Economic Growth Foreign
The main findings are provided and the conclusion summarised. Think of your introduction as a map that shows the reader where they are going, what it will be like and what they are going to get from the journey.
1.1 Statement of the Problem
For a very long time, to answer the question of what's the impact of FDI on economic growth/development and whether it actually helps to increase or decrease the economic growth has posed many great challenges to governments and policymakers in developing nations around the world.
Moreover as suggested by Basu et al. (2003) there has been no serious attempt to appreciate the two way link between FDI and growth. The two way link between FDI and growth basically proposes that increased FDI encourages economic growth whereas brighter economic growth in developing countries attracts an increased flow of FDI. Additionally according to Basu et al. (2003), many writers and researchers primarily focus on the causality running from Foreign Direct Investment (FDI) to Gross Domestic Product (GDP) and very little interest has been given to examine or study the reverse causality i.e., from GDP to FDI.
For many years now, finding the answers to questions like what impact does FDI have on developing nations and whether they help boost economic growth has posed great challenges to governments and policy makers in developing countries.
One of the most important and primary challenge that developing nation's face in the twenty first century involves the search for the best methods, practices or techniques to support long term economic growth. Many authors/economists in my studies have pointed out that by promoting or intensifying the role of foreign direct investment, can definitely help developing nations to achieve this goal. However in the current literature reviewed so far a substantial debate still exists in regards to the benefits of foreign investment to host developing countries. The advantages of foreign investment inflows on the host country have begun to be questioned. On the one hand many writers and researchers have supported the role of foreign direct investments as means to cultivate and attract managerial and technological resources and also to help in the growth of capital which in turn leads to economic growth. But on the other hand there are researchers and economists who are sceptical about the benefits of foreign investments and they believe that these investments into developing countries are harmful due to the increase in managerial control by large foreign companies.
Can or does, foreign direct investments increase the economic growth in a developing country? In theory it is very simple to state that these kinds of investments can have positive effects on a host economy's development effort. However the outcome of studies made earlier in regards to relationship between foreign investment and economic growths are varied, hence providing a very strong motivation for further research.
1.2 Research Aims, Objectives and Contributions
In recent literature, objection to the process of globalisation in general and the activities of multinational companies in particular have been a common phenomenon. Nevertheless the governments and policy makers have a more positive/optimistic observation of the impacts of foreign direct investment (FDI) on host developing countries. Many developing nations have even planned various incentive schemes to promote and motivate inflows of FDIs to jump start their economic growth. Furthermore, at this stage it becomes imperative for policy makers and governments in developing nations to avoid applying potentially damaging incentive schemes and therefore becomes very essential for them to attain more familiarity about the consequences of the inflows of such kind of investments. The extra knowledge provided through this research of foreign direct investment will not only help governments to attract foreign investment but will also help to maximise the benefits and reduce the potential shortcomings of foreign direct investment inflows that the developing nation receives.
Therefore from the above discussions, if foreign investments are executed well it should then be able to bring about encouraging effects in terms of economic growth in less developed nations. However as mentioned above in section 1.1 the association of FDI and economic growth according to previous studies are mixed. Keeping this in mind, the main goal of the proposed study is to investigate the impacts of FDI on the economic growth. This research recognizes the most important questions, addresses the major controversies ,introduces the latest research and also draws the most appropriate conclusion as to whether FDI leads to growth or if it's the other way round. The research will be carried out with in the framework of developing countries like India. In addition an investigation will be conducted to determine the effects of FDI in India post 1991 and also to examine how these investments have performed in terms of economic growth.
It is hoped that the forthcoming study will contribute to the existing knowledge, through combining a thorough review of literature and secondary data gathered, which will provide facts about the nature of foreign direct investments that can help policy makers in host countries like India to take correct/appropriate decisions when dealing with such kind of foreign investments. In total, this research is designed as a guide for the various policy makers, governments, researchers, practitioners etc and all other parties that are involved in debates about foreign investment and its impact.
1.3 Organisation of the Study
The research is divided into 6 chapters. Chapter 1, 2, and 3 will as questions, what's the impact of FDI to host developing countries? What are the benefits or threats of such kind of investments? How can governments and policy makers in developing countries maximise the opportunities from this investment and avoid potential drawbacks?
