Foreign Direct Investment

Empirical studies prove that foreign direct investment (FDI) is one of the positive strengths of economic development of a nation [2]. FDI also has an important role in improving the welfare of recipient countries: bringing new innovations, new technology, new managerial techniques, skills development, capital enhancement, creation of new job opportunities and development of the industrial sector in recipient countries [3], [4]. Apart from its direct benefit, an increase in the amount of capital in the host country, FDI also creates a spillover effect that is beneficial for host countries in developing countries [5]–[7].

Foreign direct investment (FDI) promotes the continuous economic and social development by transferring technology, skill development, innovation and management efficiency both developed and developing country. This study is mainly accentuated on determining the host countries’ overall welfare gain due to the incessant flow of FDI. Li and Liu (2005) examine a panel of 84 countries over the period 1970-1999 to understand whether FDI triggers economic growth. Their result reveals that FDI not only promotes growth directly, but also increase growth with its interaction term. They further test their hypothesis in two sub-sample; developed and developing countries by dividing the whole sample (84 countries). Again the result confirms

The theories of FDI explain why firms undertake foreign investment rather than export to overseas markets but it is equally important to understand where these investments flow or what determine foreign investment flows to a particular region. For this it is essential to analyse determinants of Foreign Direct Investment flows with a view to gain better understanding of the factors that influence the locational decisions of MNCs. The determinants of FDI can be understood from two interrelated questions. Why do firms invest overseas and why they choose particular destination.

Many developing countries now actively solicit foreign investment, offering income tax holidays, import duty exemptions and subsidies to foreign firms, as well as measures like market preferences, infrastructures and sometimes even monopoly rights. The reason for subsidising these firms is the positive spillovers from transferring technology to domestic firms. In fact, foreign direct investment (hereinafter FDI) not only plays an important part in creating jobs but is also viewed as a source of income. Yet the strong argument in favour of public support for FDI is based on the prospect for knowledge spillovers. Indeed, FDI offers an opportunity to obtain foreign capital without assuming the debt-related risk.

A foreign direct investment (FDI) is an investment made by a company or entity based in one country, into a company or entity based in another country. According to Demirhan and Masca (2008), FDI has significantly grow due to several factors, namely rapid technological progress, emergence of globally integrated production and marketing networks, existence of bilateral investment treaties, recommendations from multilateral development banks, and positive indication from developing countries that attracts FDI into the country. In other words, FDI has seen to be changing over time due to the response of investors towards the environment for investment.

Foreign direct investment (FDI) has become a crucial driver of economic integration since the sales by foreign affiliates have outnumbered exports two decades ago. There is a considerably large literature devoted to the explanation of the existence of multina- tional firms and FDI. Starting with the knowledge-capital model by Markusen (1984), it has been shown that it is advantageous to operate multinational firms when firm-level scale economies, generated mostly by R&D, are large, and plant-level scale economies are small (Horstmann and Markusen, 1992; and Markusen and Venables, 1998; 2000). Statistical evidence shows that multinationals intensively use professional and techni- cal workers, and are well represented in capital-intensive and R&D-intensive industries; see, for instance, Antràs and Yeaple (2013) for U.S. multinationals, Mayer and Otta- viano (2008) for French, German, Norwegian and Belgian multinationals, and Navaretti and Venables (2004) for French, German, Japanese, British and U.S. multinationals. Multinationals’ large R&D investments and intensive use of professional and technical workers generate proprietary knowledge (patents, blueprints, technical know-how, or reputation), and are considered as an important source of firm heterogeneity. 1 Helpman

