StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

FDI and Economic Growth - Article Example

Cite this document
Summary
Foreign direct investment (FDI) is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. …
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER92.2% of users find it useful
FDI and Economic Growth
Read Text Preview

Extract of sample "FDI and Economic Growth"

FDI and Economic Growth Foreign direct investment (FDI) is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. The FDI relationship, consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm. In the years after the World War II global FDI was dominated by theUnited States, as much of the world recovered from the destruction wrought by the conflict. The U.S. accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20% of global GDP. In the last few years, the emerging market countries such as China and India have become the most favoured destinations for FDI and investor confidence in these countries has soared. As per the FDI Confidence Index compiled byA.T. Kearney in 2006, China and India hold the first and second position respectively, whereas United States has slipped to the third position. Types of FDI Greenfield Investment: direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nation's promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. However, it often does this by crowding out local industry; multinationals are able to produce goods more cheaply (because of advanced technology and efficient processes) and uses up resources (labor, intermediate goods, etc). Another downside of greenfield investment is that profits from production do not feed back into the local economy, but instead to the multinational's home economy. This is in contrast to local industries whose profits flow back into the domestic economy to promote growth. Mergers and Acquisitions: transfers of existing assets from local firms to foreign firms takes place; the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Unlike greenfield investment, acquisitions provide no long term benefits to the local economy-- even in most deals the owners of the local firm are paid in stock from the acquiring firm, meaning that the money from the sale could never reach the local economy. Nevertheless, mergers and acquisitions are a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI flow into the United States. Horizontal Foreign Direct Investment: investment in the same industry abroad as a firm operates in at home. Vertical Foreign Direct Investment: is of two kinds: 1) backward vertical FDI: where an industry abroad provides inputs for a firm's domestic production process 2) forward vertical FDI: in which an industry abroad sells the outputs of a firm's domestic production FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm: Resource Seeking: Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. cheap labor and natural resources). This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe. Market Seeking: Investments which aim at either penetrating new markets or maintaining existing ones. FDI of this kind may also be employed as defensive strategy; it is argued that businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one. This type of FDI can be characterized by the foreign Mergers and Acquisitions in the 1980's by Accounting, Advertising and Law firms. Efficiency Seeking: Investments which firms hope will increase their efficiency by exploiting the benefits of economics of sale and scope and also those of common ownership. It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm. Typically, this type of FDI is mostly widely practiced between developed economies; especially those within closely integrated markets (e.g. the EU). Ireland comfortably tops the league out of 111 countries as the most desirable place to live, according to the Economist Intelligence Unit's The World in 2005 index report. It successfully combines elements such as the fourth-highest GDP per head in the world, low unemployment, political freedom, stable family life and high community standards. With economic growth estimated at 5% in 2004, Ireland continues to attract investment in a wide range of activities from manufacturing to e-business in sectors as diverse as IT, software, pharmaceuticals, medical technologies, financial and international services. Investors have been attracted by a corporate tax rate of 12.5% on all trading activities and a business-friendly environment, where skills, research and knowledge, and a high quality infrastructure are combined with innovation and flexibility. The availability of key human resources has been vital in attracting inward investment; Ireland's young population is highly educated, flexible, responsive and creative. The education system pursues a collaborative approach with business and industry. IDA Ireland - the government agency responsible for attracting overseas investment - is encouraging more innovative and knowledge-based investment. This means increasing higher value-added activities in the manufacturing sector and adding corporate level innovation such as research and development, shared services, logistics and supply chain management functions. During the 1990s, the Irish economy boomed. Rapid output and employment growth resulted in a sharp rise in the ratio of employment to population, which played a major role in closing the gap in living standards between Ireland and the rest of the European Union (EU). Substantial inflow of foreign direct investment (FDI)-mainly from the United States-reduced the economy's dependence on agriculture and low- productivity industries. The Irish economic success story has attracted considerable international interest. Even though the economy slowed dramatically in 2001, the transformation of the 1990s is still worthy of scrutiny. (Brendan Walsh). Dr. Michael Cuddy , Dean of Faculty of Business, National University of Ireland, Galway discusses the reasons for companies to engage in FDI. The companies seek resources (physical and human), They seek market following and a customer following.. They look for an export following. Engaging in FDI facilitates acquiring technological managerial and organizational skills resulting in efficiency. It is a strategic motivation. FDI helps to overcome trade barriers and risks are diversified. Most importantly there is a scope for short term profit maximization. Ireland is an immediate attraction for FDI because of its saving source, direct output, and backward linkage. Employment creation is Ireland's forte and management skills are of an optimum level. Technology transfer is another reason to attract FDI. Ireland stands for balance of trade and balance of payment. Taxation revenue also attracts FDI. Furthermore Ireland has executed certain policy measure to attract FDI. The most import of the these policy measures is seen in taxation - corporation tax, repatriation of profits, patent royalty tax exemption, capital allowance, expenditure on scientific research. Financial incentives include grants for capital, employment s, training, research and development. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“FDI and Economic Growth Article Example | Topics and Well Written Essays - 2250 words”, n.d.)
Retrieved from https://studentshare.org/business/1508039-fdi-and-economic-growth
(FDI and Economic Growth Article Example | Topics and Well Written Essays - 2250 Words)
https://studentshare.org/business/1508039-fdi-and-economic-growth.
“FDI and Economic Growth Article Example | Topics and Well Written Essays - 2250 Words”, n.d. https://studentshare.org/business/1508039-fdi-and-economic-growth.
  • Cited: 0 times