Chapter 2 turns to the question as to how the developing nations exploit the benefits from foreign investment. It also discusses the difficulties that developing nations face in terms of attracting FDI. However this chapter also talks about poor countries like India or China that have been successful in taking the benefit of such kind of investments.
Chapter 6 goes on to .........
In chapter......, various definitions of FDI by various disciplines are studied and an attempt has been made to define FDI in a broader sense. This chapter also considers global trends with regards to FDI flows to host countries. The next chapter is dedicated to an in-depth discussion on the determinants of FDI.
Chapter 5 discusses the cyclical effects of FDI on the macroeconomic variables such as balance of payments, employment levels etc. If capital is coming from outside the host country, initial inflow of FDI may have a positive impact on the foreign exchange reserve of the host country. By manufacturing goods that were previously imported and also by producing exportable goods, it would be able to earn good foreign exchange. However on the other hand this reserve of foreign exchange may be eradicated by the way of repatriation of capital, interest and profits. The direct effects of FDI on employment are also examined in this chapter. So in nutshell this chapter basically looks into the effects of FDI on host developing countries and concludes by assessing the intensity of the impact of FDI on host developing nations. After going through many of the journals that are available of FDI, it is conformed that there exists both a positive and negative effect. However there seems to be more positive effect of such an investment, hence which in turns justifies the cause for studying the needs for this type of an investment. Therefore chapter 6 is dedicated to understand the reasons why FDI is so important and why it is needed by developing countries like India. With its many advantages FDI does not go without risks. In this regards, chapter 6 will focus on discussing the main advantages and disadvantages of such investments.
There is no doubt that FDI has become an important source of finance for many countries. Therefore given the potential role that FDI can play in accelerating economic growth of developing nations, these countries are interested in attracting maximum FDI. Keeping this in mind Chapter 7 goes on to discuss the methods by which developing nations like India can attract more FDI into the country.
Chapter .......... Will go on to conclude the discussions in the previous chapters and by doing so, assess whether the objective of the overall dissertation has been achieved.
CHAPTER TWO: Literature Review (5000 words)
Need to raise questions.
2.1 FDI Overview
In this section different definition by different writers/authors will be explored and an attempt will be made to define these foreign investments in a broader sense. In addition, this section will also discuss the background and global trends of Foreign Direct Investments.
FDI has been defined by different writers/authors as follows: ......................................................................................................................................................................................................................
An agreed framework definition of FDI exists in the literature. That is FDI is an investment made to acquire a lasting management interest (normally 10% of voting stock) in a business enterprise operating in a country other than that of the investor.
Strictly speaking, FDI is actually any flow of lending to or purchase of ownership in a foreign enterprise that is largely owned and controlled by residents of the investing country (need to reference). The International Monetary Fund (IMF) on the other hand defines FDI as ........................................................................................................................................................................................................................
So from the above different definitions of FDI, FDI in a broader sense can be referred to as an investment ........................................................................................................................................................................................................................
As per Ki Kim and Soo Seo (2003), beginning in the mid 1980s, world foreign direct investment growth increased rapidly with a growing number of multinational enterprises as the engine of the increased international economic activity. Both industrialized and developing countries are becoming more receptive to FDI flows such that a majority of FDI policy changes in these countries are in direction of more liberalization of FDI inflows.
Although FDI flows and stocks are concentrated mostly in industrialized countries, developing nations, especially in the Asia-Pacific region, recently showed a noticeable increase in their absorption of world FDI flows. Therefore FDI in recent period has become the principal source for external capital for many developing countries, particularly in Asia. According to the world investment report (United nations, 2000), FDI contributes to economic growth through its positive effects on domestic investments.
Economic growth in developing nations depends on their stability to adopt and implement new technologies. New technologies may be available to developing countries through various sources like R&D activities, imports of capital goods and equipments, buying technology and FDI.
However developing nations are faced with many internal and external constraints and also it becomes difficult for developing nations to procure technologies via external arms length such as licensing and franchising as industrialized countries are increasingly reluctant to transfer their technology. These developing nations prefer FDI as a mode of technology transfer to other modes mentioned above.
As per Na and Lightfoot (2006), as the rate of globalisation increases, and the economic linkages between countries strengthens, FDI is playing an increasingly important role in the world economy. As per Cheng and Kwan (cited by Na and Lightfoot, 2006) FDI is widely regarded as an amalgamation of capital, technology, marketing and management. Many countries consider the attraction of FDI as a crucial element in their strategy for economic development.
