Foreign Direct Investment and Economic Growth



Foreign Direct Investment and Economic Growth


The topic of FDI and economic growth is very popular in conditions of development of the modern world and modern economics. Foreign direct investment named FDI is a term, which determines a part of a system of international economics. FDI seems to be an irreplaceable assistant for development. Additionally, the benefits of FDI cannot arise automatically. Moreover, the FDI would not be effective without any efforts if directed across countries, local communities as it is much wider than just one country’s economic affairs.

Nowadays, the national politics of most countries are aimed at international investment, providing the tool for attracting FDI to a larger amount of modern developed countries and getting as many benefits for development as possible. In such a situation, host countries feel the most hurdles as policy regarding environment and fine conditions for investment to be established.

In the project, there are addressed papers regarding the relationship between FDI and the economic growth of countries. This analysis includes not only the connection between these two nations but what factors also influence the FDI flows (Kemeny).

The author addresses famous economic researchers Xiaoying Li and Xiaoming Liu that stated the importance of detailed tests and interactions between foreign direct investment and other factors.

They think that while FDI to developing countries has just a positive effect on economic growth, it has no positive effects on technology development. In their opinion, the human capital and the opportunity to use more technologies will give better functioning of the FDI inflows (Li and Liu). Li and Liu stated that this, in turn, will promote further economic growth and enhance competitiveness.

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The methodology of researched studies also gives a positive effect on the thesis. The studies were done across 84 countries during the period from 1970 till 1999. They used a panel data approach to fit the specifications of every country.

Those tests were applied during the last time. Moreover, they have shown that the process of FDI to other countries becomes harder and specific. Other scientists that also were investigated by the author are Batten and Vo. Their analytic paper contains searches that are very similar to this given topic. The main goal of that study, as well as the goal of this study, is to assess the effects that different institution gives for the FDI investment, and how current policies influence the FDI effectiveness concerning economic growth (Batten and Vo).

Batten and Vo's researches spanned a territory of 79 countries during a period from 1980 to 2003. This statistical data would not give something new but will confirm the statistics already gathered. There is something more in their article that investigates the interaction between FDI and economic growth, not only the effects.

Description of the Project

The project was written in a clear, understandable form using the method of analysis of separate sources. The main objective is to evaluate the effects of different institutional conditions on the functioning of FDI and the impact of FDI on economic growth. The author followed the strict plan of analyzing his sources estimating every separate part concerning FDI and economic growth.

The plan included the main problems and issues to reveal the main sense of the topic. Traditionally, the project begins with the introduction where we get the acquaintance with the next data and topic, which is to be revealed. First of all, the chapter of the literature review lighted out the common sense of:

  1. FDI and economic growth.
  2. Institutional variables.
  3. Urbanization and agglomeration.

There goes the data description and in this chapter, the author was analyzing the main notions and the common related sources that are of great value for the project.

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Next, we have a methodology part and estimation, which concludes the statements about:

  1. Basic specifications.
  2. Infrastructure.
  3. Urbanization.
  4. Primacy.
  5. Institutions.
  6. Estimation of separate samples.

Then, the author’s objective goes further to describe the results of the gathered information and to conclude the final part of the project.

The Contribution of the Student

What was the contribution of the student to this project and how it influences the research and the chosen topic? The student analyzed and compared different points of view on diversified parts of his topic. He gathered the main information concerning the effect of FDI from the side of urbanization, infrastructure, the level of development of the country, etc. The calculations made by the student allowed us to compare and better understand the influence of, for example, FDI percentage, population growth, trade percent, and so on. He started his own opinion concerning the role of the regime in the economic life of the taken country.

The student concluded the results of his project properly. The student compared whether democracy or autocracy is better for countries with unstable political situations. In his research, the student tried to find the answer to the level of international economics and conducted the estimation of different effects on foreign direct investment.

