The Relative Costs and Benefits of Foreign Direct Investment (FDI) on a Host Country

The benefits brought by FDI to China are apparent. Economy is influenced by FDI in a number of ways. FDI involves transfer knowledge in the host country, which will create an increase on the existing stock of knowledge through labor training, the transfer of skills, and the transferring of new managerial and organizational experience. Also, it can help local corporations to access to advanced technology by capital accumulation in host countries (Mello, 1999 and Mello, 1997). Furthermore, FDI may allow China to develop in technology and knowledge which are not readily available locally, as a consequent increase productivity growth through the economy (Jose, 2003).

Several economists have investigated ways of transferring technology, however, all of them agree that the most significant and efficient way to transfer technology is through FDI.

This essay will give a general introduction about the location choice of foreign direct investment (FDI). After that, it will focus on

Tarun Kanti Bose (Corresponding author) Assistant Professor, Business Administration Discipline, Khulna University Khulna 9208, Bangladesh Tel: 880-1911-451-044 Received: February 25, 2012 doi:10.5539/ibr.v5n5p164 Abstract This study was directed towards detecting the positive and negative sides for the foreign investors while they go for direct investment in India and China. A descriptive and explorative research study has been carried out for investigating the current proposition of the concerned case of FDI in those two countries. Advantages of investing in India includes-Huge market size and a

The growth of globalization has created a massive impact in businesses all over the world. Companies are competing against one another in order to find the most profitable way to conduct business. As the global competitions rise, companies must now consider new dimensions of conducting business to survive in the highly competitive world. In order to create a successful Foreign Direct Investment, companies must look into numerous factors in the target country. Some of these factors include cultural differences, political stability, exchange rate stability, tax policies, state of infrastructure, and corruption level.

Foreign direct investment plays a critical role in financing the development of emerging economies. Foreign direct investment benefits countries through a transfer of resources in the form of capital, technology, management of resources, creation of work opportunities, and a positive impact on the country’s balance sheet, typically through an increase in export volumes. These benefits are essential for sustainable growth and development of a country, especially for developing countries. Despite the important role that foreign direct investment plays in helping to achieve the Sustainable Development Goals, many developing countries face challenges in accessing this source.

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

FDI is where the MNE invests directly in production or other facilities over which it has effective control in a host economy (j &t). According to Pollan (), the definition of the terms “investment” is highly significant to Foreign Direct Investment, which can be typical comprehend as the conveyance of capital to a country. Investment can be defined as money committed or property acquired in order to gain profitable returns, as interest, future income or appreciation in value (business dictionary, 2014). The commonest definition used to understand the idea of FDI is the definition provided by International Monetary Fund’s (IMF). The IMF definition of FDI introduces systems and structures which clearly demarcates foreign direct investment from portfolio investment. According to the IMF, direct investment creates a lasting interest in an enterprise, consisting of a long-term relationship between the investor and the enterprise and that the investor has an outstanding amount of control on the management of the enterprise, while portfolio investment does not create an extended relationship and the portfolio investor is rarely directly partaking in the day-to-day management of the enterprise (Pollan,). FDI however has no comprehensive, authoritative and ubiquitous legal definition and the test for the existence of enough degree of control differs in scope depending on applicable law in a

On the other hand, John Dunning claimed that there are four types of FDI in terms of their motivations: resource seeking FDI, efficiency seeking FDI, market seeking FDI and strategic asset or capability seeking FDI. According to resource seeking FDI, companies invest in foreign countries with the purpose of acquiring resources of higher standard and at a smaller cost than in their own country. Examples of resources are raw materials, labor force, infrastructure (roads, telecommunication) and technological level (Dunning, 2008). As claimed by market seeking FDI, firms invest in a country with the purpose of supplying goods and services to the host country’s market. It highly depends on market size and products distribution channels. At the same time, efficiency seeking FDI has the aim to exploit greater availability and lower costs of all relevant components from foreign countries. Last, strategic asset seeking FDI is driven by the strategic goals in the long run of foreign firms such as encouraging and promoting their worldwide competitiveness or weakening their rivals (Wadhwa, 2011). If we analyse the FDI amount in Romania during 1990-2009, over 50% of it was concentrated in the secondary sector (manufacturing). So investors

FDI is the outcome of Mutual interest of MNC’s and host countries. The FDI refers to the investment of MNC'’ in host countries in the form of creating productive facilities and having ownership and control. On the other hand if MNC or a foreign organization or a foreign individual buys bonds issued by host country it is not FDI, as it has no attached management or controlling interest. Such investments are called Portfolio Investments.

For growing economies, Foreign Direct Investment (FDI) has momentous advantages over equity and debt capital flows. Most of the foreign firms that start their conduct of business in other countries, they not only come with capital but transfer modern technology, promote human capital by training the host country’s employees according to the change of technology to those countries, and this is the key for the development of the host country.

The unpredictability of autonomous FDI flows, in both scale and direction, has generated a substantial research effort to identify their major determinants. The remainder of this paper is mainly concerned with examining the factors influencing the destination of the investment: Host-country determinants, rather than industry specific factors. The major determinants of FDI are as follows---

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,

Foreign Direct Investment (FDI) refers to ownership of physical productive assets in the recipient country. It can be seen as the sum of the following components;

Foreign Direct Investment is the investment of a country domestic assets into foreign structures, equipment and organizations, but does not include investment into stock markets. Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (direct investor) in an entity resident in an economy other than that of the investor (direct investment enterprise). The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated.