Fdi Positive Consequence On Economic Growth Economics Essay

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Cross-country confirmation on whether FDI affects economic growth is conflicting. For example, two early significant studies tell that FDI has a statistically significant impact on growth in all countries (Blomstrom, 1992) and in developing countries (Borensztein, 1998). Though, a recent dominant study of FDI in all countries resulted no such results (Carkovic and Levine, 2005). The studies that are significant impact of FDI on growth in one form or another conclude that it is frequently harmful. In Borensztein (1998) at the sample mean for schooling, a sensible increase in FDI of one standard deviation of the data increases the growth rate percentage points each year. In Alfaro (2003) in the industrialized sector, at the sample mean, a one standard deviation increase in direct investment increases growth points each year

FDI increase the business progress in the huge amount country (Findlay, 1978) which easiest to move forward to executive course of action by firms. (Georgia 1992) analyzed the 12 Latin American countries its consequence is shown the optimistic and show the result on economy intensification. Its research also shown proficiency of FDI is advanced than home investment. (Fry, 1992) it tells the position of direct savings in promote the expansion using the macro mock-up of 16 developing nations. The countries integrated in the sample were brazil, chile, argentina, mexico , Egypt, Nigeria, , sri lanka, Pakistan, india, turkey, Venezuela, Indonesia, Thailand, Philippines , Malaysia, korea.

An entire sample did not discover FDI a considerably different effect from home investment on the economy growth. FDI had a negative effect on on local investment. Direct investments had a positive consequence on growth rate of per capita income standard and the sample size taken seventy eight developing countries and twenty three developed countries (blomstrom1994) its hole the developing countries into2 groups FDI result is came positive.

For studies conducted in Pakistan, a study by (Shabir & Mahmood, 1992) analyzed

The linkage between foreign private investment FPI and economic growth in

Pakistan. The research used the data for 1959-60 to 1987-88; the research concluded that

net foreign private investment (FPI) and disbursements of grants and external loans

(DISB) had a positive contact on the rate of growth of real GNP. Conversely they did not treat FDI as a separate variable. Likewise (Ahmed, 2003) examined the causal relationship between FDI, exports and output by employing Granger non-causality procedure over the period 1972 to 2001 in Pakistan. They found significant effect from FDI to domestic output, in contrast to the above mentioned studies.

An important study undertaken by (Khan, 2007) examines the link between FDI and

economic growth by including the role of domestic financial sector, Khan argues that

introduction of financial sector indicator is expected to improve and reinforce the link

between FDI and economic performance, as well as reflect the level of absorptive

capability of a recipient country in enjoying the benefits embodied in FDI inflows. The

study covers the time period from 1972-2005, and to examine the long run relationship

between variables i.e. growth rate of real GDP, ratio of FDI to real GDP, financial

sector development, labour, and physical capital the study uses the Bound testing

approach to co-integration within the framework of Autoregressive Distributes


Shumaila hashim and khair uz zamam december 2009

Bruckner (2003) described the relationship between trade and telecommunication. He found positive impact of telecommunication on economic growth. He was in view

that improvement in telecommunications infrastructure and reducing costs lead to a higher growth in trading other than non-trading sectors. He also emphasized the

importance of FDI in telecommunication sector. Restriction on licensing rules and excessive interconnection tariffs are major barriers to trade. Freund and Weinhold (2004), studied the effect of internet as a communication tool in the promotion of international trade. He observed positive impact of internet in trade promotion and concluded that 10% increase in web hosts in a country leads to rise in 0.2% increase in export growth. Hirschman (1967) examined various development projects. He found that a credit market for the coffee trade developed in Ethiopia after the installation of a long distance telephone networks. So he recognized the importance

of telecom infrastructure in trade development. Saunders et al. (1994), in his micro level studies

observed that investment in telecom firms normally generate internal rate of return approximately 20%. At their macro level studies they examined the economies of Hong Kong, Singapore, Korea and Taiwan and found that these countries gave more attention to the development of telecom infrastructure and now they are in strong position in the world trade market.

Ghulam mohey-ud-din GC university june 2006

As Chenery and Strout(1966) concluded, on the basis of empirical evidence from LDCs, that foreign capital has a positive effect on the economic growth. Afterwards

some other studies also argued that foreign economic assistance

stimulate the economic growth.

North (1956) found that foreign capital played the important role of directing real resources into the needed social overhead investment and of sustaining an import surplus of consumer and capital goods that helped in the period of development. Bosworth, Collins and Reinhart (1999) applied a regression analysis on sample of developing economies to analyze the effectiveness of various forms of the FCI and found that FDI has a strong positive impact on domestic savings and investments

than other form of FCI like loans, portfolio investment and borrowings and some of these forms of FCI have negative impact on domestic savings and investment.

However, some other economists like Leff (1969) and Griffin (1970) have analyzed its negative impacts on growth. They argued that the foreign capital could adversely affect the economic growth by substituting the domestic savings. So, the literature on effectiveness of foreign aid shows

both, positive as well as the negative effects, of foreign aid on the economic development. Hansen and Tarp (2000) run a regression between aid and the growth. It is shown that aid increases the growth rate, and this result is not conditional on ‘good’ policy. There are, however, decreasing returns to aid, and the estimated effectiveness of aid is highly sensitive to the choice of estimator and the set of control variables. When investment and human capital are controlled for, no positive effect of aid is found. Yet, aid continues to impact on growth via investment. We conclude by stressing the need for more theoretical work before this kind of cross-country regressions are used for policy purposes.

Burnside and Dollar have constructed an index of three policies (on fiscal surplus, inflation, and trade openness), interact it with foreign aid, and instrument for both aid and aid interacted with policies. They find that aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies. In the presence of poor policies, on the other hand, aid has no positive effect on growth.

Anjum aqeel and Mohammad nishat

Discussing the labor cost which is one of the major components of the cost function, it is

mentioned that high nominal wage, other things being equal, deters FDI. This must be

particularly true for the firms, which engage in labor-intensive production activities.

Therefore, conventionally, the expected sign for this variable is negative. The studies that find no significant or a negative relationship of wage and FDI are: Kravis and Lipsey, 1982; Wheeler and Mody, 1990; Lucas, 1993; Wang and Swain, 1995; and Barrell and Pain, 1996. Nonetheless, there are other researchers who have found out that higher wages do not always deter FDI in all industries and have shown a positive relationship between labor costs and FDI (Moore, 1993; and Love and Lave-Hidalgo, 2000). Because higher wages indicate higher productivity, hi-tech research oriented industries in which the quality of labor matters, prefer high-quality labor to cheap labor with low productivity