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Evaluate The Impacts Of Foreign Direct Investment Economics Essay

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Globalization has changed companies international activities over the year all over the world for well developed and developing countries (Stefanini2006). Globalization; countries worldwide dissemination of the material and spiritual values ​​are considered as beyond national borders, among countries in the economic, political and cultural values, variable gain, resolution of ideological distinctions based on the polarization of different cultural values, beliefs and expectations and better recognition of the intensification of these relations, as well as homogeneity of the differences reached a development that would be correct. Another way, globalization of economic, political, social and cultural fields, some common values ​​beyond the local and national boundaries are defined as the spread around the world.

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Globalization has been seen important improvement around the world countries and economies, creating greater unity in international business and finance and rapidly accelerating the integration of developing countries into the global economy. Wit and Meyer(2005) suggested that in analysis of globalization has crucial importance which are Globalization of companies, businesses and economies. However, these trends have not in any sense been universally positive for all the countries. There are many reasons that globalization has negative impacts to different countries well developed countries have seen benefit of globalization while poor and developing countries and economies have been faced negative effect of globalization.

The globalization is not just expand to investment to other countries because it is effected the host countries economical social existing and future condition such as employment rate, GDP, increase technological skills and integration and cross border cooperation. Emerging and developing countries try to attract to invest foreign investment with such as new regulations, law, reduce to borders to have global competitive advantage to attract business firms because one of the most crucial issue of development is the investment for the countries. It is not always to possible to cover all needed investment by internal resources.

The process of globalization, particularly foreign capital flows to developing countries is of great importance for the development and to attract and growth foreign investment is a great change to host countries especially in the developing countries. The multinational companies have reached significant transnational trade helping by improvement of services, technologies.

Foreign direct investment (FDI) decision of the firms is one of the crucial issues in term of the host country such as the market and political situation and certainty, benefits and alternatives shapes the entre strategies.

Foreign Direct Investment

Definition of Foreign Direct Investment

FDI can be descried that activities of a business of beyond the borders of the home country and the manufacturing plant to establish of existing production facilities by increasing its capital to a subsidiary of a FDI in the different country.

In the worldwide perception, foreign direct investment (FDI) is delicate to economic situation of the countries. Allen and Edward (2008) mentioned that the inadequacy of data for surveillance remains an issue in many countries. FDI growth factors demand less of the monitoring and compliances to lure the investment leading to more exposure.

It was reported by The World Bank (Investing Across Borders 2010) that “in 1970 global FDI total $13.3 billion and in 2007 it was $1.9 trillion however in 2009 the economic rescission affected all type business trade and FDI in developed countries dropped 41% contrast in developing countries it was 35%.”

There is many benefits and disadvantages of FDI in the host countries. Business firms has facilitated many new jobs, develop the skills, new technologies on the other hand impact of FDI is not always positive for example competition with local business, environmental labour right issues, undermining local government(Navaretti and Venables 2004)

Foreign Direct Investment(FDI) influences the economic performance and is given various advantages to firm thus reach cheap raw materials and natural resources in different geographies, cheap cost of manufacturing process, weak labour and health safety regulations, less taxing.

FDI decision is one of the most important issues companies need to carefully reviews the conditions of the host country, in line with the market situation in which competing firms choose the way of investment. There is factors directly affecting foreign direct investment (FDI) desions such as political balance, low rates, indused policies.

According to Sun(2009) linkages between domestic and foreign firms can also affect the export performance of domestic firms, which provides yet another explanation for increased competition for FDI among host country governments.

There are two basic understanding of the effect of FDI, one of them is considered that this effect is positive and other second believe refused it however “spillover effect” is still important matter for these two sides. (Aitken and Harrison 1999)

Navaretti and Venables (2006) mentioned the FDI effect host and home countries in variety of ways and it can be structured in three way firstly product market effects these are the quantity and quality of home and host country and also competitive conditions of multinational and local companies. Secondly factors market effects can be expand as capital and labour and thirdly spillover which is effects of technological improvement in host country.

FDI Theories

Vernon (1966) as cited by Bora (2002) examined “Product life cycle model seeks to bridge international trade theory and individual firm`s perspective of investment in product development and mentioned that there different level in the product life cycle in different multinational companies.” The theory basically concerned that foreign direct investment (FDI) is major way to transfer new innovations and technology and assume three level of product life cycles.

Caves(1971) as cited by Jones and Wren(2006) studied Hymer`s theory and linked Hymer`s theory of international production to the then current theories of industrial organization on horizontal which is firm`s product in foreign market and vertical integration which is different stage of production.

Dunning (1997) developed OLI(ownership, location initials of internationalization) theory also known as eclectic theory. According to the eclectic theory multinational companies invest and acts to advantages of ownership advantages, location advantages, and internationalization advantages. Domestic and foreign companies can achieve competitive advantage in markets that are closely related to benefits.

