Economic Effects of China's Investment in Tanzania

by

TABLE OF CONTENTS

CHAPTER 2: LITERATURE REVIEWS1

Introduction1

Determinants of Foreign Direct Investment2

The Effects of Foreign Direct Investment on Host Economies (General Perspective)5

Role of Foreign Direct Investment in Host Economies6

Effects on Economic Growth8

Effects on Balance Of Payments and Foreign Trade8

Foreign Direct Investments and the Private Sector as Agents of Economic Growth in9

Developing Nations9

CHAPTER 3: METHODOLOGY15

Research Methodology15

Application of Methodology15

Data Collection Methods16

Literature Search16

Limitations16

REFERENCES17

CHAPTER 2: LITERATURE REVIEWS

Introduction

Before 1960, the effect of Foreign Direct Investment was not well understood by researchers. Some researchers even argued that Foreign Direct Investment was harmful to the host countries, especially to less advanced countries. Since then, more and more papers have gradually explored the favorable roles that Foreign Direct Investment plays in the development process (Eliezer & Georgios, 2008, 327). Many people have found the inflow of foreign direct investment (Foreign Direct Investment) can play a critical role in the development of host countries. Foreign Direct Investment can help increase local market competition; create more job opportunities and so on. However, the empirical tests of the effect of Foreign Direct Investment on growth are mixed. Many researchers argued that Foreign Direct Investment can foster economic growth in the host country if the host country can take advantage of the spillovers of the inflows of capital. For example, recent papers show that Foreign Direct Investment can increase productivity by facilitating the transition of technology (Eliezer & Georgios, 2008, 328).

If we accept that Foreign Direct Investment has a positive effect on economic growth in the long run, or we expect the advantages of Foreign Direct Investment will exceed its disadvantages, the next relevant question we might be interested in may be what determines the amount of Foreign Direct Investment (Eliezer & Georgios, 2008, 338). From the supply side, the answer can provide some guide to investors. From the demand side, the answer can provide suggestions to governments if they want to attract more Foreign Direct Investment.

Determinants of Foreign Direct Investment

The studies on the determinations of Foreign Direct Investment have been well developed since the 1950s; the heading is divided into two levels.

At the micro level, researchers focus on the motivations of multinational enterprises. The generally accepted reasons why firms invest internationally is they take advantage of ownership advantages or to acquire intermediate products they need. Many researchers divide Foreign Direct Investment into several types according to this aspect. For example, Blonigen (2005) divided Foreign Direct Investment into three categories: natural resource-oriented, market-oriented and production-oriented. Hanson (2006) summarized the types of Foreign Direct Investment as: resource-oriented, market-oriented, efficiency-oriented and strategic asset-oriented.

At the macro level, variables include factors in both home and host countries. The former is usually called push factors and the latter pull factors. Of course some factors between the two are also considered in the process, such as the trading agreement, the distance and so on. Considering characteristics of host and home countries, the gravity model is very useful in analyzing the factors that influence Foreign Direct Investment flows. Field (2008) was first to use the gravity ...