Describe The Role Of Foreign Direct Inv

Topics: Macroeconomics, Economics, Economy Pages: 9 (2943 words) Published: December 12, 2014


Describe the role of foreign direct investment in the economic development of host countries

Foreign Direct Investment (FDI) is seen as the fundamental part for an open and successful international economic system and a major mechanism for development. In this circumstance, we will examine the benefits of FDI as a key component for successful and sustainable economic growth and also as a part of a method to social improvement. The aim is to highlight the most important channels through which FDI makes a significant and exceptional impact on the economic development of the host countries. Nevertheless, at the same instance, it is important to recognize that, like all things, FDI is not all good no bad. The Benefits of FDI for Host Country’s Economy

Developing counties, emerging economies and countries in transition, due to advantages related to FDI have liberalized their FDI regime and followed best policies to attract investment. It has been recognized that the maximizing benefits of FDI for the host country can be significant, including technology spillovers, human capital formation support, enhancement of competitive business environment, contribution to international trade integration and improvement of enterprise development. Moreover, further than economic benefits, FDI can help the improvement of environment and social condition in the host country by relocating ‘cleaner’ technology and guiding to more socially responsible corporate policies. All of these benefits contribute to higher economic growth, which is the main instrument for alleviating poverty in those economies. However, the economic impact of FDI is difficult to measure with accuracy. Benefits of FDI do not increase automatically and equally across counties, sectors and local communities. These benefits vary from one country to another and are difficult to be separated and measured. Foreign direct investment can make a positive contribution to a host economy by supplying capital, technology and management resources that would otherwise not be available. Such resource transfer can stimulate the economic growth of the host economy (Hill, 2000). Capital

As far as capital is concern, multinational enterprises (MNEs) invest in long-term projects, taking risks and repatriating profits only when the projects yield returns. The free flow of capital across nations is likely to be favored by many economists since it allows capital to seek out the highest rate of return. Many MNEs, by virtue of their large size and financial strength, have access to financial resources not available to host – country firms. These funds may be available from internal company sources, or, because of their reputation, large MNEs may find it easier to borrow money from capital markets than host – county firms would (Hill, 2000). Technology

The crucial role played by the technological progress in the economic growth is now widely accepted (Romer, 1994). Technology can stimulate economic development and industrialization. It can take two forms, both of which are valuable. Technology can be incorporated in a production process (e.g., the technology for discovering, extracting and refining oil) or it can be incorporated in a product (e.g., personal computers) (Hill, 2000). However, many countries lack the research and development resources and skills required to develop their own native product and process technology. This is particularly true of the world’s less developed nations. Evidence provides that the vast majority of economic studies dealing with the relationship between FDI on the one hand and productivity and/or economic growth on the other hand, have found that technology transfer via FDI has contributed positively to productivity and economic growth in host countries (OECD, 1991). Technologies that are transferred to developing countries in connection with foreign direct investment tend to be more modern, and...

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Graham, E.M., Krugman, P.R. (1995): Foreign Direct Investment in the United States. Washington: Institute for International Economics.
Hill, C. (2000): International Business - Competing in the Global Marketplace. University of Washington: Irwin McGraw-Hill.
Lall, S., Streeten, P. (1977): Foreign Investment, Transnationals and Developing Countries. London: Macmillan.
OECD (1998): Open Markets Matter: The benefits of Trade and Investment Liberalization. Paris: OECD.
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Romer, P. (1994): The Origins of Endogenous Growth. Journal of Economic Perspectives, 8(1), 3-22.
UNCTAD (1999): World Investment Report. Geneva: United Nations.
UNCTAD (2006): World Investment Report 2006: FDI from Developing and Transition
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