One of the arguments for pursuing Foreign Direct Investment (FDI) by countries is the belief that FDI bridges the gap between rich and poor nations by promoting economic growth and development in addition to generation of technological transfers. However, empirical studies have found divergent views on the effect of FDI on growth and development. This paper examines the determinants of Foreign Direct Investment (FDI) in Nigeria during 1980 – 2011. It aimed at determining functional relationships that exist between GDP, wage rate, interest rate and relative openness index, and the extent to which each variable has influenced FDI inflow to Nigeria. The paper contributes to existing studies by using the multiple regression analysis in testing whether the set of independent variables explained the dependent variable. The study found that a significant relationship existed between GDP and inflow of FDI as well as real wage rates and inflow of FDI. It also found no significant relationship between FDI in flow and the relative openness index as well as lending rate and FDI inflow in the years under review. Based on the findings, it was concluded that Nigeria being a latecomer to the quest for FDI, campaigns for inward flow of FDI have not yielded the desired result. Specifically, it was found that improvement in GDP would lead to an improvement in inflow of FDI. Per capita income is too low to effectively draw FDI into sectors that will generate positive externalities. When the wage rates increase in Nigeria, it will have a positive impact on the FDI inflow. To address the problem, it was recommended that; government must follow through with the reform programmes and pursue policies that will increase the GDP and income per capita, address the issue of poor wage rates, review trade and investment policies as well as customs and banking regulations.

The problem about the determinants of the foreign direct investment has received a lot of attention by policy makers and scholars due to its economic and policy implications. FDI is an integral part of the economic development strategies of almost all countries, especially of developing and emerging markets countries. FDI is a key element of the international economic relations as it is an engine of employment, technology transfer and improvement of productivity which ultimately leads to economic growth. The need to attract FDI pressures governments to provide favourable climate for business activities of the foreign firms as they consider the political and economic institutional framework of the host country when deciding where to invest their capitals. There is an ongoing debate among scholars about the most important factors that attract investment inflows into a country – the debate concerns different types of factors ranging from purely economic indicators like market size and natural resource endowments to legal and political factors like the quality of the institutional framework of the host country and the type of the political regime.

reinvesting profits earned from overseas operations and intra company loans". In a narrow sense, foreign direct investment refers just to building new facility, a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. FDI is the sum of equity capital, other long-term capital, and short- term capital as shown the balance of payments. FDI usually involves participation in management, joint-venture, transfer of technology and expertise. Stock of FDI is the net (i.e., outward FDI minus inward FDI) cumulative FDI for any given period. Direct investment excludes investment through purchase of shares.

Many empirical studies have yielded mixed results about the impact of foreign direct investment (FDI) on domestic innovation in developing countries. This pa- per investigates the effect of FDI-promoting policy on innovation in the South in a general equilibrium model that incorporates both the knowledge spillover effect and the market stealing effect via FDI. Specifically, we conduct the analyses of both the short-run effect and the long-run effect. While FDI-promoting policy temporarily discourages Southern innovation in transitional dynamics through the market steal- ing effect, the accumulation of Southern knowledge via FDI helps domestic firms begin innovation again in the long-run. In the long-run, FDI-promoting policy may generate an inverted-U effect on innovation depending on whether the knowledge spillover is strong. This paper also examines the effect of FDI-restriction policy on Southern innovation, and the model shows that FDI protectionism has only a short- term effect and may decrease the innovation rate in the long-run.

According to Borensztein’s 10 How does foreign direct investment affect economic growth?, probably the best known paper on FDI and GDP growth, governments tend to see FDI as a subsidy on their own investment as, according to the paper, FDI investment is usually matched locally by one for one or greater – hence the favourable regulatory changes. Also according to the same paper, this is beneficial for the recipient country as GDP growth is indeed increased through improved productivity, caused by transfer of advanced technology and improved working methods – but only where the recipient nation has a sufficient existing stock of human capital 11 . This makes sense given that developing country workers cannot embody new knowledge without sufficient critical mass, and thus affect long-run Total Factor of Productivity.