FDI has no doubt grown at a very extraordinary rate since the early 1980s, and the world market for it has become even more competitive. The modern world has been witnessing a non-stop increase in economic growth which has been characterized by the flow of private capital from developed countries to the developing nations in the form of foreign direct investment. Furthermore Goldberg (2007) informs that it was basically in the 1990s when FDI became the largest single source of external finance for developing nations. According to the World Investment Report by the United Nations Conference On Trade and Development (2005), starting from 1990, FDI has become without any doubt a major element of national development strategies for almost all developing countries over the world and has been considered to play a very important role for jump-starting economic growth in less developed nations.
The overall level of global foreign direct investment has been growing rapidly for the past 20-25 years. Moreover a report by United Nations Conference On Trade and Development (2004) shows that the total reserve of foreign investment in 1980 equated only to 6.6 percent of the worlds GDP and that number drastically increased to 23 percent in 2003. Therefore it is believed that foreign direct investment inflows play a fundamental role as a source of technology, management and capital to host countries. Likewise it has been argued that these foreign investments can positively bring technological diffusion to the various sectors through knowledge spill over which improves the rate of growth of output via increased labour productivity. According to Feldstein (Cited by Loungani and Razin, 2001), the gains which a host countries receives from FDI can take place in several forms such as
Transfer of technology.
Recipients of FDI often gain employee training in the course of operating the new businesses.
Profits generated by FDI contribute to corporate tax revenues in the host country.
The above mentioned review shows that the debate on the impacts of FDI on economic growth is far from being conclusive. The role of FDI seems to be country specific, and can be positive, negative or even insignificant, depending on the economic, institutional and the technological conditions in the recipient country. Also according to Zang (2001), the extent to which FDI contributes to growth depends on the economic and social conditions.
The potential contribution of FDI to growth depends strictly on the circumstances in recipient countries. Certain host country conditions are necessary to facilitate the spill-over effects.
FDIs are basically made by multinational enterprises (MNEs). FDI basically is motivated by the ability to earn higher profits on activities in the foreign country. The financial returns from FDI are normally paid out in the form of.........................................................................................................
FDI has been one of the most fascinating topics among researchers in international business. By 1991, FDI was one of the fastest growing strategic activities that multinationals were pursuing around the world. Also during the 1990s, FDI accounted for an increasing share of private capital flows to developing nations. According to the world investment report (2002), developing countries received 28% of the worlds FDI inflow in 2001.
FDI is definitely an important source of private external funding for developing nations like India. Developing countries share of total FDI inflows increased tremendously from 26% in 1980 to 37% in 1997. However the distribution of these investment inflows was uneven across developing countries. This uneven distribution of FDI among developing nations is a major cause of concern as these investments are significant source of growth for developing nations. These investments do not only bring in capital but also can help stimulate technological development with much of the benefits arising from positive spill-over effects.
Talk about regional distribution of FDI flows to developing countries (regions): 1982-1999 (world investment report 2001)
This dissertation will provide the evidence on the effect of foreign investment on the productivity of local firms, which is an important subject at a time when the level of foreign investment has increased significantly around the globe over the last few years and countries that used to restrict such investments have now opened up there economies to such investments.
Apart from noticeable gains such as generations of employment and capital inflows, these investments have other benefits in terms of transfer of superior skills and technology. Also such kind of investments according to .... These foreign firms in protected markets may provide the competition which is necessary to fuel technology diffusion
Chapter... then concludes with a brief summary, followed by the policy implications of the findings and offer some suggestions of future research on this topic.
As per Caves (cited by ) who conducted a study of the Australian manufacturing industry and found some evidence of spillovers from multinational firms. In addition according to Blomstrom and Person (cited by ) analysis, labour productivity was significantly higher in sectors which had a higher concentration of foreign firms.
The subsequent liberalization of the economy in the early 1990s was followed by an influx of foreign investment, the growth rate of which increased by around - percent in the when compared to - percent in the years --.
According to () many developing countries support these foreign investments with the goal of achieving some transfer of technology and know how that would raise productivity in domestic firms. In addition , according to their findings they believe that the benefit from these investments might not have the desirable long lasting affect and the benefits (if any) may disappear when the foreign firms left the country.
