United States dominated the foreign direct investment (FDI) after the World War II before FDI becoming a global phenomenon. FDI has grown with the cues of globalization and now it constitutes around 28 percentage of the world’s GDP. Foreign direct investment is generally defined as a company or a group of people making investment in building infrastructure or investing in a company with the motive of long term investment in another country. FDI has plays the major role in economic development of the host nation. Over the years FDI has helped the economies were they make investment to obtain a great launching pad from where further improvements could be looked upon.
“Foreign direct investment is an investment of assets done by foreign origin company into the domestic equipments, organization, and company”.
This investment does not include the investment in the stock market of a nation were equity investment is done with the capital appreciation which generally leads in to the situation of ‘Hot Money”. FDI in any form as an investment pumps a lot of capital knowledge and technological advancement to the economy of a country. The latest World Investment Prospects Survey aims at estimating foreign direct investment in the coming years which was based on the responses taken on a sample of company executives of the largest transitional corporations. In order to lure FDI the developed and developing nations of the world putting there promotional efforts, it has also been maintained at the level were countries are integrating to each other.
Many countries have lowered there standards in order to attract FDI were as on the other hand some has raised standard and welfare to attract FDI. Expansion of information and technologies, leads to improvement in the logistics and lead to allow production into more discrete phases across national barriers.
Source: International Monetary Fund.
[Data determining growth of foreign direct investment in 2000:
FDI Outflow: $35 billion in ‘75 to $1.3 trillion in ‘00 to $653 billion in ‘03
FDI Flow (from all countries): from ‘92 to ‘02 up 292%, compared to trade up 69% and world output up 28%.
FDI Stock: $3.5 trillion by ‘97 to > $7 trillion in ‘02
– 64,000 Multinational Enterprises had:
l 850,000 foreign affiliates
l 53 million employees
l $17.7 trillion in sales
– $8 trillions global exports ]
From the data it could easily be drawn that FDI flow growing faster than world trade and world output. Here are the few reasons why FDI are prefered over the exporting becoause in case of exporting a lot of high transportaion cost is involved and there are lot of barriers. In the same way FDI has been prefered over licensing and Franchising is that in case of licensing there need to reatin strategic control, need to protect technological know how and the capabilities of most of the firms are not suitable for licensing/franchising. They follow immediate strategic responses with following few competitors.
The Literature Search
An important reason for obtaining a better understanding of the consequences which directly or indirectly impact foreign direct investment is to explicate efficient policies that will assist the development process. That’s why there need to be connection between theories, policy making and evidence. In order to build the infrastructure the quality of research done on FDI are getting stronger and stronger and stronger, but still some grey areas need to be touched upon. The most appropriate way to be used for the purpose of exploring about the FDI (Foreign Direct Investment) is through internet using online library Proquest. Since the online library could also be access from the home this allowed flexibility in exploring about the subject. In the project key words used ‘Investment’, ‘Foreign direct Investment’ and ‘Globalization’. Few of the literature reviews have chosen for the purpose of the focusing on the FDI.
The studies done by Haddad and Harrison (1993) on Morocco, Aitken and Harrison (1999) on Venezuela and Djankov and Hoekman (2000) on the Chez All were casted doubts on the existence of the spillovers from FDI in the developing countries, Either they failed to find the significant effort or produce the evidence of spillovers on the horizontal side the effect of the multinational corporations on domestic firms in the same sector. And the pictures was cleared in the paper of Haskell that it’s more positive in case of industrialized countries. Pereira and Slaughter (2002) gave there convincing evidence of the positives spillovers taking place in case of FDI in UK.
Some of the macro facts in the foreign direct investment which are brought into notice by the James R Markusen are which provides FDI as an edge over the other options like exporting, licensing or franchising. The FDI has grown rapidly in the whole world more so particular in the period of 1980’s. Developed countries accounted for the outward FDI and vice- versa, as they are too the major recipient of the FDI. In a paper by Hummels and Stern (1994) reported that developed nations were the source of around 97% of direct FDI flown and the in response received 75%. There was a huge amount of foreign investment flow between two developed nations. Most of the FDI went towards production facilities and most of the output of foreign producer was sold in foreign country. It can be said that the FDI has been growing on a rapid pace and most of it in terms of horizontal investment among countries with similar per-capita incomes and similar economy. The first factor is the rate of technical progress: since the increase in technical progress through the new technology may increase the dispersion between the best-practice firm and the industry average. The other factors are competitive pressure, market growth, and ownership structure.
