Foreign Investment During the Recent Global Economic Recession

The early 1990s exhibited a boom in many economies throughout the world due to factors such as globalization and other trade liberalization practices, but this boom was quickly halted in the latter half of the decade when bad investments nearly sent the entire world into economic turmoil. With the introduction of free trade practices such as the North American Free Trade Agreement, or NAFTA, the economies of many of the worlds “developing countries” skyrocketed due to an influx of foreign investment. At, first this exponential boom in small countries with emerging economies seemed like it would never end. However, this all changed when investors “caught wind” that these developing countries did not have the means to keep up with the massive inflow of investments. This led to what we know refer to today as the Asian Financial Credit Crisis. In order to understand how to prevent such a disaster from happening again, we must first examine how exactly this event was triggered, and what should have been done differently.

As well as the direct impact on employment and wider economic benefits of FDI as follows:

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.

The market crash drastically altered the nature of FDI. After consistent growth between 2003 and 2007, investments in developed countries experienced a steep fall, suffering from about a 29 per cent drop. In contrast, investments in developing countries skyrocketed, peaking at an about 43 per cent increase (UNCTAD 2009).

FDI has only been treated as separate to traditional theories of capital movements in the internationally sphere since the 1950s (ref: lit review copied text). It became a system and theory in its own right in response to undertakings to understand the inadequacies in projected investment return from different countries, and began to differentiate between them as individual systems. A study by Mundell (1960) showed that some American firms were actually able to gain a higher rate of return on European investments that those in their local economy.

In figure 3, Cho and Rhee (2014) show the composition of capital flows for all 10 Asian Countries excluding Hong Kong and Singapore. While the FDI was quiet stable, the portfolio investment part decreased from 2.2% of GDP in 2007 to -2.9% in 2008. Also, the other investment part of capital inflows, like bank loans, declined since 2007; nevertheless, it rebounded over than the pre-crisis level and became the major source of capital inflows after GFC.

In today’s increasingly globally integrated business world, foreign direct investment (FDI) “provides a means for creating direct, established and long-lasting links between economies,” according to the 2008 Organization for Economic Co-Operation and Development Benchmark Definition of Foreign Direct Investment (OECD, 2008, p. 14). Foreign direct investment (FDI) is defined as “an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor,” by the United Nations Conference on Trade and Development (UNCTAD).9

Another incentive for prospects of FDI in developing countries has moved from location advantage to competitive advantage. Before, investing firms based their FDI motives on natural resource allocations, cheap labor and production. Now, it is becoming a bigger trend for these firms to count more on the `availability of knowledge creating activities' that allow them to exploit their advantage over competition through the new technology they bring to the developing countries. A further incentive deals with `asset control' that leads to cost reduction and larger markets in which

Economic growth and benefits of foreign direct investment depend on factors such as the industry and the learning curve. Foreign direct investment (FDI) is, “a controlling ownership in a business enterprise in one country by an entity based in another country.” [1] There are three strategic types of FDI: Horizontal FDI, Platform FDI, and Vertical FDI. The horizontal FDI is, “when a firms duplicates its home country-based activates at the same value chain in a host country through FDI. Platform FDI occurs when “foreign direct investment from a source country into a destination country for the purpose of exporting to a third country. Vertical FDI “takes place when a firm through FDI moves upstream or downstream in different value chains i.e., when firms perform value-adding activities stage by stage in a vertical fashion in a host country.”[1] It is a common belief that FDI increases local growth (economic development); and the benefits come from transfer for technology and management know-how, introduction of new processes, and employee training. [2]

In today’s world of investment, every country, every region, competes for foreign direct investment; however, they do so disproportionately - one thing is for sure: The more FDI, the better. FDI flows generally follow investor’s choices, interests, and perceptions. The need to earn more creates new opportunities for investors and nations alike. But

Ekpo, A.H. (1995) investigated that the element like higher gain from investment, low labor and production cost, political stability, enduring investment climate, official infrastructure facilities and helpful regulatory atmosphere also serve to invite and guard FDI in the host country.Chadee and Schlichting (1997) investigated some of the aspects of FDI in the

The factors involved in process of economic growth of nations have transformed overtime, from savings to trade, foreign investment and human capital base of the country. With opening up of the economies and the formation of multiple agreements among the countries, trade and FDI have become the major medium of accord among the economies. There has been surge in FDI inflows ever since the countries adopted liberalisation policies across the globe. The countries have been looking for policies to attract more FDI by boosting investment climate in their countries, to finance their process of growth and development.

By using monthly time series data, we found that Foreign Direct Investment (FDI) is positively affecting the economic growth direct contribution, while Foreign Institutional Investment (FII) is negatively affecting the growth alb its, in a small way and make a preliminary attempt to test whether the international capital flows has positive impact on financial markets and economic growth. The empirical analysis using the time series data between April 1995 to December 2004 shows that FDI plays unambiguous role in contributing to economic growth.

Foreign Direct Investment, or FDI, is a type of investment that involves the injection of foreign funds into an enterprise that operates in a different country of origin from the investor” (economy watch). The determinants of foreign direct investment may be the socio-economic, financial and the cultural factors which usually have positive and negative effect on the foreign direct investment. The risk is attached to the determinants of foreign direct investment. This paper examines the major determinants of foreign direct investment exchange rate, market size, political instability, infrastructure, openness to market and military rule. Data constraints in Pakistan some determinants consider to be the inefficient.

More than twothird of FDI is between TNC’s. Total revenues for the Global 500 TNCs in 2006 add up to $18.9 trillion, a third of the world 's GDP. 70,000 TNCs and their 6, 90, 000 foreign affiliates, contributing $19 trillion in sales, a third of world GDP, create major component of this FDI stock and worldwide FDI flows. GE (US), Vodafone (UK), and Ford (US) are the top three non-financial TNCs worldwide contributing maximum FDI flows. The global FDI in 2005 increased to $730 billion registering a growth of 18% over $648 billion of 2004. Of the total FDI flows, the developed world contributed $637 billion, out of which half is from only three countries-US, UK, and Luxemburg. In 2005 the net outflows from the developed world exceeded the inflows by $260 billion. For the US, the largest economy in the world with $ 12.5 trillion GDP, FDI outflow increased by 90% to $ 229 billion in 2005. The developing world FDI grew by 40% to $ 233 billion in 2004 mainly due to M&A activity and also due to green field FDI rising consecutively for the third year. Studies suggest that FDI flows by TNC’s have transformed international trade in the last two decades and created new giants and a new world order (Blonigen, 2005). For 2006-07, global FDI flows are expected to rise further if economic growth is consolidated and becomes widespread, corporate restructuring takes hold, profit growth persists and the pursuit of new markets continues (UNCTAD,