This paper explores strategies for accelerating the flows to developing nations like India. The role of FDI in the development of low income countries is controversial. On the one hand many authors and researchers like Chowdhury and Islam, Rodan, Borensztein et al. (cited by -----) view FDI as a major motivation to economic growth. These authors argue that these investments by foreign investors can provide technical know how and capital which can be used to stimulate growth in a developing nation. But on the other hand other authors see FDI as a negative action as they argue that this investment could have adverse effects on income distribution, employment and national sovereignty.
Low income developing countries are not attracting significant volumes of FDI. In addition the flows of FDI to developing countries are concentrated in a small group of countries with large markets, high income levels and rapid economic growth (UNCTAD, 2002).
2.2 Determinants of FDI
Many developing nations like India are trying to make their business environment even more competitive so as to attract foreign firms/multinationals to invest in the country. Some of the methods that governments and policy makers take is by relaxing the rules regarding market entry, improving the functioning of markets etc have been the methods of developing nations to attract FDI. Also countries which have low labour costs are successful in attracting FDI. While low labour costs and large markets are the main determinants of FDI, the role of exchange rate in influencing FDI inflows has an important part to play.
2.2.1 Political and Economic stability
2.2.2 Market Size
The larger the market size, MNEs will be more attracted to invest in those countries as that would lead to greater economies of scale.
2.2.3 Access to global markets
2.2.4 Availability of Raw material and Human Capital
The education level in a country is also an important determinant for the FDI inflows, since it reflects the availability of skilful labour. An educated population has a higher ability to perform more complicated tasks and assimilate new tasks with ease. As a result it measures the country's ability to absorb new technology.
2.2.5 Low Labour and input costs
2.2.6 Favourable investment and Tax Regimes
2.2.7 Location Advantage
2.2.8 Technology and Innovative capacity.
2.3 Effects of FDI on an economy
This section basically examines the effects that FDI can have on host developing economies balance of payments (BOP), foreign exchange rates, interest rates and employment.
The balance of payments is a statistical statement that explains the economic transactions of an economy with the rest of the world.
FDI may contribute to economic growth directly by creating employment opportunities
2.4 The Need for FDI in an economy
This chapter is not limited to discussing the benefits of FDI alone, but also looks into the possible drawbacks of this investment. The drawbacks have been found to include...............................................................................................
It has been recognized for a long time that FDI can bring huge benefits to host developing nations. These benefits includes knowledge and technology transfer to domestic firms, productivity spill-overs, enhanced competition in the market and also improved access for exports abroad. FDI not only adds to capital formation but also can be used as means for transferring organisational and managerial practices between locations as well as accessing international marketing networks.
As suggested by Griffith (2006), many researchers and analysts for decades have been debating about the various advantages and disadvantages of foreign investment and whether it is wise for less developed countries to attract more and more of these investments to stimulate their economic growth and development. In addition to the above Hansen and Rand (2006) also states that the studies made earlier in regards to the relationship between foreign investment and economic growths are varied. Therefore as per these writers, on one hand there are those who are in favour of foreign investments and believe that these investments can help create a better economic environment for the host countries. But on the other hand there are those who believe that these kinds of investments by foreign firms have potential drawbacks such as deterioration of the balance of payments, as profits are repatriated having negative impacts on competition in national markets.
Furthermore according to Sylwester (2005), there are many researchers and economists who see globalisation and the prevalence of foreign investment in developing nations to have a major negative impact on these countries. They not only have doubts as to whether FDI promotes economic growth but also assert that foreign investments can have negative effects on the distribution of income, working conditions and environmental quality etc.
In contrast to the above mentioned negative impacts of FDI, Makki and Somwaru (2004), state that foreign direct investment can be seen as a significant channel for economic growth in the developing nations. They claim that these kinds of investments are important vehicles for technology transfer from developed countries to developing countries. In addition, Makki and Somwaru examined data from 66 developing nations over the last 3 decades and noticed that foreign direct investments does contribute to the economic growth and then concluded by saying that the benefits from such investments would improve only when developing host countries have better stocks of human capital and domestic investment, macroeconomic stability and trade polices.
Also according to Olofsdotter (cited by Sylwester, 2005), there does exist a positive relation between FDI and growth although the association is greater in those countries with stronger property rights regimes and where there is greater bureaucratic efficiency, are more capable of capturing the benefits provided by FDI. Moreover according to Mallampally and Sauvant (1999), FDI does not only add to capital formation and resources but more importantly it can act as a means for transferring skills, technology, innovative capacity and organisational and managerial practices between locations and can even help accessing international marketing networks.
