Foreign direct investment essay

Countries should not allow foreign ownership of companies in strategically important industries. They could sell unprofitable portions of the company to local, less sophisticated investors. The Balance uses cookies to provide you with a great user experience. By using The Balance, you accept our.

Glossary Trade Policy. By Kimberly Amadeo. Four agencies keep track of FDI statistics. The U. It summarizes FDI trends around the world. It reports on both inflows and outflows. The only statistics it doesn't capture are those between the emerging markets themselves. This annual worldwide survey is available as an online database. It covers investment positions for 72 countries. It provides the financial and operating data of these affiliates. It says which U. FDI now played a role as major economic driver of globalization and control over most of cross border investment.

The changes in technology, declining in communication cost and policies liberalization are among the factors that contribute to FDI expanded its role. The employment effects of FDI in host countries are underlie in several areas of economic elements.

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Essay on Foreign Direct Investment (FDI)

Those effects are including job growth, higher wages and better working condition. The positive effects were occurred when foreign Multinational Enterprise MNE employed host country citizens to match their demand for workforce. This economic activity will result in new and better jobs in areas with high unemployment, productivity and better work salaries.

The relevant prior research has shown the evidence on this effect of FDI. Direct FDI has a positive impact on Pakistan employment growth. According to Muhammad Atif , foreign direct investment in Pakistan has lead to positive impact on employment growth in Pakistan. The study shows that a unit increase in FDI as a percentage decrease in unemployment rate by 0. The positive impact may come from labor intensive industries that show substantial increase in employment rate. This is due to increasing in demand for labor where many workers are needed for domestic investment in setup and running a new plant.

FDI is said as a powerful development tool in contributing the economy growth of host country. This growth are may contribute by the injection of capital stocks in host country, increase in productivity and creating new jobs. Chan study as cited in Esther O, found that when a country adopts an export strategy, FDI will bring positive impact on growth. This researcher found that FDI may promote host country growth through its effect on trade. Activities that create by FDI also lead to productivity and knowledge spill over on host country domestic firm.

Productivity and knowledge spill over is arise when the productivity of locally owned firm is gain through access to the advance leading edge of technologies employed by foreign companies. However, there are some arguments on this matter. As the foreign presences were in greater level, the negative impacts were start to apparent. These foreign companies have ability in draw the demand away from local counterpart due to the price reduction to their new differentiated and innovation products.

Foreign Direct Investment Theories And Foreign Investment

In addition, the ability of firm in host country to reap the spillover benefits is depend on the ability of local firm to absorb foreign companies know how , skills and technologies. If local firm capabilities are insufficient to appreciate the value of knowledge and technology, it will restrict them to absorb the spillover benefits. According to Galina Hall , the lack of spillover effect in China was due to lack of the ability in hiring skill workers that limit the abilities in adopting new technologies.


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In other words, spillover benefits are only happen to local country if the technology gap is small. Examining productivity spillovers from foreign to local firm is very crucial in understand the impact of inward FDI to host country economic growth. In case of balance of payment, FDI can have beneficial and negative impact on host country. When a company invests in foreign country, the capital inflow to that country will be use to produce the good or services that can be substitute for imported product or services.

This are consider as one of positive effect of balance of payment.

Foreign Direct Investment and its Roles in Economic Development

There is another positive effect of balance of payment when the good or service produce by host country are exported to another country. This improvement in trade balance is cause by the inflow of payments from export of goods and services by host country. However, this beneficial impact is only gain by host country depend on several justifications. The above prediction may not true if the input used by foreign firms are imported from abroad. It also depend on whether the investment is source out of money capital borrowed in the host country and the share of profit repatriated.

On negative side, Multinational Enterprise may have too strong position in the local market and kill the competition especially from the new entrant local company. This are consider as adverse effect after the initial inflow of capital, outflow of capital may occur when a foreign form import inputs from abroad. The strong position of Multinational Enterprise in host country are let them to hold the key decision that affect host county economy. As foreign company has no commitment to the host country, they may take decision that not favor to the economic condition of host country. In , Myanmar changed its economy into market oriented system after the nullification of centralized planning economic system.

