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What is the impact of international trade for developing countries
Positive effects of fdi
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The paper discusses the notion that foreign direct investment (FDI) can both damage and facilitate economic growth in the world’s poorest regions. It does so with a particular focus on the current trend of global economic integration. The potential dual effects of FDI are discussed here in terms of both their long and short-term effects, i.e. those arising from its routine operation, and those arising from particular events, such as the 2008-9 financial crash. The paper first defines the key terms under discussion, i.e. global economic integration (globalisation), FDI, the world’s poorest regions, and contemporary economic integration. It then discusses the variable effects of FDI on the world’s least developed countries (LDCs). It does so by looking at the ways in which FDI supposedly encourages development (i.e., through technology spillover), and considering the problems which may arise. The paper concludes that the producing a definitive explanation of the dual implications of FDI for LDCs is made difficult – if not impossible – by the variables which arise across the national economies in question.
In positive terms, globalisation can catalyse cross-border capital flows into the poorest regions, alleviating poverty through increased government revenue (through taxation), knowledge spillovers, capital formation, and employment (Aswathappa, 2010). Analysts such as Borensztein et al. (1994) considered this phenomenon from a macro-economic perspective, focusing on technology diffusion; they assume that if the minimum levels of human capital were present, FDI would have complimentary effects on domestic businesses. However, as Moran (2011, p.4) points out, establishing whether or not FDI makes a positive contribution to developm...
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...n of forces such as technology spillover. Reaching the critical mass of productive resources, entrepreneurial capabilities and production linkages which will support technology spillover (i.e. from MNCs to local enterprises) is something which national governments can encourage as a precondition of successful FDI. However, this in itself cannot succeed if the FDI in question only allocates capital to discrete enclaves of economic activity, as typically occurs in the energy sector. Catalysing enterprise remains a notoriously difficult challenge for governments (of developed, developing and the least developed nations), and one where the misallocation of capital is fairly likely. To this may be added the problem of significant deficiencies in the kinds of data which both national governments and NGOs such as UNCTAD need in order to anlayse the situation accurately.
Off-shoring is the establishment of business operations outside national boundaries. The process of moving business outside these boundaries is to garner an advantage either through tax breaks, lower wages, lower transportation cost and/or relaxed regulations ("Offshore definition," 2014). Many firms either branch out as a horizontal multinational or vertical multinational. Horizontal multinational’s produce the same good or services as abroad. This foreign direct investment (FDI) is done to strategically place production closer to the target market. Doing this provides advantages surrounding transportation cost while enhancing learning associated with local needs. A vertical multinational is one that fragments a portion of its good to take advantage of lower cost (i.e. cheap labor). Markusen and Maskus found horizontal multinational replaces trade whereas, a vertical multinational positively correlates with trade (Markusen & Maskus, 2001).
to jobs moving overseas and the flow of wealth in the energy industry, going towards
Globalization over the past twenty has become an issue in many countries. This industrialization of second and third world countries by Western Civilization creates many opportunities for the inhabitants. Not only does it expand trading markets, but also promotes productivity and efficiency; thus improving the country and integrating it into the industrial world. This process not only benefits third world counties, but also industrialized nations by allowing them to export goods to the developing world and increase their profit margin.
Some argue that MNCs actually encourage local business to flourish by encouraging competition, but most local business could never possible compete with these giant corporations. People also argue that they provide technology that wouldn’t be there otherwise that aid their economic development. Even though they may now have this technology, local business still are in no shape to compete with these companies that have so many choices at such low cost. Many defenders of MNCs also argue that they are truly part of the solution for third world countries, while the third world countries disagree bec...
The paper first compared the broad categories of aid to physical capital with aid to complementary factors of production. It was found that aid to physical capital produces a crowding out effect for private investment but that aid to complementary inputs attracts private investment. Within the category of complementary inputs was social aid and economic aid. Though development in both human capital and infrastructure is important in promoting FDI, foreign aid was found to be relatively unsuccessful in fostering growth in human capital. Therefore, aid to infrastructure was shown to be the most effective form of ODA in attracting FDI.
One of the most well accepted models of FDI is Buckley and Casson’s (1976) internalisation theory, who developed a model of MNCs and FDIs centered around the interrelationship between market imperfections, knowledge and the internalisation of production and consumption (Buckley and Casson, 2009). Specifically, the theory recognized that multinational corporations are both horizontally and vertically organized, and that the “the vertically integrated firm internalises a market for an intermediate product, just as the horizontal MNE [multinational enterprise] internalises markets for proprietary assets” (Caves, 1996: p.13). In addition, internalisation will occur, and multinational corporations will expand only as far as the advantages, including barriers to entry, are not offset by the costs of control, communi...
Throughout the chapters assigned, Dicken focuses on the patterns and processes of global shifts, on the forms produced by the globalization of economic activities and on the forces producing those forms. He builds his arguments around three interconnected processes, which in his view are the reasons for reshaping the global economic map. Those are Transnational Corporations (“TNC”), States, and Technology.
Woodward, D. (2001). The next crisis?: Direct and equity investment in developing countries. London: Zed Books.
... to the country and bring with it the advantages of advanced technology, management practices and assured markets. In due course there is a technology transfer as the local workforce gains knowledge of the manufacturing processes and management practices. The value added in these industries is a contribution to GDP and foreign exchange earnings. Therefore FDI contributes to foreign exchange earnings, employment creation and increases in incomes, especially of skilled and semi-skilled workers in these industries
Two internal barriers to economic growth and development are International trade and Political barriers. Barriers prevent and restrict development in some countries. While some things are barriers to economic growth some are barriers to economic development. In this case being international and having a political sense is a barrier to both thoughts. Change and the process of development is a multi-generational process.
An increasing number of countries are encouraging investments with specific guidelines toward economic goals. MNCs may be expected to create local employment, transfer technology, generate export sales, stimulate growth and development of the local industry.
Sukar, A., Ahmed, S., & Hassan, S. (n.d.). THE EFFECTS OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH. Southwestern Economic Review.
“…increasing international trade and financial flows since the Second World War have fostered sustained economic growth over the long term in the world’s high-income states. Some with idle incomes have prospered as well, but low-income economies generally have not made significant gains. The growing world economy has not produced balanced, healthy economic growth in the poorer states. Instead, the cycle of underdevelopment more aptly describes their plight. In the context of weak economies, the negative effects of international trade and foreign investments have been devastating. Issues of trade and currency values preoccupy the economic policies of states with low-income economies even more than those with high incomes because the downturns are far more debilitating.1”
Smith, M. H. (2006). The natural advantage of nations: business opportunities, innovation and governance in the 21st century. Earthscan.
Foreign direct investment policies in different countries influence the investment into business in a nation by a company of an alternative country.