In addition to the above discussion as per Hansen and Rand (2006), there seems to be a consensus that there exists a positive relationship between FDI inflows and economic growth, provided that the receiving countries of FDI have reached a minimum level of technological, educational and infrastructure development. Furthermore Zhang (2001) advises that there is considerable evidence on the link between FDI and economic growth in less developed nations however FDI is likely to promote economic growth faster and more when host countries adopt liberalized trade regimes, improve education and encourage export-oriented FDI etc.
Last but certainly not the least Loungani and Razin (2001), suggests that although there is considerable data proving that foreign investments benefits host countries, these countries should not get too carried away with the benefits and must assess the potential impacts of these investments realistically and carefully. Hausmann and Fernandez-Arias (Cited by Loungani and Razin, 2001), state that the FDI no doubt has an important role to play in the economic development of less developed countries, however these countries apart from FDI should also focus heavily on developing and improving the functioning of its markets and the environment for investment.
2.4.1 The Benefits of FDI
Various developing countries and economies have started seeing FDI as a source of economic development, employment generation and have liberalised their FDI regimes to attract more investment. The overall benefits of FDI for developing economies are well documented. It's considered that FDI triggers technology spill-overs, assist human capital formation, contributes to international trade integration and above all helps create a competitive business environment.
Those countries lacking capital accumulation and technological progress are developing at a snail pace rate that countries which have high investment rate and R&D expenditures. Therefore FDI can provide these countries with both the capital and technology. The multinationals that are responsible for FDI basically integrate production processes across national boundaries, transfer capital and technology.
Many authors researchers have observed the rationale for increased efforts to attract more FDI grows from the belief that FDI has several positive effects. Among these are technology transfers, productivity gains, employee training, superior managerial skills etc.
184.108.40.206 Capital Formation
220.127.116.11 Technology Transfer
2.4.2 The Drawbacks of FDI
2.5 Liberalization of FDI
2.6 FDI in India
The volume of FDI in India increased from less than two billion dollars in 1991, when the country undertook major reforms to open up the economy to almost thirty nine billion dollars in 2004(UNCTAD).
The Indian government and policy makers are making plans to further deregulate the FDI restrictions.
The improved investment climate in India has not only resulted in more FDI inflows but also in higher GDP growth.
It is far from obvious that FDI in India will have the desired effects. It is widely believed that the type of FDI and its structural composition matters at least as much for economic growth effects as does the overall volume of FDI. It is the quality of FDI that matters for a developing nation like India rather than its quantity. FDI is believed to be of higher quality if it exports oriented, transfer's latest technologies to the host country and has a positive impact on the local firms.
CHAPTER THREE: Methodology (1500 words)
Here you are expected to outline the ways you collected your empirical data (questionnaires, interview etc) and substantiate your argument for why you have approached your research topic in a particular way. You need to explain HOW you are going to carry out your research and WHY you have chosen the method that you chose. WHY not other methods? WHY will this method produce the best results? You should be explaining things like, WHERE are you going to find materials to analyse? WHY are you going to look there? WHERE else COULD you find materials to analyse (perhaps you're not going to look there - why not?). Limitations, assumptions, and range of validity. What limitations are there on your research and your method? Is there simply too much material to look at? How and why did you choose the method of limiting your data or resources to certain information? Reader needs to see you were thorough in your methods and that the methodology you utilized was sound. Its based on research questions as well as goals that you set to attain.
This dissertation of the impacts of FDI, especially in host developing countries like India relies mainly on secondary information and data collection. The data will be gathered basically from various journals, academic publications etc. The research has involved reviewing relevant literature on the subject written by previous authors/ writers/ researchers on foreign investment and has been used extensively.
Given the complexity of this topic and the diverse method by which these investments can have an impact on host developing economies, I believe that a qualitative approach is essential to address the issue.
3.1 Research Problems
However there could be potential limitations while investigating the impacts of FDI on less developed countries. One of the main problems or limitations that could be encountered while researching is that of the extensive collection of available definitions of foreign direct investments. There are just so many writers/authors/researchers who have described the concept of FDI to suit their own ideas. Another possible limitation that could come across after going through some of the literature is that the impacts of the foreign investment on one host country maybe different to that of another host country depending on the policies/or procedure used by the government to encourage/or attract foreign direct investment. Hence it may become difficult to conclude that these kinds of investments always have positive effects on all developing nations. Therefore to make it simpler a study on India or maybe China will be conducted to see what effects FDI has had in these growing economies that receive the bulk of foreign investments.
