East Asian countries have served as host countries for various multinational organizations. These organizations invest in the human capital and technology of East Asian countries. As a result, the once underdeveloped countries can flourish into developed ones.
How does foreign direct investment promote economic growth in East Asia?
East Asia once represented one of the poorest regions in the world. However rapid growth, during the 2000s, helped advance the development of the region. Foreign direct investments (FDIs) have played a major role in East Asian economic growth. Dunning (1981) comprehensively defines FDIs as: “ the existence of multinational enterprises, a firm in one country with certain ownership advantages would open a subsidiary in another country with locational advantages and both advantages can best be captured by internalizing production via direct investment.” In essence, capital-abundant countries create an inflow of resources into capital-scarce countries.
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Gholami, Tom Lee and Heshmati (2003) specify the following growth theories as promoters of economic growth, as it relates to FDIs: capital investment(classical model), technical progress (neoclassical models), accumulation of human capital and externalities (new growth theory). According to Kurtishi-Kastrati (2013), the classical model is an older one that indicated a one-way flow of capital from developed to underdeveloped countries. Contrarily, FDI is a two-way flow between developed and underdeveloped countries. Secondly, Mahembe and Odhiambo (2014) shared that the neoclassical growth model assumes that economic growth is produced by the accumulation of exogenous development factors. It has been shown that through this process, capital accumulation directly contributes to economic growth concerning the share of capital in the national production.
Lastly, the new growth model postulates that economic growth is driven by two main factors: the stock of human capital and technological changes (Romer, 1986, 1990 and 1994; Lucas, 1988). Nair-Reichert and Weinhold (2001:154) also argue that this growth model looks at the long-term and can lead to economic growth, driven by technology transfer, spillover and diffusion effects. Thus, it would then appear that the relationship between FDIs and economic growth is interdependent. This paper will seek to examine how these development resources, based on the theories presented, continue to promote economic growth in East Asia.
Main Points With Supporting Details:
1) East Asian economies recognized the need for diversification, after the collapse of the Soviet Union.
a) After the collapse of the Soviet Union, upon which many East Asian countries relied for technical support, they realized that there was a need for a regional bloc.
b) East Asia is now supported by both informal and formal integration.
2) Free-trade agreements were a necessary component, in the placement of subsidiary organizations in East Asia.
a) Krasner’s Hegemonic Stability theory suggests that trade openness provides smaller states with more welfare benefits.
b) The Japanese-East Asian trade relationship, with reference to FDIs, demonstrates the positive impact of trade liberalization.
3) Foreign direct investment into human capital and technology results in the promotion of economic growth through production-efficiency that spills over into other sectors of the East Asian economy.
a) Sarel (1996) mentions that the rate of labor participation can be increased for a while and will increase production, but it can obviously not increase indefinitely. And, ultimately, more growth in capital than in labor leads to decreasing returns on capital, resulting in a fall in output growth, even if capital continues to grow at a constant rate. Therefore an economy needs to continually improve its technology and human capital in order to achieve sustainable growth.
b) Spillover from foreign direct investments continues the promotion of economic growth. The biggest spillover, affected by production-efficiency, is encountered in East Asian import and export markets.
Conclusion: Foreign direct investments create East Asian economic growth through a combination of trade openness ,along with, foreign direct investments into human capital and technology.
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