The following is main components of the policy; a Allocation of resources by adopts the market oriented system.


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Since Myanmar transformed to open market system in and practiced many improvements for overall economic growth of the country. The Board is the top inter-ministerial body of the Central Government that handle with plans relating to Foreign Direct Investment into India for sectors or project that do not entitle for automatic approval by the RBI Reserve Bank of India or are outside the parameters of the existing Foreign Direct Investment policy.

The growth of Foreign Direct Investment carry out opportunities to Indian industry for technological up stages, obtaining access to global practices and managerial skills, optimizing utilization of natural resources and human competing globally with higher efficiency. In , the new economic liberalization policy of the Foreign Direct Investment inflow in India for the last 14 years brings the country development in both quantity and the way India attracted Foreign Direct Investment.

FDI as a strategic element of investment is needed by India for its endured economic growth and development through creation of jobs opportunity, expanding of existing manufacturing industries, long and short term project in the field of education, research, development and health career. Pakistan has designed its investment policy in a way to make foreign investor attract by opening up the marketing and economy the potential for foreign direct investment.

The first manufacturing sector was the only avenue for foreign investors interested in investing in Pakistan. However Pakistan FDI has decline due to several factor like political instability, energy crisis, lack of infrastructure, cultural and social factors, lack of skill workforce, declining Gross Domestic Product GDP , law and order situation, share of credit to non-government sector and high corporate tax. The investment was tied to the sole use of Chinese workers as well as exploitative resource agreements.

Migrant workers limit employment creation and multiplier effects resulting from FDI into Africa. Finally, human capital can be underdeveloped as a result of dubious ethical standards on the part of the foreign project owners. Many African economies suffer from low savings.

According to the Harrod-Domar, savings create loanable funds, which are the lent to finance investment via financial institutions. This money is then invested in capital boosting growth.

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The rate of GDP growth is the savings ratio divided by the capital output ratio. Therefore, a savings gap would be a significant constraint to growth. However, FDI can help to replace the need for domestic savings for investment purposes in the shot-run and boost savings in the long-run. This should increase incomes both of those employed in the project as well as the wider community through the multiplier effect. Assuming a constant marginal propensity to save, this should boost domestic savings.

This should lower the capital output ratio, leading to growth according to the Harrod-Domar model. Collier highlights that high quality FDI can enable projects to fund themselves in a sustainable manner, reducing the need for need for initial savings to invest. However, in many Sub-Saharan African countries, a savings gap may not be a prevalent issue.

In the graph below, Ghana and Ethiopia show savings well above the world average. Across Africa, household saving has increased in the wake of the financial crisis. However, FDI is often a more preferable catalyst for development and growth than savings in developing economies due to lack of institutions to reinvest savings. According to the Solow model, growth is a function of physical capital, productivity and innovation, and human capital, therefore, if savings cannot be invested in capital then they are unlikely to boost growth.

However, FDI can directly affect all of these factors. Furthermore, investment boosts AD, thereby boosting short-run growth, unlike savings which acts asa withdrawal from circular flow. Therefore, savings assists growth and development both in the short and long term. In conclusion, the extent to which economic growth and development in Sub-Saharan Africa has been assisted by FDI depends critically on its ability to develop Africa in an inclusive manner in the future. African governments must be proactive in introducing reforms to harness the benefits of FDI. Chief among them is the development of formal property rights.

Impact of FDI on Indian banking sector

These reforms must continue to be implemented on an inter-regional scale to ensure FDI benefits rather than exploits the domestic country and its citizens. Collier also calls for governments to emphasise transparency and partnership agreement with TNCs so that governments can make informed decisions, with symmetric information, regarding the benefits of projects. Prudent management of mineral resources, through the use of rents, taxes, and other royalties such as windfall taxes , will be crucial to combating foreign exploitation and ensuring long-term growth.

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