In response to the open-door policy formulated in 1978, inward foreign direct investment (FDI) in China has grown appreciably. By June 2002, the cumulative contracted and realised values of inward FDI reached US$ 789 and 420 billion respectively (People’s Daily, Overseas Edition, 12 July 2002). China is now the largest host to FDI in the developing world. A remarkable development in the contemporary period of globalisation, the opening up of China to FDI has attracted much attention from both the academic and business sectors. A large number of studies have attempted to addressed the following issues. Why is China so successful in attracting FDI? What role has FDI played in the development process of China? Is China's experience with FDI unique? This paper examines the evidence on these and other issues. Section 2 of the paper reviews general trends and characteristics of FDI in China. Section 3 outlines various determinants of FDI at the national and regional levels in China. Section 4 investigates the relationships between FDI on the one hand and technology transfer, spillovers, foreign trade and economic growth on the other. The last section concludes.

Melitz [2003] developed the so called “new-new trade theory” regarding firm heterogeneity, which analyzed what kind of firms choose to undertake foreign direct investment (FDI) when they decide to sell their products overseas. Traditionally, many international economics textbooks (for example, see Helpman [2011]) utilized the eclectic theory of Dunning, which states that firms require ownership advantages, location advantages and internalization advantages to choose FDI. Moreover, there are traditionally two purposes of FDI: horizontal FDI aims at supplying goods to the host country, whereas vertical FDI divides a production process, such that some of it occurs overseas, and final goods are imported from an overseas affiliated firm. Recently, a third pattern of FDI, complex integration, in which the aim is to export to a third country, the export platform, has been recognized and analyzed.

We derive the sub-game perfect Nash equilibria for the foreign direct investment (FDI) game played between two unionised firms. Among other results, we show that FDI is less likely, ceteris paribus, the greater is union bargaining power, the stronger the weight the union attaches to wages, and the more substitutable are firms’ products in the potential host country. We derive results concerning the conditions under which FDI will be reciprocal. We also examine conditions under which the FDI game between firms will possess the characteristics of a Prisoners’ Dilemma. Finally, we consider the possibility that firms might delegate wage determination to unions as a method of strategic deterrence against entry by FDI.

The notion that foreign aid and foreign direct investment (FDI) are comple- mentary sources of capital is conventional among governments and international cooperation agencies. This paper argues that the notion is incomplete. Within the framework of an open economy Solow model we show that the theoretical relation- ship between foreign aid and FDI is indeterminate. Aid may raise the marginal pro- ductivity of capital by …nancing complementary inputs, such as public infrastructure projects and human capital investment. However, aid may also crowd out produc- tive private investments if it comes in the shape of physical capital transfers. We therefore turn to an empirical analysis of the relationship between FDI and disag- gregated aid ‡ows. Our results strongly support the hypotheses that aid invested in complementary inputs draws in foreign capital while aid invested in physical capi- tal crowds out FDI. The combined e¤ect of these two types of aid is small but on average positive.

I propose that modest levels of FDI enhance human development through economic growth and higher income, but that these positive benefits taper off as FDI increases. Alongside these benefits, the cost of FDI (greater income inequality) also increases which refers to the extent to which income is distributed in an uneven manner among a population (Inequality Org, 2017). I argue that these counteracting forces of positive and negative FDI effects on human development create an inverted U-shaped relationship (Haans, Pieters, & He, 2016). In this study, the predictor is inward FDI stock which measures the total level of foreign direct investment at the end of year (UNCTAD, 2016). Particularly, it accumulates the value of foreign assets at a given point which captures long lasting effects. Furthermore, I adopt the United Nations’ definition of human development which emphasizes that people and their capabilities should be the criteria for assessing the development of a country (UNDP, 2015b). This measurement comprises three components: (i) health, (ii) education, and (iii) income (UNDP, 2015b). In this section, I build my arguments for how FDI affects each of these components.