Foreign direct investment (FDI) studies regarded to positive effect of employment in host countries and emerge of economy. Chen (2000) mentioned that foreign direct investment(FDI) helps to improve knowledge skills and assistance to progress new technologies and adaptation to new ideas marketing and business strategies and also make attractive to other investors in host country.

Foreign Direct Investment in China

China`s historical changes is an important example to progression communism and imperialism systems. “Chinese communists have transformed their socialist ideology into a new national project that de¬nes modernisation in globalist terms.”(Harris 2005) Zhilong(2002) mentioned that “China began to implement the ‘opening-up policy’ and actively utilise foreign direct investment (FDI) after Deng Xiaoping had come into power, which means that China did not open its domestic market until the early eighties. During the three decades from 1949 to 1979, China absolutely forbade foreign investments and hardly took foreign loans.”

Since agreement to the WTO in 2001 FDI growth dramatically and China has become biggest FDI share comparing in developing countries according to WTO(2008) China has become the world`s third largest trader and manufacturer.

WTO(2009), export of Chinese goods has determined that the first order and export of commercial services ranked Fifth in the world also China has become one of the largest importer in the world. One of the most well developed country Germany has ranked second in export of merchandise and export of commercial services was third. This report shows that Brazil and India other most emerging countries in FDI.

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Euromonitor (2010) indicates that China`s export were valued China’s exports were esteemed at US$119.9 billion in April 2010, up by 30.5% year-on-year and increase 24% than last year. The reason of increase of export was mainly growing machinery and electronics sales to USA, the EU and Japan. In addition in April 2010, imports went up 49.7% year-on-year to US$118.2 billion however The annual expansion in imports slowed compared to March 2010, when imports increased by a robust rate of 66.2% year-on-year to US$119.4 billion. In April 2010, China, open 7.2 billion U.S. dollars recorded in the previous month, according to the first time since 2004, recorded a trade surplus of $ 1,700,000,000. However, compared with a year ago, China’s trade surplus shrank 87.0% in April of 2010.

Muyuan(2011) argued that after earthquake in Japan there will be negative impact of FDI in China because Japan is the second foreign direct investment(FDI) country in China after Hong Kong. Japan FDI was $4.1 billion in 2010 and this figure corresponds to 3.9% of FDI in China. However China`s economic growth is not just depend on FDI there is significant foreign exchange reserves and surplus even though it was believed that there will be long term impact of Japan FDI rise of economic growth in China.

The massive expansion of the Chinese economy growth can be described as a miracle comparing the improvement global export and has become an economic power in the world. Chinese companies ranked top list of leading global business firm over the years.

Since economic development people lifestyle, consumer behaviour has changed in China.

There is huge movement to rural area to big cities even though largest population still remains in the rural areas.

There is different studies have defined FDI in different ways for instance according to Chen(2000) “foreign direct investment defined as investment in which a firm acquires a substantial controlling interest in a foreign firm or sets up a subsidiary in a foreign firm or sets up subsidiary in a foreign country and also is one of the strategy to getting multinational”. There is different ways to invest other countries such as licensing, franchising, joint venture, exporting, greenfield investment, merger and acquisitions.

Foreign Direct Investment in Brazil

FDI has crucial role in progress and improvement of Brazil economy and being attracted by many multinational firms. Over these progresses Government policies has been changed to make suitable to invest by firms.

Euromonitor(2010) confirmed that Brazil has second foreign direct investment(FDI) inflow in the world. According to the central bank foreign direct investment in Brazil (2009) totalled $25.9 billon.

The impact of FDI on Brazilian economy has been helped a number of ways for instance improvement policies, economical situation, political stability and increasing the countries reputation over the years.

The growth of FDI has changed and increased productivity level, competitiveness and become more ease up since 1990s in Brazil.

The spillover effect influence existing market and productivity of other firms also and it is more likely that products becomes cheaper

The foreign investors create outflow of personnel, management styles from the foreign firms to host companies. Moran(2004) mentioned that Citibank`s training program influend the financial sector and become a leading example to train their own employees in Brazil.

FDI is not effect employment level also it may affect technological improvements which is called spillover effect which is transferred by firms and effect productivity, effiency and econimal growth.(Jones and Wren 2006)

The growth of FDI has changed and increased productivity level, competitiveness and become more ease up since 1990s in Brazil.


This essay aims to give an overview of foreign direct investment with main theories and examples from variety of countries. Activities of multinational companies effect in both home and host countries in the global world and also these activities have some advantages impact in short and long term prospects and significant effects on both sides.

Over the past decades emerging countries have changed and improved existing economical and political situations to attract by and become very attractive for FDI and gain competitive advantages especially such countries China, India and Brazil become major host countries for international companies. Foreign direct investment has been effected economy, investment trade ,structure, envoriment and labour in host countries.

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