CHECK THESE SAMPLES OF FDI and Economic Growth

Rapid Expansion of Trade and FDI in Asia Pacific

Since fdi and trade are more of complementary to each other than substitutes, large inflows of FDI to Asia Pacific have increased the region's participation in international trade.... A combination of fdi and international trade has therefore become the main driver of economic change in the Asia Pacific.... Many nations surrounding the Pacific Ocean have been instrumental in creating an economic miracle that has come to be referred to as the Pacific Rim....
8 Pages (2000 words) Essay

The Impact of Inward Foreign Direct Investment

Some studies on the other hand, found a weak link between FDI and Economic Growth based on research done on a mix of developed and developing countries.... Analysts relate FDI to per capita to GDP growth by looking at figures of gross FDI inflows and FDI inflows per capita to see if they have any impact on the economic growth of a country.... It has been seen that, the more developed a country is, the better and greater positive effect FDI will have on its economic growth....
8 Pages (2000 words) Essay

Qualitative research paper

The qualitative research paper analyzed in this paper is “Risk, FDI and Economic Growth: A Dynamic Panel Analysis of the Determinants and Growth Impact of FDI in Africa” by Kevin N.... The study has been done in order to determine the FDI flows to Africa, FDI… The study addressed the issues of the growth convergence and the extent to which FDI contributed faster growth in Africa and sector-wise distribution of FDI. The topic of the study is very Qualitative research paper The qualitative research paper analyzed in this paper is “Risk, FDI and Economic Growth: A Dynamic Panel Analysis of the Determinants and Growth Impact of FDI in Africa” by Kevin N....
2 Pages (500 words) Essay

Financial and Macroeconomic Stability

Inflation and real growth has been more stable now.... Monetary policy which gets transmitted to the real economy and thereby impacts the lending policies of the bank requires to be altered as they hinder growth.... Therefore establishing a control over the assets possessed by the bank is a suitable way by which it is possible to manage the macro-economic environment....
7 Pages (1750 words) Research Paper

The Impact of the Growth of FDIs on the Indian Economy

The current financial crisis amidst globalization makes it more important to understand the linkages between the FDI, and the economic growth.... This would be done by applying the Johansen co-integration test between fdi and growth rate in the past 15 years in India and drawing out possible recommendations from the findings.... The paper "The Impact of the growth of FDIs on the Indian Economy" highlights that according to reports by Ministry of Commerce and Industry, GoI, India has received a total Foreign Direct Investment to the tune of Rs....
9 Pages (2250 words) Research Proposal

Economic Reforms and Economic Growth in India

The paper “Economic Reforms and economic growth in India” looks at specific retail stores that are looking into expansion to heighten the economy of developing nations and to begin altering the trade that is developing into global aspects.... For the past 20 years, Mexico has gone through several changes in development, specifically because of the economic growth and development, political changes and the social movement toward becoming global.... Fashion weeks and growth from entertainment entities, such as Bollywood, are continuing to grow expansively and offer more in terms of fashion retail....
14 Pages (3500 words) Dissertation

The Impact of Inward Foreign Direct Investment on Host Countries

Analysts relate FDI to per capita to GDP growth by looking at figures of gross FDI inflows and FDI inflows per capita to see if they have any impact on the economic growth of a country.... It has been seen that the more developed a country is, the better and greater positive effect FDI will have on its economic growth.... Most studies that have analyzed the impact of FDI on the economic growth of the host country have found the results to be pretty elusive....
8 Pages (2000 words) Essay

Business Culture of Singapore and China

The economic and fiscal focus of both the economies differ notably, and because of this very reason, it is imperative for us to study both of them in order to guide those employees who are shifting from Singapore to China to find out better employment.... However, the South Asian economic giant is working to produce basic cars and vans that their target populations can afford....
8 Pages (2000 words) Term Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us