Foreign Direct Investment: Evolutions and Trends in Developing Nations

Previous investigation regarding the potential differential effect of the determinants of FDI in Latin America and the Caribbean countries relative to a globe sample was made, and was able to conclude that in comparison with other developing countries, L.A provides some evidence, that better governance in L.A provides greater incentives for foreign investors, given that there is some type protection of intellectual property rights in these countries. (Williams 73, 2015).

Ajami and BarNiv (1984) attempted to explain the variability of FDI across countries. They emphasized in following determinants of FDI in US: relative size of the US market, change in exports to the US, growth of GNP in the home and host countries, decline in value of the US dollar during the late 1970s, inflation rates in the home and host countries, attractiveness of the US capital markets and research and development and manufacturing as a percent of GNP.

On the contrary, for developing countries FDI can be a big aid to boost their economy and to increase the level of

FDI allows the home country to invest into the host country to produce, advertise, and distribute products, in order to upsurge their market share and provides a long-term investment and enhancement. (Moosa, 2002)

I found this article "Foreign direct investment: Companies rush in with the cash" on the financial times website (www.FT.com) published December 11, 2002 written by John Thornhill. The reason for choosing this article is my personal interest in the Chinese economy and its attractiveness to the foreign investors. Apart from the foreign direct investment this topic has also helped me in understanding the impact of Chinese economy on the global market.

Since World War II, trade between growing and manufacturing nations has strengthened and borrowing of poor countries from the rich countries has increased. The growing link between these two groups of economies increased eventually in addition to the increase in the rate of dependability amongst them. With the rapid growth in wealth and industrialization of the First World, only a few developing countries managed to have adequate economic growth on the line of the developed countries. Many of the developing countries which were poor at that time still remained to be poor today even today in comparison to the industrialized nations. Dearth of capital and skilled labor produces a low level of per capita income preventing the developing countries to realize their economies of scale through which many of the developed countries benefit from. Several attempts have been made by developed countries to decrease the disparities between rich and the poor economies. To finance their domestic investment, developing countries rely on other governments or international organizations like International Monetary Fund (IMF) and World Bank to procure loans. Besides these loans, foreign investments in these countries are financed by private companies, this from of investment is known as Foreign Direct Investment (FDI). In case of FDIs, the foreign companies, especially Transnational Corporations (TNCs), invest in the growing nations and remain as the solitary owners of these

An FDI may provide some great advantages for the MNE but not for the foreign country where the investment is made. On the other hand, sometimes the deal can work out better for the foreign country depending upon how the investment pans out. Ideally, there should be numerous advantages for both the MNE and the foreign country, which is often a developing country. We'll examine the advantages and disadvantages from both perspectives, starting with the advantages for multinational enterprises (MNES).

China’s economic reform has attracted worldwide attention. From the early stage of mainly export-oriented industries with cheaper labour costs to more recent foreign investments aiming to tap the huge domestic market, China, especially eastern region has gradually opened up to the rest of the world. While this research study is not only of vital importance to China, but also meaningful to the FDI development efforts to the individual regions in other countries.

[UNCTAD2003] As a result, global FDI grew much faster than either trade or income in the last two decades. Whereas world real GDP increased at an average rate of 3.00% between 1985 and 2004 and world exports by 6.29%, world real inflows of FDI increased by 9.85%. The liberalization processes varied considerably, however, across countries in timing, speed, and magnitude.

‘Global FDI flows rose by 9 percent in 2013 to $1.45 trillion from $1.33 trillion in 2012’ (UNCTAD, 2014) Between 2012 and 2013, FDI inflows increased in all major economies - developed, developing and transition economies. FDI flows to developed economies increased by 9 percent, reaching $566 billion, for developing countries they achieved a new high of $778 billion and inflows to transition economies grew by 28 percent to $108 billion and accounting for 7percent of global FDI inflows.

With globalization and technological advancements comes offshoring – the movement of services or manufacturing to another country in an attempt to take advantage of favorable business conditions in that country. As a result of offshoring, the last decade saw significant amount of capital flight to developing Asia. Skilled work force, availability of labour, low-wages, and easy access to supplies, were some of the factors influencing the move of FDI to the region. Although recent economic data suggest that developing Asia holds 52% of global FDI (UNCTAD 2014), the region’s FDI inflow has been declining since 2011 (UN 2014). A significant cause of this FDI decline is from West Asia with -20% from 2012 (Asia top the world in FDI 2014). So, the economic ill of developing Asia is whose gain?

Developing countries are stuck in a cycle of poverty that can’t be broken from within the domestic economy due to an insufficient supply of investment available in these countries to raise the productivity and income levels of workers. The only way to break the cycle of poverty is through investment from multinational corporations. FDI is an

This paper thus will add value to the existing literature and find the impact of FDI particularly on the African countries. The further sections will develop on the existing literature in this regard, the importance and need for this research and the empirical strategy to evaluate the research question.

Arguments supporting FDI in developing countries suggest that recipient countries need to fulfill some preconditions to create a favorable business environment. It has certain advantages to both the host country and the investor. Host countries’ macroeconomic policy, tax regime, regulatory practices are critical determinants for attracting FDI.

In Indian context, the importance of FDI was realized way back in 1948 when emphasis was given on creating domestic base. However, since access to finance was quite limited, the attitude towards FDI was receptive (Kumar, 2004). Since then there was a debate over the necessity of FDI and Government of India in the 1980s cautiously went on deregulation of industries. However, after the adoption of liberal investment policy under economic reforms in 1991 resulted in attraction of more FDI inflow to the country. In recent times, FDI inflow to India increased by 17.1 percent in 2005, which is 5.8 percent of GDP of the country.