Some of the micro factors were also reveled in the paper it has been noticed that there is a large difference between industries in consultation with the production done by multinational companies. The companies which are bigger in size were the market value of tangible assets such as plant and machinery considered to be huge.
Comparison of Articles
While analyzing the different papers most of them are in favour of foreign direct investment and they see it as an opportunity for the FDI receiving country to grow economically on the base from of infrastructure and on the other aspects economy as a whole. The phenomenon of FDI has created a healthy competition between many countries which includes developing countries too to attract foreign investors and which justifies their actions with the productive gains which are expected to accrue to the domestic producers in the form of knowledge and advancement in technology which the FDI brought by the foreign countries.
There is evidence founded by Beata K. Smarzynska in his paper which is important for the choices of public policy. The studies reflected correlation between the production done by the domestic firm and with the presence of the foreign firms as FDI investment. The studies also revels various economic problems which were biased and were against the FDI.
The definition provided by the researchers for the industries is broad and they segregate the producer of product which was totally different. The FDI has outrageously favored over traditional way of raising funds through exporting, licensing or franchising. Some of the data from Economy watch the total amount of FDI which was made in UK has been growing over the years. The EU received 45% of the total FDI made in the year 2006. While the FDI made in the organization of economic co-operation and development were not so impressive. It has been on the down side from 2003 for these nations.
There are few disadvantages of FDI which occurs mostly in case of matters related to operation distribution, profits which are been made on the investment and the personnel. One of the major disadvantages of the FDI is that the host nation is always in convinced when the stream if FDI affects negatively. Some of the cases are Ireland, Singapore, Chile and China. It’s up to the host country to limit the impact of the FDI if it gets into the doll drum of the domestic economy. They must focus on the environmental, governance and social regulations which had been laid down by the country. Other disadvantages are when some of the secrets of a nation are revels to the world which the nation dosen’t wants to disclose.
Before concluding the remarks it has been that there have been serious repercussions as the investors who invest in the domestic country are not truly loyal and obedient in conclusive remarks to the economic policies of the country. And there have been cases where FDI has negative effects on the balance of payment of the country. Generally this has led to manipulation of the economic policies and investors tried to take advantages of the loop holes. But even after these adverse scenarios foreign direct investment has proved to be a major development mechanism in the countries. It has lead to economic changes and the speed of developing the world has been accelerated by these FDIs.
The frame work presented in the paper might look hazy .Although it has been captured at macro and micro level , In the micro level the FDI firms offers both ownership and internalization advantages. In fact much can be explored because there are lost of gray areas which could be touched upon. Case studies focusing on FDI pertaining to one company or a sample could be helping to understand exactly what services were being offered by the company which is making direct investment in to the domestic market of the domestic company. More works could be done on the side of vertical investment were production process is been divided into phases. This type of direct investment has been growing in many developing economies liberalizing there trade and investment laws. An attention could be paid on the Joint Ventures.
- Aitken, Brian J. and Ann E. Harrison 1999 “Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela, “American Economic Review”. 89(3): 605-618
- Haddad, Mona and Ann Harrison 1993 “Are there positive spillovers from direct foreign investment? Evidence from panel data for Morocco,“Journal of Development Economics”, 42: 51-74.
- Haskel, Jonathan E., Sonia C. Pereira and Matthew J. Slaughter. 2002. “Does Inward ForeignDirect Investment Boost the Productivity of Domestic Firms?” NBER Working Paper 8724
- James R. MArkusen , 1995“The boundries of Mulinational Enterprises and theory of International trade” Journal of Economic Perspectives Vol 9
- Beata K. Smarzynska, “Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers through Backward Linkages”
- Djankov, Simeon and Bernard Hoekman. 2000. “Foreign Investment and Productivity Growth in Czech Enterprises,” World Bank Economic Review, 14(1): 49-64.