Foreign Direct Investments Essay Research Paper We

Foreign Direct Investments Essay, Research Paper

We are living in a time where world trade is and globalization are rapidly increasing. Because of this, Foreign Direct Investment has also become an increasingly popular way of doing business. Foreign Direct Investment (FDI) can occurs two ways. a.) When foreign firms acquire a substantial ownership position in a domestic firm. or b.) when foreign firms locate production plants in the domestic economy. There are many reasons why firms decide to invest in foreign countries; one such reason would be better access to cheaper means to produce their products. Entities, which are involved in Foreign Direct Investment, are, Multi National Corporations, host countries, and their governments, etc. Each of these entities are affected as well as have an effect on FDI’s.

This paper begins with an overview of FDI and the policies in which it is involved. Next, the nature of multinational corporations will be outlined, along with a description of recent trends in FDI flows. It will then move on to discuss the costs and benefits of Foreign Direct Investments, from the host country’s point of view. Following will be the host countries’ policies toward multinational companies, and the effects of those policies will also be discussed.

This paper begins with a general overview of the topic of Foreign Direct Investments, economies that it effects and some ideas which have been discussed and are still being developed. One such requirement for economic development in a low-income economy is an increase in the nation’s capital. A developing nation may increase the amount of capital in the economy by encouraging foreign direct investment. Many developing economies have attempted to restrict foreign direct investment because of nationalist sentiment and concerns about foreign economic and political influence. One reason for this sentiment is that many developing countries have operated as colonies of more developed economies. This colonial experience has often resulted in a legacy of concern that foreign direct investment may serve as a modern form of economic colonialism in which foreign companies might exploit the resources of the host country.

In recent years, however, restrictions on foreign direct investment in many developing economies have been substantially reduced as a result of international treaties, external pressure from the IMF or World Bank, or unilateral actions by governments that have come to believe that foreign direct investment will encourage economic growth in the host country. This has resulted in a rather dramatic expansion in the level of foreign direct investment in some developing economies.

One agreement, which will help in the increase of foreign direct investment, is the Multilateral Agreement on Investment. It increases the rights and opportunities of multinationals but does not hinder them with any increased responsibilities, or restrict the investment incentives offered by host countries. This is partly due to the influence of MNCs on the negotiations. Foreign direct investment may encourage economic growth in the short run by increasing demand in the host economy. In the long run however, the increase in capital raises the use of labor which leads to higher incomes. Another long-run impact, however, comes through “technology transfer,” the transfer of technological knowledge from industrial to developing economies. Many economists argue that “this transfer of technology may be the primary benefit of foreign direct investment.”(4) It is often argued, however, that it is necessary to restrict foreign direct investment in a given industry for national security purposes.

Multinational corporations (MNCs, which can be defined simply as companies which have operations in more than one country) account for over 70% of world trade. “Multinational investment has grown 13% per year through the last two decades – twice the rate of growth of world trade”.(2) The vast majority of MNCs originate in the United States, Japan, and the EU. These countries are also the main hosts to MNCs, although many of the less developed countries have increased their involvement with FDI. Most of this new investment has been to China and the ‘tiger’ economies of South-east Asia. Many people have strong opinions about multinational corporations and there involvement in investing in foreign countries.. “International institutions such as the World Bank, IMF, and WTO tend to see MNCs as champions of free trade and mechanisms by which national economies will be forced to open up”.(1) On the other hand many others have expressed concerns about whether the benefits of FDI are as great as it has been said to be, or whether they exist at all. So what are the benefits and costs of FDI.

The below areas will be focused on when dealing with the benefits and costs of foreign direct investment and its effects on host countries. Including effects on a country’s growth rate, tax revenues created for host governments, a spill over effect of capital (knowledge, technology, expertise) changes in consumption patterns, and an increase in economic independence.

“A country’s growth rate is strongly influenced by past investment levels. Therefore, if the level of investment in a country is increased, future output will be higher.”(3) However, FDI may not raise the level of output in the host country. Because MNCs