CONSUMERISM AND FOREIGN DIRECT INVESTMENT

Consumerism and foreign direct investment

Consumerism and foreign direct investment

Introduction

The effect of foreign direct investment (FDI) on growth has been debated extensively in the economic literature. The rising interest in this area of research also coincides with the shift in emphasis among policymakers towards attracting more FDI inflows in recent years. Since the early 1980s, many countries (including the developing ones) have lifted many of the restrictions imposed on foreign capital flows. As a result, global FDI inflows rose sharply from $57 billion in 1982 to $1271 billion in 2000. In fact, over the past few decades the growth rate of world FDIs has exceeded the growth rates of both world trade and GDP (UNCTAD, 2001). The reason for the increased effort to attract more FDIs stems from the widespread belief that FDI has several positive effects, including productivity gains, transfers of new technology, the introduction of new processes, management techniques, and technical know-how in the local market, employee training, and international production networks. Additionally, FDI is not as volatile as other forms of capital (e.g., short-terms capital), and hence, is less destructive (World Bank, 1999).

Although the theoretical literature predicts that FDI inflows bring enormous benefits to the host country, empirical studies on the FDI-growth relationship have reported conflicting results (see Herzer et al., 2008). Some studies in this literature have found that FDI exerts a positive growth effect on the recipient countries ([De Mello, 1999] and [Chong et al., 2010]), while others have found no such evidence (Ericsson and Irandoust, 2001) or even a negative effect (Moran, 1998) on growth [see also the survey by Gorg and Greenaway (2004)]. In recent literature, the absorptive capacity of the host country appears to be the key explanatory variable for the weak (or conflicting) FDI-growth relationship.

Specifically, the growth effect of FDI may not be strong in countries with low (or poor) absorptive capacity. In other words, host countries must have certain qualities that allow them to absorb the benefits linked to FDI flows. Apart from this important finding, several intervening factors that are important for FDI spillovers have also been identified in earlier literature, such as the quality of human capital, the development of financial markets, and trade policy.

Consumerism is a way of life combining high levels of material affluence with an emphasis on symbolic and emotional meanings associated with shopping and possessions. The United States continues to lead the way, but the phenomenon increasingly is of global scope. Consumerism can be interpreted positively as a means of stimulating the economy while facilitating people's liberties to shape their identities and subcultures. In contrast, critics perceive consumerism as a manipulated and environmentally destructive habit leading to too many units of stuff being designed, produced, advertised, sold, and discarded (Hobson,1999,14).

Objective

In this paper, we utilize the index of economic freedom (EF, hereafter) provided by the Fraser Institute to establish the potential link between EF and growth. The index is a measure of institutional quality that provides insight into the characteristics ...