The Zambian Economy's Benefits from Foreign Direct Investment

Topics: Macroeconomics, Economy, Investment Pages: 7 (2521 words) Published: February 15, 2013
Discuss the extent to which the Zambian economy has benefited from using FDI, cite examples Development process must encompass improvements in production of goods and services which essentially aim at raising the standards of living of society’s social, economical, political, environmental and administrative structures (Gabas, 1993), with development comes improved education, health, social and economic benefits of the citizenry. However, for development of the country to take a predictable route, the economic activity must show increase over time. Economic indicators such as Gross Domestic Product (GDP), National Income, Inflation, export balance of trade, balance of payments, budget deficits and employment opportunities all demonstrate economic vibrancy and viability of a nation. These depend on supply and demand of goods and services in the nation’s major economic sectors such as mining, service, agriculture, tourism and manufacturing industries. Therefore, development can be described as a general process of capital accumulation through investment and reinvestment which ultimately translates into improved economic indicators and improvement in quality of human life. Foreign direct investment, in its classic definition, is investment by a company in production located in another country either by buying a company in the country or by expanding operations of an existing business in the country (Todaro 2006). Foreign direct investment is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as lax exemptions offered by the country as an incentive for Investment or to gain tariff free access to the markets of the country or the region. Foreign direct Investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. According to the Longman Dictionary of contemporary English, investment is defined as the use of money to get a profit or to make a business activity successful or something that you buy or do because it will be useful later. Foreign investment is use of money from another country or multinational corporations to increase capacity for local company (Longman Dictionary of contemporary English). In the Wikipedia the free encyclopedia, FDI is defined as “Investment made to acquire lasting interest in enterprises operating outside of the economy of the Investor.” FDI or direct Investment abroad relationship consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). United Nations defines control as owing 10% or more of ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm ( direct Investment). It is very clear from the onset and based on the definitions that when one refers to foreign direct Investment, in essence it means investment of multinational or transnational companies into the economy of third world countries. Developing countries have strongly been recommended by International organizations and other external advisors to rely primarily on foreign direct investment (FDI) as a source of external finance. It is argued that FDI is superior to other types of capital inflows in stimulating economic growth (Nunnen Kamp, 2003). It is argued that foreign investment brings with it technical expertise and access to foreign markets, creating new employment possibilities. Foreign companies also have access to sources of finance, especially important in those developing countries where local financial institutions are weak (Sliglitz, 2002). Although foreign companies have access to international finances, this does not trickle down to local entrepreneurs so that their potential could be expanded and begin to compliment the various economic efforts. In effect what it then means is that third world countries like Zambia ought to develop sound...

References: 1. Foreign Direct Investment: What difference for Zambia? Jesuit Centre for Theological Reflection Bulletin No.50 15th September 2007
2. Gabas, J.J. (1993, January-February). Dossier: Aid and development - where the twain shall meet. The Courier. 137, 100.
3. Investment Act No. 39 of 1993.
4. Lipalile, M. (2006). Foundation of Development Studies, 2nd edition: Zambian Open University.
5. Longman Dictionary of Contemporary English (2006). Edinburgh: Pearson Education.
6. Nunnenkamp, P., and Spatz J. (July, 2003). Foreign Direct Investment and Economic growth in developing countries: How relevant are host-country and industry characteristics? Kiel Institute for World Economics Duesternbrooker Weg 120 24105 Kiel (Germany). Kiel Working Paper No. 1176.
7. Todaro, M.P., and Smith, S. C. (2006). Economic Development, 8th edition. New Delhi, India: Pearson Education.
8. Stiglitz, J. (2002). Globalisation and its discontents. London, England: Penguin Press.
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