FDI

Foreign Direct Investment and Economic Growth

Foreign Direct Investment and Economic Growth

Introduction

The world total Foreign Direct Investment (FDI) has been increasing gradually for the last three decades. According to Bashier, and Talal (2006), the multinational companies (MNCs) are making huge investments in the developing economies (DEs), taking control on the assets, and has successfully managed the production systems in these countries. In 2009, the global levels of FDI cross the limit of $ 17.7 trillion around the world, over 27.5 percent of which was invested in Developing Economies. This type of FDI arrival not only illustrates the business trend of MNCs toward Developing Economies but also increases the number, and sales volume of MNCs. By exploring the new foreign markets to introduce their products in DEs markets, they are utilizing the host country's resources, enjoying the lower production costs, lower labor costs and more profits (Dilipk 2004, p.12).

Literature Review

In 1981, most of the East Asian developing countries started to liberalize their economies, introduced new set of laws, and regulations relevant to FDI influx, and presented themselves as safe haven for the FDI influx. Today, FDI is considered as the prime factor, which can foster economic growth in underdeveloped countries. We will discuss the role of developing countries in development of underdeveloped economies.

The FDI's role in economic growth is not novel in the economic literature. It has been discussed by a great number of experts, research scholars, and policy makers in different periods; that have explored, and evaluated its different aspects. Fidel Castro (1993) stated, “Who would have thought that we, so doctrinaire, we who fought foreign investment, would one day view foreign investment as an urgent need?” Nelson Mandela (1994) stated, “Please come and invest in my country”. Fernando Henrique Cardoso (1995) stated, “We need private capital” (Soysa & Oneal 1999, p.766).

In 1960s, large scale foreign investment started in DEs. In the late 1970s, some members of OPEC (the Organization of Petroleum Exporting Countries) in the Middle East shifted their investment policy away from giving loans into indirect investment and then from indirect investment into direct investment. In1990s, there was a sharp growth in FDI flux towards East and South East Asian countries like India, Indonesia, Malaysia, Pakistan, Philippines, Republic of Korea and Singapore.

“The globalization processes that have taken place for the past two decades, as well as the development of MNCs, have led to a search for new sites for investment” (p.601). According to Pantelidis, and Nikolopoulos (2008), the competition among same graphical zone countries such as European Union, Asian. And others countries have increased to attract more FDI influx (p.90). The effect of FDI on the economic growth depends upon the open trade policies, and macroeconomic stability of the host country. The trade liberalization policy of host country not only enhances the trade volume but also increases the FDI influx, which contributes to economic growth of that country (Dritsaki et.al 2004, p.230).

“Foreign direct investment (FDI) has a potentially important contribution to make to the growth ...