Using Examples and Case Studies Discuss and Evaluate the Impacts of Foreign Direct Investment on Host Country Economies.

Topics: Investment, Foreign direct investment, Macroeconomics Pages: 8 (3000 words) Published: October 26, 2011
Word count 2.269words
Using examples and case studies discuss and evaluate the impacts of foreign direct investment on host country economies. Introduction Foreign Direct Investments are long term capital holdings directly invested in one country by another country. These foreign direct investments can be either outwards or inwards. The outward foreign direct investment is also referred to as investments abroad and is usually supported by the government against various types of risks associated with the investment1. It is also able to enjoy various types of incentives such as tax incentives. These are usually the investments invested by the country in to a foreign country2. The inward foreign direct investments are the investments invested by a foreign country in to the country1. Foreign direct investments can also be in the form of mergers and acquisitions, where a firm in a foreign country acquires a firm in the host country and obtains the power to make strategic decisions concerning the firm. Foreign direct investments usually result into the making of multinational corporations. There are various reasons why people invest in foreign countries: They do this to expand and strengthen the markets that are already in existence or to explore and exploit virgin markets with incredible potential for profits. Some multinational corporations transfer strategic assets and capital in order to optimize the market opportunities that are available in order to improve their operational efficiencies and to enjoy economies of scale3. Foreign direct investments have been viewed as a tool of driving economic growth and development in countries especially the less developed nations. It helps such countries build up and increase their physical and operating capital, create opportunities of employment, increase the capacity of production, globalize the local economy by introducing new products and skills in to the local market through transference of technology and technical know how4. In essence the inflow of direct foreign investment in to a country is very important as it determines the Balance of Trade of a country2, which in turn is seen to be a very important indicator of the economic condition of a country. There have been different views with regard to the impacts of foreign direct investments to the host countries. There are those who view it positively in term using the case of the Greenfield investment and there are those who view it negatively and stipulate that investors aim is to obtain cheap resources in the said countries and sell their final products expensively to incur huge profit margins4. 1. Cavusgil, S T, et al ‘International Business: Strategy, Management, and the New Realities’, Prentice Hall, 2008. 2.  Morrison, J ‘The International Business Environment’, Palgrave, 2002. 3. Rugman, A M and S. Collinson, ‘International Business’, 4th Edition, Prentice Hall, 2006. 4. Hailu, Zenegnaw Abiy. 2010. "Impact of Foreign Direct Investment on Trade of African Countries." International Journal of Economics & Finance 2, no. 3: 122-133. Business Source Complete, EBSCOhost (accessed March 21, 2011). The impacts of Foreign Direct Investments

For most developing countries, the most important source of external capital is usually in terms of the foreign direct investments. Over the past decade foreign direct investments have drastically increased in developing nations by over 60 percent5. The 2008 global economic and financial crisis saw global foreign direct investment inflows drop from 1979 billion dollars in 2007 to 1697 billion dollars in 2008 and a further decline in 2009 by 44%6. With the world economy at a recovery stage, it is possible that there could be increased foreign investments. There have been two schools of thought with regard to the effects of foreign investments to the host countries. One supports the investments while another...
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