However there is no universal agreement about the positive association between FDI inflows and economic growth. Basu et al. (2003) also proposed that there is no common consensus regarding the permanent effects of FDI on growth. In these lines, Griffith (2006) suggests that a search for a universal end result of foreign direct investment on a developing economy is simply misguided because these foreign investments can have significantly differing impacts, both positive and negative. Therefore the international business scholars according to Ramamurti (2004) should be alert to both the positive and negative impacts that foreign direct investments can have on host developing countries.
3.2 Research Approach/ How are you going to use the data
3.3 What kind of information are you looking at?
3.4 Data Collection method/ Justification
3.5 Alternative Data Collection method (Advantage and disadvantage)
CHAPTER FOUR: Analysis of Data and Findings (2000 words) - IMP
This is where you present the data thatyou havecollected, and highlight the main issues that emerged from the research. Why do you think the result is this and that.
Developing countries with good infrastructure, natural resources etc tend to attract FDIs.
To take full advantage countries need to meet certain threshold levels (talk about the determinants of FDI)
I can argue that growth in an economy leads to FDI and not the other way round. Hence becomes imperative for the developing country to improve basically everything in the determinants of FDI.
There is no doubt that FDI has a positive effect on the level of economic growth and is definitely consistent with the literature. However according to this research we can not say that FDI directly causes economic growth. Both economic growth of a country and FDI go hand in hand. If there is no economic growth in the country that will not attract multinationals to invest in that country and also if there is no FDI that to in developing countries then the rate at which the economy grows will be too slow. Therefore governments have a huge role to play both to improve the determinants of FDI and also to attract quality FDI which has a long lasting effect. Some of the important ways that government can attract FDI has been discussed in Chapter 6 of this research.
Also the quality of FDI and not the mere volume determines the economic growth of a country.
CHAPTER FIVE: Discussions (2000 words) - IMP
Here you combine your findings from the literature, from your empirical work (for example your company project or interviews), develop your analysis and present your main findings. Discuss your research findings. Your findings may be derived from the analyses of statistical data, interviews, questionnaires or any viable combination of instruments used for research collection and the measurement of data. Link important points of this chapter back to principle ideas in the Literature Review with the evidence obtained in your own research. Is the finding
CHAPTER SIX: Conclusion and Recommendation (1500 words)
Where you bring it all together, stating very clearly your answer to your central question and if appropriate making recommendations, suggestions etc. The Conclusions and Recommendations chapter gives you the opportunity to evaluate the effectiveness of your research programme and to offer recommendations, if desired. In your Conclusions be sure that all of the questions raised in the Literature Review have been addressed.
6.1 General Remarks
In this dissertation, we have discussed in theory what impacts FDI can have on the host developing country's economy through four channels namely: capital formation, technological transfer, employment and trade. The results of the study have been examined on one of the biggest developing countries and one of the largest recipients of FDI in the world, India. The result is absolutely clear that the inflow of FDI has significantly promoted economic growth in India since the opening up policy and economic reforms adopted by the Indian government in .....................
FDI has fulfilled the gap between the capital required for developing and the limited domestic investment. Also the spill-over effects brought by FDI has helped in the transfer of new technology and improved management practices from large multinationals to domestic firms, which in turn has improved India's overall productivity, therefore boosting economic growth. In regards to employment, FDI has created large amounts of employment opportunities. In addition the increase of export has boosted the Indian economy.
Nevertheless the drawback and shortcomings of FDI that has been discussed in the literature review should not be neglected by policy makers and governments of any developing nations. Therefore two sets of policy recommendations can be created in order for developing countries like India to gain more from FDI. The first recommendation is in regards to accelerating the FDI inflows into the Indian economy and the second is concerned with improving the utilization of FDI in India.
6.2 Policy Recommendations to Attract More FDI Inflows
Governments basically need to put in place a very open-minded, transparent and investor friendly FDI policy, wherein FDI up to 100 percent is allowed under the automatic routes that does not require government approval. Cases which require prior approval from the government are actually considered by the Foreign Investment Promotion Board (FIPB). The FDI policy in India is considered as one of the most liberal with very few barriers.