Understanding determinants of Foreign Direct Investment (FDI) and Agricultural Foreign Direct Investment (AGFDI) is vital to policy makers in developing countries. FDI is a source of capital for the host country that does not affect its debt balance. Even so, technological spillover, better infrastructure as well as an increase in value added and market access have been the source of motivation to increase efforts to attract FDI. As for AGFDI, ongoing uncertainty with the financial markets created a shift in private investment towards tangible assets, which favors AGFDI to developing countries. Nevertheless, investment in agriculture suffers from low commodity prices and

Foreign direct investment contributes to a country’s economic growth and development. It adds to fixed capital formation and has a positive impact on balance of payments without the risk of debt creation or the volatility associated with short term portfolio capital flows. By investing in the other country companies get required resources, cheap labor, and better technology and customized products. Companies also expand their business and generate handsome profit as well as generate employment opportunities for the people of the host country. FDI can enter in various ways in the host country like International franchising, branch contractual alliances, Equity joint ventures, wholly foreign-owned subsidiaries, investment approaches: Greenfield investment (building a new facility), cross- border mergers, cross-border acquisitions, sharing existing facilities. Mauritius, Singapore and USA are the top investors of FDI in India and the service sector is attracting highest FDI inflow and region-wise, Mumbai secures that place.

Mete Feridun (2002) This study examines the relationship between economic growth as measured by GDP per capita and foreign direct investment for Singapore, using the methodology of Granger causality and vector auto regression (VAR). Evidence shows that there is a unidirectional Granger causation from foreign direct investment to economic growth. Anitha (2012) This study discussed about FDI inflow during pre and post liberalization period in India, determinants of FDI inflow to India, problems for low FDI flow to India, suggestions for increased flow of FDI into the country. Dr. Jasbir Singh (2012) In this paper recommends that we should welcome the inflow of foreign investment because it enable us to achieve our cherished goal like making favorable the balance of payment, rapid economic development, removal of poverty, and internal personal disparity in the development and also it is very much convenient and favorable for Indian economy. Mahanta Devajit (2012) The study tries to find out how FDI seen as an important economic catalyst of Indian economic growth by stimulating domestic investment, increasing human capital formation and by facilitating the technology transfers. The main purpose of the study is to investigate the impact of FDI on economic growth in India. Shalini Aggarwal (2012) These paper tries to study the need of FDI in India, to exhibit the sector-wise & year-wise analysis of FDI’s in India, to rank the sectors based upon the highest FDI inflows. Kali Ram Gola (2013) This paper is discussed about capital inflows from abroad that are invested in or to enhance the production capacity of the economy. Despite, globalization is the essential role of foreign direct investment (FDI) in economic development has not changed. In many mechanisms and dynamics of FDI-assisted developments have changed: there is greater variation in the kinds of FDI, the benefits each offers, and the manner in which each interacts with the host economy. The main purpose of the study is to investigate the impact of FDI on economic growth in India, from the period of 1990 to 2011. Sourangsu Banerji (2013) In this paper we study the effects of Foreign Direct Investment (FDI) with respect to India and its economy. The study analyze the merits and demerits of FDI upon implementation in the Indian domestic market.

A BSTRACT : This article studies the relationship between the foreign direct investment (FDI) and the industrialization. It examines the impact of the FDI on industrial performances in a sample comprising thirty nine African countries within the period extending from 1980 til 2015. The estimation technique hinges upon the generalized method of moments along with instrumentation of variables based on dynamic panel data. On the one hand, the results of different estimations proved that the FDI does not contribute to the industrialization of Africa. Contrarily, the latter has a positive and significant impact on added value by manufacturing integrating interaction variables. On the other hand, the FDI contribute significantly to the amelioration of the added value in the industrial sector. The positive and significant effect characterizes the five African regions in a distinct manner. This disparity is essentially due to the availability of natural resources and the difference in inter-regional economical and political structures. Based on the aforementioned results, it is advisable that African countries reinforce the FDI in favor of industrialization in order to assure an adequate structural transformation of the continent.