英国economic essay

What impact does foreign direct investment have on economic growth
 

In this essay we review the causality between Foreign Direct Investments (FDI) and economic development in emerging and developed countries, in both directions according to recent studies of a few researchers. From this preliminary research we have seen that there is no clear tendency to the direction of this causal interaction. But according to most researchers the Foreign Direct Investment have a positive correlation with the GDP growth, an increase in FDI factor would cause economic development and so GDP increase under certain economic conditions.

 

1.0 Introduction
 

Foreign direct investments or FDI define as investments involving a long term affiliation of an overseas company in an enterprise based in a country other than the investor’s country (Kamath, 2008). FDI can be done by incorporating an entirely owned company, through a merger or an acquisition of a not related company or by participating in an equity joint venture with another investor or company in the host country. FDI does not include investments through purchase of shares. Most of the empirical studies support the argument that FDI play an important role as an engine of economic growth for both developed and emerging countries. Until 1980 most emerging economies viewed FDI with skepticism because they believed that it was an economic form of colonialism and raised trade barriers (Shu-Chen, 2010). During the last 30 years this thesis change dramatically and they relax regulations, reform their investment policies and offer incentives to multinationals to invest. This change happened because developing countries understand the benefits of FDI for their domestic economy and its growth through the FDI’s capital inflows which are more attractive than the bank loans (Battena, 2009). This change explains the tremendous increase of inward FDI funds to emerging economies from $54 billions in 1980 to $1.4 trillion in 2000.

 

2.0 Literature Review文献回顾
 

According to several theoretical models FDI promotes economic growth like the Solow neoclassical model suggests, but empirical tests have shown that this theory has its limitations.

 

FDI can increase a country’s GDP significantly when FDI takes the form of a Greenfield-FDI compare to M&As FDI form, (Mergers and Acquisitions) which can lead to completely undesirable economic results(Nanda, 2009). Greenfield investment is when a multinational creates in a developing county a new business in a district where no previous facility exists. But the host country is not sure that will enjoy high growth rates even when there is Greenfield-FDI like in Mexico where the impact of this type of FDI concentrated in specific industries and it is difficult to be a spillover-effect in order to drive the economy upwards. In this case the domestic investments have a greater impact on GDP growth (Oladipo, 2007).

 

In most of Latin America’s countries the FDI increase the GDP significantly in the long term because it is a long term source of capital investment and the investors obtain earnings from productive activities in a long period and it is difficult to divest (Falla, 2009). Also FDI helps a country to overcome its capital shortages and also increase the domestic investments and consequently its GDP in short-term (Tang, 2008).

 

FDI could boost the GDP like in China and Ireland (Rios-Morales, 2007) because it increases the level of employment, introduce new technologies, through labor training transfer skills to employees help the host country to better use their resources, promote the competition with the existing local companies and in most of the cases increase their tendency to invest and thus increase also the domestic investment (Abor, 2008). Further more foreign subsidiaries learn to local companies how to export in foreign markets and so increase the host country’s trade balance surpluses (Hetes, 2009).

 

Most of the countries in order to maintain a sustainable level of GDP growth like China, Ireland, Ghana, Kenya and Angola need to attract FDI by encouraging and support foreign investors (Jacques, 2010). But there are some countries where there is a reverse causality between FDI and GDP, from GDP growth to FDI growth and not the opposite like in India, Malaysia and South Africa (Pradhan, 2008) because of the corruption (Brouthers, 2008), low infrastructure, insufficient capital and financial markets, high tariff barriers, no tax incentives, macroeconomic instability, high volatility of the home-country’s exchange rate (MacDermott, 2008), and lack of skilled labor (Busse, 2008). The importance of skilled human capital is evidence in most of the studies that boosts economic development because it can absorb new ideas and manufactured goods brought from foreign investors (Varamini, 2007). There is a strong positive correlation between lack of skilled human capital and its negative effect in economic growth. Countries with such tough regulated economies have a low stream of FDI and when there are capital inflows could not take advantage of them (Farshid, 2009).

 

There are also countries like Japan where there are no causal relationships between FDI and GDP growth in either direction especially in the manufacturing sector which is highly regulated (Asheghian, 2009). In Japan for instance the increase in GDP is an outcome of a raise in productivity and in domestic investment.

 

FDI according to empirical results for the Central and Eastern European countries, contribute in a different way in the host country’s economic development during their life cycle (Hetes, 2009). At the initial stage of the investments the effects for the economy are negative and the economic growth comes at the maturity stage when investments become less volatile and they add value to the economy.

 

An additional characteristic of FDI is, that there is a stronger positive correlation between an inward FDI and a host country’s GDP if this country is a developed one, compared to a developing country where the effects are (Ghosh, 2009). There are findings also that support the argument that for a developed country there is positive correlation between outward FDI and its GDP growth rate but for a developing one there is a negative correlation (Alhakimi, 2009).

 

3.0 Conclusion总结
 

From our literature review we extract the following results:

 

▪In most of the developing countries GDP growth has a strong positive correlation with the FDI because these host countries fully liberalize their economies.

 

▪There are also few developing countries where there is a negative correlation between FDI and GDP growth because those countries have not done the necessary transformations to their economy and there are adverse economic results like contraction of GDP.

 

▪In another category we find developing countries where there is reverse causal relationship, from increase in economic development to increase in FDI. This is happening because these countries have maintained high barriers to entry in certain sectors of their economies in order to protect the local businesses.

 

▪Developed countries like Japan where there is no causal relationship in either direction between FDI and GDP growth. Economic development based solely on domestic investments.

 

▪In the latter category involves developed countries like USA where there is very strong relationship between FDI and economic development, because these countries qualified to fully absorb the elements arising from the foreign direct investments.