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Foreign Direct Investment In Developing Countries Economics Essay

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Published: Mon, 5 Dec 2016

The increasing global economic integration has been one of the most important development in the world economy in which there is a increasing internationalization reflected in terms of the growing share of international trade and foreign direct investment flows. In the late 1980s the financial services have been liberalized on a large scale and so a number of business services such as banking, insurance, advertising, accounting, communications, media, car rental and catering services have also become increasingly internationalized over the past decade.( Kumar Nagesh, 1998).

The successful Asian and Latin American (countries) experience has been the main responsible for the increasing concentration of the FDI in the developing countries over the last two decades , is the reason why we see developing countries engaging in activities with intention to attract more and more flows of foreign direct investment (FDI). The efforts of these developing countries have been strongly supported by global institutions such as the World Bank Group and the United Nations and also by bilateral development agencies such as the Us Agency for International Development. (Blomstrom, 1989).The FDI influences the income, production, prices, employment, economic growth, development and general welfare of the receipt country and it is probably one of the major factors leading to the globalization of the international economy.

Oxelheim Lars and Ghauri Pervez (2004) state that foreign direct investment (FDI) during financial crises may have led many developing countries to regard this type of international capital flow as the private capital inflow of choice. But evidence on the size of the specific benefits of FDI inflows to emerging markets is still very vague. We note that while there is some evidence that FDI benefits host countries, they should assess its potential impact carefully and realistically . In this literature i will focus on FDI flows into developing countries.

The authors Bailey David, Coffey Dan and Tomlinson Phil (2007) say that foreign investors were responsible for these economics crises and the analysts are now worried if it is a good idea for developing countries depend on external capital growth and development. The critics of FDI classify it as risky and destabilishing for developing economies.

Foreign Direct Investment (FDI) in developing countries

Economists normally agreed that foreign direct investment (FDI) is a important instrument for the globalization of the international economy and it is also characterised as the investment of real assets in a foreign country, in which they will acquire assets such as land and equipment to the host country but the facility will be operated from the home country.

The international journal of social economics (2009) announce that the trade effects of FDI depend on whether it is undertaken to gain access to natural resources, to consumer markets or whether the FDI is aimed to exploit location comparative advantage or other strategic assets such as research and development capabilities and that the developing countries will only reduce the technology gap by accepting foreign investments to facilitate technology transfer.

It can be seen that FDI inflows into developing countries have been concentrated in a few leading Southeast Asian and Latin American economies, and the rate of growth of FDI inflows as a share of exports into those economies has outpaced that of exports as a share of GDP. In fact, according to the GATT/WTO, total FDI flows have increased nine fold between 1982 and 1993, whereas world trade of merchandise and services has only doubled in the same period. Also, according to the OECD [1991], the growth rate of FDI outflows from the OECD countries in the 1980s doubled compared to the 1970s.

The most important factors explaining the surge of FDI inflows into the developing countries in recent years have been the foreign acquisition of domestic firms in the process of privatisation, the globalisation of production, and increased economic and financial integration (UNCTAD, 1996). However, the growth of FDI flows into developing countries has not matched the flows into developed economies, mainly due to the international debt crisis faced by developing countries in the 1980s.

Does the FDI benefit the host country

In the international journal of social economics (2009) it is said that FDI has controversial views where many says that it stimulate the economies of both developed and undeveloped countries and it also offer economic benefits such as increased competition, technological spillovers and innovations and increased employment, but others are more sceptic about the benefits of the foreign investment because it can have numerous negative effects, such as job loss, human rights abuses, political unrest, financial volatility, environmental degradation and increased cultural tensions. The international journal argues that governments should address gender issues as well as implement official measures and institutional changes to facilitate women`s inclusion into production and social system, especially in parts of Mexico and Asia.

With regards to environmental effects, there is sufficient evidence to state that FDI does contribute to environmental degradation, however the environmental degradation is a trend that began with earliest forms of industrialization and is not partial to developing countries. The reasons environmental protectionists have focused their attentions on the impact of FDI on the environments of developing countries is because these countries currently require the same policies and regulations and policies in developing countries which might protect the environment. These regulations are meant to slow the effects of continual resource use and to provide the citizens of host countries with the same rights afforded in a more developed countries.

Another problem discussed in the international journal of social economics (2006) is that the developing countries fear of losing foreign investors, so their government will start to compete each other to deregulate their policy to attract FDI`s and MNC`s, in which they will describe this form of competition as “ race to bottom”, the governments dismantle regulatory structures ensuring that wages and taxes should remain low because if the government of development countries do the opposite like attempt to regulate foreign MNC`s by increasing minimum wage, labour safety standards, it might risk that MNC`s relocate their business to other developing countries who will offer them low wages by any standards.


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