Attracting FDI is not an easy endeavour for policy makers and governments in a highly competitive international market. After realizing the benefits of foreign investment that it can contribute heavily to economic development, governments around the globe especially developing nations are setting in a number of policies and incentive programs to attract FDI. In other words various developing nations have been amending their regulatory environments to become more attractive to foreign investment.
India can no longer compete on lower wages as many developing nations can offer even reduced cost of labour to multinationals. Indian needs to differentiate itself from the rest of developing nations as a productive economy driven by a pool of competent and trained people. To achieve this, the Indian government needs to invest further in its educational system. Also building the required infrastructure that is missing and also efficient and cheap transport and telecommunication systems would help to increase its chances in attracting FDI.
India's strategy to attract higher levels of FDI should be based on raising the efficiency and productivity of the economy. Higher productivity in the economy implies that companies can do more with less, therefore saving them a lot of costs and increasing their returns on their investments. Also another prerequisite for attracting FDI is to create a pleasant macroeconomic environment in which foreign firms can grown and thrive. Inflation should be well under control while GDP is also growing. Role of governments is also very important. Also the quality of labour force is important. The quality of labour force basically depends on the level and composition of skills and educational system.
As per Dunning (cited by Jones et al, 2000), argues that the competition to attract foreign direct investment has become highly intense, as policy makers and governments of host countries are devising various strategies to exploit this investment to the fullest. They believe that by increasing the inflow of foreign direct investment would help to improve their competitiveness in terms of their capabilities and resources. However, countries capabilities to attract FDI highly depend on its current business environment that it has to offer and also various government policies. In addition to the above there are some countries which may enjoy a better competitive advantage in terms of abilities to attract FDI. Some countries may manage to attract more while other less FDI inflows. The reason for such differences in the ability to attract FDI according to Dunning (cited by Jones et al, 2000) is primarily due to the infrastructure level in the host country, economic and political condition and also because of the economic objectives and policies followed by host governments.
As per the Economic Briefing Series No. 1, most of the developing nations rely on multilateral and bilateral aid for their growth and development strategies. In addition much more focus is now being placed on various other sources of capital and FDI has been considered to be the largest source of private foreign capital flowing to developing nations.
Many developing nations are now creating various strategies to attract and maximum FDI inflows as they assume that greater inflows of such investments will have greater positive impacts on their development and economic growth. However as mentioned above the nature of FDI is complex and also its impact depends on various attributes such as the sector in which foreign firms are investing, the scale, duration and type of FDI.
Now refocusing the viewpoint, from simply enhancing the availability of such investments to putting these kinds of investments to better use is critical to push discussion forward.
FDI flows are directed principally towards developed countries. The UN (1999) reported that 72 per cent of global FDI was destined for developed countries. Even among the developing countries, FDI is concentrated primarily in a group of high income and large economy developing countries.
However it is assumed that policy makers and governments of developing nations can influence FDI flows through special attractions efforts in the form of various incentives and investment promotion.
Also as per Wells and Wint (cited by ), who conducted a study on the effectiveness of promotional activity on the flows of FDI, suggested that these incentives and investment promotions have had a significant positive impact on FDI flows into host developing countries who have developed special programs to attract FDI.
Since then many developing countries have shifted towards a more liberal attitude towards FDI and have created favourable conditions for the entry of foreign firms into developing nations as per U.N (cited by ). This trend of attracting FDI is in some way or the other is similar among countries who are trying their level best to attract FDI and thus raises questions about the continued differential effectiveness of promotion. If there is no policy differences among countries with respect to receptiveness to FDI and the promotional programs or incentives are equally effective or ineffective then there will be no country which would be capable of using such programs or policies to increase the FDI inflows. This in turn suggests that the various programs to attract investment would loose their effectiveness in terms of their ability to influence investment flows differentially.
Nevertheless, the first mover countries who come up with a fresh, innovative and new strategy or new incentive and investment programme to attract these kinds of investments will definitely gain more in terms of FDI inflows.
Having recognized the important role played by foreign capital in economic growth and development, many developing nations have opened up their economies and dismantled regulatory barriers to foreign investment and adopted policies to attract the same for example various fiscal and financial incentives.
