Foreign Direct Investment

Introduction

In macroeconomics, foreign direct investment has been defined as the direct investment made in a country by foreign individuals or corporate organizations. On a broader view, FDI refers to activities such as acquisitions and mergers, building of new facilities like factories and joint ventures. Zilibotti (2009) posits that there are three major forms of Foreign Direct Investment: Horizontal FDI where corporate investors duplicate the same activities in their home country in the country of investment, Platform FDI where the corporate invests in a country as a platform for exporting to another third country and vertical FDI where corporate investors downstream or upstream in a value chain. According to Zilibotti (2009), the concept has been studied extensively and hence much information can be available.

To understand the impact of FDI on a country’s economy, the aggregate demand given by where is the aggregate demand, is consumption, is investment, is government expenditure, is net exports (Zilibotti, 2009). Foreign Domestic Investment is injected through the investment expenditure variable. In order to determine how much FDI a country has, a net value between inflow and outflow investment. The impact of FDI on the aggregate demand is positive when the net FDI value is positive (there is more inflows than outflows) (Zilibotti, 2009). In order to understand these theoretical arguments, this paper presents a discussion on the practical impact of FDI on Chinese economic growth measured through Gross Domestic Product per capita annual growth rate. The use of GDP per capita is commonly used to measure economic growth as it takes into account population differentials. In the sequent discussions, a detailed overvi...

... middle of paper ...

...ely slow. Therefore, impact of FDI on economic growth is not instant rather lagged and other factors neutralize the actual impact of FDI and hence response is lagged or slow. This explains the low coefficient of determination (33.35%) of FDI.

Conclusion

In summary, Foreign Direct Investment is defined as net investment inflows derived by finding difference between inflow FDI and outflow FDI. Economic theories such as classical theory indicate that the impact of net FDI on economic growth is positive. The aggregate demand function can be used to illustrate this relationship. The analysis in the case of China has found that its net FDI inflow between 1982 and 2012 has positive impact on its economic growth rate. Additionally, it is a significant variable in determination of the variation in economic growth. Nevertheless, further research can help expound on the issue.