Tuesday, March 10, 2020

Foreign Direct Investment Essays

Foreign Direct Investment Essays Foreign Direct Investment Essay Foreign Direct Investment Essay Foreign Direct Investment Name: Course: Instructor: : Institution: Date: Foreign Direct Investment Foreign direct investments are the investments made by a company situated in one country to another company situated in another county. The company investing may make its investments by forming a subsidiary or an associate company in the country it is making investments. For example, a European company may take a majority stake in a company in Japan. The foreign direct investments cause an increase in growth, in the developing countries. It does this by accumulating capital in the developing country. FDI promotes the use of new inputs and foreign technology in the production process. It acts as a complement to the developing countries. It enables technological advancements in the developing countries. These technologies enable economic growth since they are efficient. In addition, these are the same technologies used by the multinational firms. This enables production good quality products enabling the developing countries to gain competitive advantage in the market. Technological ad vancement enables long-term economic growth in the developing countries (Cohen Oxford University Press, 2007). The foreign exchange rate policy also affects the developing countries economic growth. The foreign direct investments enable the developing countries to practice the key exchange rate reforms. This enables it to eradicate the real exchange rate misalignments. In turn, this enables the developing countries to experience a growth in their GDP. In addition, the foreign exchange rate policy enables trade liberalization. This enables the developing countries to experience an improvement in their international trade. They are able to trade with more countries by maintaining a constant high trade pattern, than before. By trading with more countries, they enjoy greater exports as compared to the imports. This prevents them from experiencing a deficit in their balance of trade. In turn, the developing countries gain access to the foreign currency that comes from the trade. This improves the developing country’s economic growth. The countries are also able to improve their terms of tra de. It can do this by raising their export prices permanently. This, in turn, increases the countries national income causing a growth in GDP. FDI enables the provision of capital to the developing countries. The multinational companies enable the transfer of capital in order to support the domestic savings. This leads to an increase in the domestic capital for the developing countries. This, in turn, increases the domestic investment. In addition, FDI increases the growth of the developing countries through promoting the returns in production. This is aided by its externalities and the spill over effects. FDI provides a knowledge channel for the developing countries. It provides knowledge to the countries engaging themselves in FDI. Example, FDI increases the flow of knowledge to the Japanese firms engaging in FDI. It also enables the provision of employment, which in turn raises the living standards of people. A new stock measure of the FDI centered on the employment enables access to a long-term effect of FDI in the states involved. This, in turn, increases growth in the developing countries, which finally increases the GDP. FDI helps in reducing the inflation rate and the government consumption, which in turn raises the GDP in the developing countries. Inflation control is a great macroeconomic stabilization policy. It is important for inflation to be controlled in order for the developing countries’ GDP to increase. On the other and, increasing the government spending reduces economic growth in the developing countries. Therefore, FDI helps in the reduction of inflation and government spending, a great barrier in the developing countries. With the achievement of this, the developing countries enjoy an increase in their GDP (Cohen Oxford University Press, 2007). References Cohen, S. D., Oxford University Press. (2007). Multinational corporations and foreign direct investment: Avoiding simplicity, embracing complexity. Oxford: Oxford University Press.

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