Tariffs and taxes affect the free flow of goods and therefore would scare away FDI. Similarly political instability, corruption and high inflation rate would deter FDI inflow. So to increase such inflows it becomes imperative for governments to establish political stability and environment and need to implement aggressive trade liberalization and privatization programs. Therefore to attract a reasonably large volume of FDI, it is necessary to establish and maintain political and sound macroeconomic stability and a policy environment conducive to investment.
The task of attracting FDI to a developing countries remains in the hands of the respective governments. In addition the ability of marketers to communicate effectively and efficiently their distinctive advantages and to deliver the expected value to investors is a critical requirement for success. Therefore the marketers of FDI has to adopt a strategic marketing approach, which involves the understanding of the role of FDI in the development program of the country, the identification and building of locational advantages and the formulation and implementation of adequate marketing strategies.
6.3 Policy Recommendations for improving the utilization of FDI
Therefore it's not always beneficial for a country to attract foreign investment by offering different financial and fiscal incentives to foreign firms. Those countries whose technological capability is not very strong should first concentrate on improving their technological profile first, as this is a fundament for reaping the benefits of FDI.
2. Sylwester, K. (2005), Foreign direct investment, growth and income inequality in less developed countries, International Review of Applied Economics, Vol. 19 No.3, pp.289-300.
3. Zhang, K.H. (2001), Does foreign direct investment promote economic growth? Evidence from East Asia and Latin America, Contemporary Economic Policy, Vol. 19 No.2, pp.175-185.
4. Mallampally, P and Sauvant, K.P. (1999), Foreign direct investment in developing countries, Finance & Development, Vol. 36 No.1, pp.34-37.
5. Makki, S.S. and Somwaru, A. (2004), Impact of Foreign Direct Investment and Trade on Economic Growth: Evidence from Developing Countries American Journal of Agricultural Economics, Vol. 86 No.3, pp.795-801.
6. Griffith, W.H. (2006), Does Foreign Direct Investment Promote development?,Journal of Economic Issues,Vol. 40 No.4,pp.1174-1176.
7. Basu, P., Chakraborty, C., Reagle, D. (2003), Liberalization, FDI, and growth in developing countries: A panel cointegration approach, Economic Inquiry, Vol. 41 No.3, pp.510-516.
8. Goldberg, L.S. (2007), Financial sector FDI and host countries: New and old lessons, Economic Policy Review, Vol. 13 No.1,pp.1-17.
9. Ramamurti, R. (2004), Developing countries and MNEs: extending and enriching the research agenda, Journal of International Business Studies, Vol. 35 No.4, pp.277-283.
10. Hansen, H and Rand, J. (2006), On the Causal Links Between FDI and Growth in Developing Countries, The World Economy, Vol. 29 No.1, pp.21-41.
11. Jones, A., Fallon, G. and Golov, R. (2000), Obstacles to foreign direct investment in Russia, European Business Review, Vol. 12 No. 4, pp.187-197.
12. Wint, A.G. and Williams, D.A. (2002), Attracting FDI to developing countries: A changing role for government, The International Journal of Public Sector Management, Vol. 15 No.5, pp.361-374.
13. Khawar, M. (2003), Productivity and foreign direct investments- evidence from Mexico, Journal of Economic Studies, Vol. 30 No.1, pp.66-76.
14. Musila, J.W. and Sigue, S.P. (2006), Accelerating foreign direct investment flow to Africa: from policy statements to successful strategies, Managerial Finance, Vol. 32 No. 7, pp.577-593.
Ki-Kim, D and Soo Seo, J. (2003), Does FDI inflow crowd out domestic investment in Korea, Journal of Economic Studies, Vol. 30 No. 6, pp.605-622.
Na, L. and Lightfoot, W.S. (2006), Determinants of foreign direct investment at the regional level in China, Journal of Technology Management, Vol. 1 No. 3, pp.262-278.
UNCTAD (United Nations Conference on Trade and Development), World Investment Report 2004, [Online], UNCTAD, Available from: http://www.unctad.org/Templates/StartPage.asp?intItemID=2527&lang=1 [Accessed on 02nd Sept 2008].
UNCTAD (United Nations Conference on Trade and Development), World Investment Report 2005, [Online], UNCTAD, Available from:
http://www.unctad.org/en/docs/wir2005_en.pdf [Accessed on 02nd Sept 2008].
Loungani, P. and Razin, A. (2001), How beneficial is foreign direct investment for developing countries?, Finance & Development, Vol. 38 No.2, pp.6-9.