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Examine the Role and Impact of Private Fdi in Developing Countries. Critically Analyse, from the Perspective of Developing Countries, Whether a Heavy Reliance on Fdi Is Good or Bad.

Autor:   •  June 24, 2016  •  Research Paper  •  1,944 Words (8 Pages)  •  481 Views

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Examine the role and impact of private FDI in developing countries. Critically analyse, from the perspective of developing countries, whether a heavy reliance on FDI is good or bad.

Foreign direct investment is very common in this world in recent years with nearly linear technological growth. In the past thirty years, the amount of foreign direct investment that has flowed into the developing world has increased by more than 12 times, and foreign direct investments are responsible for over 60% of private capital flows (Herzer et. al., 2006). Global flows of foreign direct investment was recorded increasing by 25% in the year 2015 (Organization for Economic Co-operation and Development, 2016). The foreign direct investment that has a large impact on developing countries is when foreign companies choose to expand their production and operations to the country. These companies, like any business venture, aims to generate profit, and to reduce overall cost. This is one of the main factors that affect companies’ choice to invest in developing countries, where resources, especially human capital, proves cheaper than their parent country. Sethi et. al. (2003) showed that companies tend to invest more in countries that are able to provide the best compliment of the traditional foreign direct investment determinants.

In examining the role of foreign direct investments in developing countries, we must keep in mind the fact that these are business ventures leveraging on opportunities in developing countries, which in many cases result in a win-win situation. Foreign direct investments play a role in developing the country’s economy and overall standard of living. Feldstein (2000) shows that host countries can gain from foreign direct investment in several ways. For example, foreign direct investments allow for the transfer of technology between countries via the multinational company. Such transfers may not be possible through normal financial investments or through international trade. At the same time, the foreign direct investment also increases competition in the domestic market. However, Borensztein et. al. (1998) notes that the foreign direct investment can only contribute to economic growth in this way if the host economy is capable of absorbing the advanced technologies offered by the international deal.

Another way foreign direct investments will develop the host country is by the development of human capital of the host country. As the multinational company opens a new business in the host country, job opportunities are created and the country’s unemployment rate will decrease. Foreign direct investments are responsible for making available 26 million jobs worldwide (Aaron, 1999). The company will also bring in new training from the parent country in order to run the new business, thus further developing the workforce of the host country. We must note at this point that the human capital used


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