How Does Foreign Direct Investment Effects on Host Country’s Gdp (Economic Growth)?

Foreign direct investment FDI is an investment of a company from one country to another whereby assets are acquired, operations are set up and joint ventures with local firms are made (Financial Times , n.d.). FDI is a risky and more expensive method of venturing globally as compared to licensing and exporting, however it does not stop companies from doing so due to its many advantages. FDI is one of the key drivers in speeding up the development and economic growth in Malaysia. Sound macroeconomic management, presence of a well-functioning financial system and sustained economic growth has made Malaysia an attractive country for FDI. Moreover, FDI plays a crucial role in Malaysia economy as it generates economic growth by increasing capital formation through the expansion of production capacity.

The Foreign Direct Investment is stimulated by diverse macroeconomic factors such as the GDP, GDP per capita and also by the political stability of a country. The US is the country, which receives the more FDI in the world; even tough some other countries recently have increased their FDI considerably in term of growth. The overall quality of the infrastructure in the US

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)

Robert E. Lipsey and Fredrik Sjoholm, (2004) “The Impact of Inward FDI on Host Countries: Why Such Different Answers?” pp. 23-43 [Online] Available at:

They FDI also increase the amount of investment and consumption goods within a country. This sets the pace for development since most of these goods that multinational corporations produce are usually for export purposes. Increased export performance also helps in mobilization of the labor and accumulation of capital within the host country4. This greatly improves the trading position of the country in question by improving its Balance of Trade statement. Increased exports not only increase the productivity of a country but also provide a country with foreign exchange which in turn increases imported capital to assist in the development of a country4.

“Let’s talk about Investment from one country into another normally by companies rather than governments that involve establishing operations or acquiring tangible assets, including stakes in other businesses. Foreign direct investment is well-known from group of foreign investment by the factor of control. FDI is a transfer of ownership; it usually involves the transfer of factors matching to capital, including management, technology and organizational skills. (D. A. MacDougall G. 1960.). Businesses that make foreign direct investments are often called multinational corporations may make a direct investment by creating a new foreign enterprise, or by the acquisition of a foreign firm. In the framework of foreign direct investment, advantages and disadvantages are one way or another kind of perspective. A Foreign

The approach that the authors take to this issue is to ask to quantitative questions. The first is "are there productivity spillovers from FDI to domestic firms?" and the second is "If so, how much should countries be willing to pay to attract FDI?" The authors note that

Inward foreign investment is believed to boost the economic growth of host countries directly through employment creation and capital formation, and indirectly through knowledge, technology, and information spillovers. Multinationals have superior technologies, technical know-how, and managerial and marketing experiences than domestic firms. Similarly, exporting firms, domestic or foreign, have advantages over non-exporting firms regarding access to advanced technologies that are more productive and efficient. However, multinationals and exporters may not fully internalize the benefits of these assets. The benefits may spillover to domestic and non-exporting firms through market interactions, competition, and public nature of the assets.

that the reliant variable is affirmatively altered by commercial factors. Saltz (1992) examined the result of FDI on commercial development for the third globe countries. His explanations concur alongside those of Bos, Sanders and Secchi (1974), that the level of output of a host state will stagnate in cases of FDI whereas there could transpire monopolisation and pricing transfers, that will cause under-utilisation of labor, that will cause a lag in the level of internal consumption demand and in the end will lead development to stagnate. Barrell and Pain (1999) discovered the benefits of FDI by U.S. multinationals in four European Coalition states and discovered that FDI could alter the host country’s presentation affirmatively in cases whereas there are transfers of knowledge and vision nevertheless the FDI to the host economy. Carkovic and Levine (2002) endeavored to reassess the connection amid FDI and commercial development for 72 states above the era 1960-1995. Their aftermath indicated that for both industrialized and growing economies FDI inflows did not exert an autonomous impact on commercial growth. Specifically the exogenous constituent of FDI did not exert a reliable affirmative encounter on commercial development, even permitting for the level of education, the level of commercial progress, the level of commercial progress and transactions openness of the recipient country. Brada,

Foreign Direct Investment (FDI) has been considered important for the growth of a country. When the individuals or companies from a country invest in another country, it is regarded as FDI. FDI not only strengthens the manufacturing base of the host country but also contributes to the strengthening of the economic outlook. FDI can be seen as an investment that leads directly to job creation in an economy. The unemployment rate decreases due to FDI, which leads to stability in economic, social and political spheres. This leads to establishing the notion that FDI is necessary for a country because it helps in strengthening the economy of a particular country. Ireland has been benefitted by

The correlation between foreign direct investment (FDI) and economic growth is well documented see (Borensztein, De Gregorio, J-W. Lee 98). Even though there has been an extensive amount of research, which includes both FDI and economic growth, there still seems to be a substantial divide between the results; which are concluded within these papers. To begin in this research paper we will define foreign direct

Otepola, Ayorinde. 2002. FDI as a Factor of Economic Growth in Nigeria. Dakar, Senegal: African Institute for Economic Development and Planning (IDEP), May. Available on line rom idep@unidep.org, http//unidep.org.

Abstract: This study examines empirically the relationship between FDI and economic growth using heterogeneous panel for the period 1983-2008. The empirical findings of Larsson panel co-integration show that FDI and economic growth are cointegrated. FMOLS results reveal that FDI and economic growth are positively related to each other. The results of panel homogeneous causality hypothesis show the existence of bi-directional causality between FDI and economic growth while the results of panel homogeneous non-causality hypothesis confirm the existence of unidirectional causality running from FDI to economic growth in selected panel. The results of heterogeneous causality hypothesis show the existence of bi-directional causality between FDI and economic growth only in case of Malaysia. The existence of uni-directional causality running from FDI to economic growth is observed in cases of Nepal, Singapore, Japan and Thailand

Research on FDI has been one of the most popular topics among the scholars in finance and economics field. In order to start the study, the definition of FDI should be clarified first.

Resources that are invested by foreign companies help in boosting the economic development that also includes increase in employment rate. Output of the country increases as FDI bring along with them new technology, efficient management that make use of resources efficiently, and make use of unemployed population of recipient country. Many researchers have focused the positive aspects associated with FDI (Xu and Wang, 2007).