional education as they are not able to afford it or it may not be available in
their areas.
Conlusion
Fears that production abroad would cause home country exports and employment to
fall have not been confirmed by evidence. Multinational operations have led to a shift
by parent firms in the United States toward more capital- intensive and skill- intensive
domestic production. However, that type of reallocation does not appear to have taken
place in Japan or Sweden. Within host countries, foreign- owned firms almost always
pay higher wages than domestically- owned firms. It is not always the case that they
cause wages in locally- owned firms to rise, but their presence does generally raise
wage levels in host countries. Foreign firms generally have higher productivity than
local firms, but the evidence for spillovers to local firms' productivity is mixed. It
seems to depend on host country policies and environments and on the technological
levels of industries and of host- country firms. The same mixture of impacts applies to
host- country growth in general. The impact of FDI in promoting the growth of host
country exports and linkages to the outside world is clearer. The major role of FDI in
the transformation of host economies from being exporters of raw materials and foods
to being exporters of manufactures, and in some cases relatively high- tech
manufactures, is also evident in some cases. Much of the impact is from the transfer
of knowledge of world markets and of ways of fitting into worldwide production
networks, not visible in standard productivity measurements.
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References
Aitken, B., Harrison, A. and Lipsey, R.E. (1996), Wages and foreign
ownership, a
comparative study of Mexico, Venezuela and the United States,
Journal of
International Economics, 40, 345-371