Impact of Foreign Direct Investment
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Impact of Foreign Direct Investment
Organisation for Economic Co-operation and Development (OECD) (1996) defined foreign direct investment (FDI) as the concept of one firm in a specific country, which has a degree of control over another firm in a different country. Therefore, it is the “investments which adds to, deducts from or acquires a lasting interest in an enterprise which is operating in an economy, rising from outside the country to have an efficient and effective voice in the management of enterprise” (cited in Jones and Wren, 2006). Currently, OECD (2008) defined FDI as the type of investment done in order to create a long-term interest by direct investors or direct enterprise based in one economy towards a direct investment enterprises located in another economy. The long-term interest focuses on vital control, but does not mean controlling interests, obtained by direct investors or direct enterprises.
Implications of FDI in Global Economy
The improvement of role of FDI in the global economy was due to globalization and regionalization. Globalization had helped in order to lower the barriers of entering different economies, which had helped in order to enable free flow of investments across the markets. Because of the involvement of business in other economies, the flow of capital from one to another economy had intensified. Furthermore, access to raw materials and other important resources, together with cost savings because of low labor, thus expanding to another market will help and is considered as advantageous in the process of doing FDI (Dunning, 1993). In addition, regionalization via membership in different trade organizations, together with the market integration had helped to make FDI very appealing and advantageous – because it had helped in order to create and build long-term interests with the expectations of high returns on investment (ROI) (Brewer and Young, 1997). Aside from that, local governments to implement looser trade barriers and rate policies, together with the promotion of different laws and regulations which enable competitiveness in the market. This is particularly because of the fact that FDI can help in order to improve the individual economy of each country (Barros and Cabral, 2000).
Impact of FDI to Developing Countries
FDI is very helpful in improving the welfare of the developing nations. First, it can help to boost output and income of the host economy. This is because the investment of capital to different sectors, which help to increase the level of production, which consequently result to growth and expansion of businesses. This in return will help to increase the level of employment and improve the income for households. Consequently it will affect the spending, which will support and maintain businesses thus the cycle will continue.
FDI can also help in the process of transferring technology. The investors which focus on improving their productivity, which will be helpful in their investment, therefore, they will mainly focus on introducing advanced technologies and high-end equipments and systems in the local business, which will help to boost performance.
FDI will also be helpful in enhancing the competition in the receiving economy. Therefore, it can help in order to lower the price of products and services in that economy. Furthermore, it can also help in order to improve and increase the investment in the domestic business environment because the growth of the business sector will help to attract the local investors.
FDI can also help in order to encourage investments in the export markets, because it will mainly affect the manufacturing activities which will mainly focus on the consumption and export, thus the increase of foreign exchange gap will be advantageous. The limited savings and limited foreign exchange will stabilize the foreign exchange with the influence of FDI (Markusen and Venables, 1999).
Dunning, J. (1993) - Multinational enterprises and the global economy. Reading, MA: Addison-Wesley Publication Company.
Brewer, T. L., & Young, S. (1997) - Investment incentives and the international agenda. World Economy, 20, 175-198.
Barros. P. P., & Cabral, L. (2000) - Competing for Foreign direct investment Review of International Economics, 8, 360-371.
Markusen, J. R., & Venables, A. J. (1999) - Foreign direct investment as a catalyst for industrial development. European Economic Review, 43, 335-356.