The Impact Of Foreign Direct Investments
The impact of Foreign Direct Investmens on the developing process of an economy has been an important topic of discussion in many countries all over the world. In the world economy, FDI has become a crucial factor, that accelerates globalization. The substantial rise of international output is determined by economic and technological forces. Also, it is determined by the progressive liberalization of Foreign Direct Investment and the change in coutries' legislations. A distinguishing characteristic of the modern world has been the circulation of private capital flow as a foreign direct investment in developing countries, especially since 1990s. Since the 1980s, multinational corporations (MNCs) have come out as main players in the globalization process.
It has been a huge tendency, that governments all over the world try to attract multinational corporations (MNCs) in order to come to respective countries and invest. This has been a strategy for both: progressive and developing states.
This experience may be related to the broader context of liberalization in which most developing and transition countries have moved to market-oriented strategies. In this context, globalization offers an unparalleled opportunity for developing countries to attain quicker economic growth through trade and investment. In the period 1970s, international trade grew more rapidly than FDI, and thus international trade was by far than most other important international economic activities. This situation changed radically in the middle of the 1980s, when world FDI started to increase sharply. In this period, the world FDI has increased its importance by transferring technologies and establishing marketing and procuring networks for efficient production and sales internationally (Shujiro Urata, 1998).
FDI flows comprise capital provided by foreign investors, directly or indirectly to enterprises in another economy with an expectation of obtaining profits derived from the capital participation in the management of the enterprise in which they invest. The foreign investors acquire ownership of assets in the host country firms in proportion to their equity holdings. This is the empirical definition of FDI adopted by many countries to distinguish it from portfolio flows. According to International Monetary Fund (IMF), FDI is defined as " an investment that is made to acquire a lasting interest in an enterprise operating in a economy other than that of the investor" The investor's purpose is to have an effective voice in the management of the enterprise (IMF,1977).FDI is the process by which the residents of one country (the source country) acquire the ownership of assets for the purpose of controlling the production, distribution and other productive activities of a firm in another country (the host country).#p#分页标题#e#
The concept of 'Investment led Economic Development' has promoted the idea that the outward and inward FDI position of a country is linked to its economic development relative to the rest of the world. It recommends that the countries changes through five different stages of development.
These stages are being classified according to the propensity of the countries to the outward and/or inward investors (Dunning and Narula, 1999). This propensity, in turn, depends on the extent and pattern of the ownership specific advantages of domestic firms, its location advantages and the degree of utilization in the internationalization of markets.
Foreign Direct Investment (FDI) has appeared as the most significant source of external resource flows to developing countries over the years and has become a significant part of capital formation in these countries, despite their share in global distribution of FDI continuing to remain small or even declining. The effects of FDI in the host economy are usually believed to be increase in the employment, augment in the productivity, boost in exports and amplified pace of transfer of technology. It facilitates the utilization and exploitation of local raw materials, introduces modern techniques of management and marketing, eases the access to new technologies, foreign inflows can be used for financing current account deficits, finance flows in form of FDI do not generate repayment of principal and interests (as opposed to external debt) and increases the stock of human capital via on the job training.
The effect of FDI on growth rate of output was constrained by the existence of diminishing returns of physical capital. Consequently, FDI could only put forth an effect on the level of output per capita, but not on the growth rate. In other words, it was unable to modify the growth of output in the long run. In the context of the new theory of Economic Growth, FDI is considered as an engine of growth of mainstream economies. As noted by the World Bank (2002), several recent studies concluded that FDI can promote the economic development of the host Country by promoting productivity growth and export. However, the exact relationship between foreign multinational corporations and their host countries varies considerably between countries and among industries. The characteristics of the host country and the policy environment are important determinants of net benefit of FDI.
In view of the above discussion, this discussion provides rich insight into the relationship between FDI and Growth.
Implications of FDI for poverty alleviation: review of the literature
It is widely believed that, given the appropriate host-country policies and a basic level of development, benefits that might accrue from FDI include employment creation, the acquisition of new technology and knowledge, human capital development through employee training in new business ventures (for example multinational relocating), contribution to international trade integration, creation of a more competitive business environment and enhanced local/domestic enterprise development, flows of ideas and global best practice standards aiding international competitiveness and increased tax revenues from corporate profits generated by FDI. All of these forms of benefits are expected thus to contribute to higher economic and employment growth, which is the most important/effective tool for achieving improvements in human well being or alleviating poverty in developing countries.#p#分页标题#e#
Unfortunately, empirical evidence regarding what impact FDI has had on poverty reduction in developing countries is limited, including in where so far there is only a few studies tried to analyze empirically this relationship. However, there is general consensus that FDI is no panacea, but, it can have a positive impact on poverty reduction in developing countries (through a variety of ways as mentioned above), provided that mechanisms are in place in the host country to have these positive effects. In other words, the impacts of FDI on poverty and other social goals of development depend principally on many factors, such as host country policies and institutions, the quality of investment, the nature of the regulatory framework, the flexibility of the labor market, and many others (Mayne, 1997).
Among these various forms of FDI contributions, it is widely believed that the most important one for reducing poverty is widening access to employment, especially productive employment. Experiences in many developing countries shows that insufficient job opportunities are the result of inadequate levels of investment, both domestic and foreign. Low investment also makes other forms of poverty alleviation more difficult, because lower rates of economic growth than the rate of population growth means that each year more people are added to the ranks of the poor. Domestic and foreign investors are potential sources for capital formation (Saravanamuttoo, 1999).
It should be emphasized that many FDI impacts are inherently difficult to measure. The academic literature typically approaches the issue in one of three ways. The first is in the context of the determinants of economic growth. In international comparisons of economic growth, FDI is introduced as an explanatory variable, together with a range of interactive or conditional variables (e.g., trade orientation, human capital, institutional quality). The hypothesis is that, other things being equal, a larger presence of FDI is associated with a faster economic growth, and the latter is associated with a faster growth of employment, and a rapid reduction of poverty. But, whether this assumed relationship between economic growth, employment creation and poverty reduction can be true in reality, it depends on the assumption that the enhanced higher economic growth by FDI is labor intensive. This implies that the effective way to transfer the benefits of FDI to the poor is through "labor intensive" economic growth. The second methodology focuses on technology spillovers and transfer of other intangible assets from foreign to domestic firms, as measured either through firm-level case studies or an analysis of cross-section industry data. This way provide only a proximate and partial picture: the former is limited by the sample size and the flows are generally not quantified; the latter is presumptive and inferential rather than demonstrated. The third way is through analyzing the allocation of tax revenues collected from foreign firms to economic activities that benefiting directly or indirectly the poor.#p#分页标题#e#