foreign direct investment

Topics: Investment, Capital accumulation, Foreign direct investment Pages: 2 (395 words) Published: January 23, 2014
FDI or foreign direct investment is defined as cross-border investment that is made by company or entity. FDI can be done in a number of ways such as merger or joint venture, acquiring shares or stocks from foreign companies, or setting up a subsidiary or new company overseas. Studies about foreign direct investment have been discovered since a long time ago and foreign direct investment is critically important to growth in any economy (Caves, 2007, Dunning and Lundan, 2008). There are several main determinants that have been identified by new theorist as the factors of economic growth such as foreign direct investment, domestic direct investment, population, improved technology, and improved efficiency and productivity (Levine and Renelt, 1992) and Foreign direct investment plays an important role for representing new technology and greater efficiency to promote or improve economic growth (Ayanwale, 2007) Several channels through which foreign direct investment contributes economic growth have been identified by the theoretical literature. The neoclassical growth theory’s point of view tells that foreign direct investments inflows can increase the stock of capital in host countries thereby allowing higher rates of growth than would be possible reliance on domestic savings. From endogenous growth theory’s perspectives tells that foreign direct investment creates technological advancement that stimulates economic growth such as externalities which can balance the diminishing returns to capital (Romer, 1990, et al., 1992). Foreign direct investments can also enhance growth by allowing host countries which are countries they are invested to use and access the advance technology that is not available domestically and domestic investors can adopt this technology as well. (Bolgien, 2005) Although, there are several arguments say that foreign direct investment can lead to increased competition in domestics market that can create greater efficiency of domestic firms...
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