The common opinion is that democratic states there are fit for the FDI and the growth of economy more than the countries without such state regimes, but in autocracies, we see that there is a great range between the maximum and minimum GDP. That argument was presented by W. Easterly in 2011. He proved that in terms of choice between the two countries to be invested in, autocratic states are more profitable for that purpose. However, the process of investing in such countries should be very careful. Autocracy has strong political boundaries and another danger. Excessive concentration in urban agglomerations is possible in such states and is negative for FDI efficiency.

The student also recognized that scientists Hermes and Lensink established a very interesting fact. They stated that it is very important to take into consideration the financial market development. Furthermore, another interesting thing is a commercial lending term or net domestic credit measures. The student found out that there could be a possibility that democracies tend to rely more on the statistics of the market and financial markets, rather than on their opinion on efficiency and decisions (Hermes and Lensink).

Another important aspect found by the student is agglomeration. Information found states that the research can be more accurate if it would be based on better measurement of agglomeration. Also, it is mentioned that there could be more economic methods for measuring the agglomeration than simply based on wages and rent differentials (Puga).

It was concluded by the student that the model of certain countries can help in evaluating the differences between countries. Additionally, the model can advise on the decisions regarding openness to international capital flows, or, Foreign Direct Investment.

Importance of the Project

Such kind of research is important because economics plays an important role in the life and construction of society. I believe that it is important to consider what the economics say about issues and specificity it lays in every country, the consequences it brings, and the opportunity it gives.

Knowledge of economics, especially of the theme of investment, can help in organizing the work and administration of enterprises and self consumptions. Economics is the fundamental science in people’s life. The essence of economics is laid in two facts. The material needs of society are immeasurable and endless.

Much of the empirical research for this project would be an analysis of the indications of every country and an analysis of how successful the economics of the country are in alliance with the state regime. Since we could notice, the regime is important in the case of this project. It is not a decisive moment, but certain aspects of the country’s life eventually have.

It is believed that people can get the right statistics of the USA or any other country making certain calculations. The importance of such processes is in the possibility to compare and make the decision by the given data.

Also, the theme of investment is essential as businessmen have got to know where the success would be more probable. If a person decides without any idea, it will rather bring no profit.

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Impact of FDI on Our Life

One of the biggest impacts that FDI has on human life is indirect. It appears to be not from the efforts of certain enterprises, but rather from government policies (OECD).

If individuals are employed by international enterprises, human capital may be raised through training, subsidiaries, and different other methods. That subsidiary company may also have a positive influence on human capital. (OECD)

Additionally, labor moves are influenced by such processes. Furthermore, some employees thus become entrepreneurs. Also, the issue of human capital development is close to other, broader development issues (OECD).

General education investments and investment in other generic human capital are of the necessary importance in creating an enabling environment for FDI.

Attaining a certain level of educational level is a big plus to a country’s ability both to attract FDI into the country and to maximize the human capital from foreign enterprises.

The level of investment attraction is the ability of the host country in enabling an effective environment and in having good professionals to provide. Education itself will not make the country attract foreign investment. In any case, a significant “knowledge gap” is also not very good (OECD). Labor market standards are important elements for the country and in enabling the environment for investments. Taking steps against discrimination and abuse, the authorities maintain employees’ opportunities to upgrade their capital and strengthen their incentives for doing so.

On the other side, foreign direct investment has the potential to get economic and social benefits to host economies (OECD). However, there is a risk that foreign enterprises can use the foreign direct investment to export production that is prohibited in their home countries. In the case where authorities of host countries are prone to attract FDI, there would be a risk of omission of regulatory standards. Responsibility to organize the environment is on the host countries, while FDI can benefit the environment…

To sum it up, the impact of FDI is generally positive. It is positive where host-country policies are normal and not strictly harsh. Examples of it can be found in sectors and industries (OECD). Consequently, the regime plays a role in FDI since democracy has more freedom for citizens, but autocracy has the rules, which are to be followed.

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