Foreign direct investment, economic growth, granger causality 1 introduction economic performance and economic growth of a country is influenced by multiple factors. The rising interest in this area of research also coincides with the shift in emphasis among policymakers towards attracting more fdi inflows in recent years. Foreign direct investment and growth in ep and is countries. Apr 30, 2020 foreign investment refers to the investment in domestic companies and assets of another country by a foreign investor. The impact of foreign direct investment on the nigerian. Pdf foreign direct investment theory, evidence and practice. It implies that, for a given level of risk, rates of return on assets are not equalized internationally by portfolio capital flows, due to inefficiencies in securities markets. How does foreign direct investment promote economic. Economic theory has identified a number of channels through which fdi inflows may be beneficial to. Theoretical studies on fdi have led to a better understanding of the economic mechanism and the behavior of economic agents, both at micro and macro level allowing the opening of new areas of study in economic theory. Foreign direct investment may be attracted toward areas where the average rates of profit are higher. Foreign direct investment in emerging market countries. Moosa presents a survey of the vast body of literature and ideas relating to foreign direct. The balance of payments constraint can be expressed as follows.
This paper studies the effects of neoliberalism on foreign direct investment in africa. The work covered a period of 19812009 using an annual data from central bank of nigeria statistical bulletin. Fdi is an important vehicle of technology transfer from developed countries to developing countries. The effects of foreign direct investment 69 the effects of foreign direct investment 69 more likely to arise when there are significant economic, social, and cultural differences between the. Despite the important role played by fdi in economic growth, a number of policymakers have.
The history and origins of fdi theories were considered, prior to dwelling indepth on the theories themselves. With fdi, foreign companies are directly involved with daytoday operations in the other country. Foreign direct investment fdi influences the host country economic growth through the transfer of new technologies and knowhow, formation of the human resources, integration in global markets, increase of the competition, and firms development and reorganization. Alliances are generally thought to limit direct competition. This improvement in the investment climate over the past decades has been in. The purpose of this study is to disentangle the effects of foreign direct investment fdi on economic growth. The theory of internalisation does provide an explanation of certain types of fdi activities by mnes. In this lesson, youll learn about it, including some of its advantages and disadvantages. Foreign direct investment, finance, and economic development laura alfaro and jasmina chauvin. The threshold for a foreign direct investment that establishes a controlling interest, per guidelines established by the organisation of economic cooperation and development, is a minimum 10%. And ascertain the direction of causality between foreign direct investment fdi and economic growth in nigeria.
Oecd benchmark definition of foreign direct investment. During the past two decades, foreign direct investment fdi has become increasingly important in the developing world, with a growing number of developing countries succeeding in attracting substantial and rising amounts of inward fdi. A model of endogenous growth first highlights the transfer of foreign technology as a key determinant of economic growth, and suggests that economic growth may conversely influence the inflows of foreign capital. For economies in general and developing economies in particular, foreign direct investment fdi has been observed and argued as a significant determinant. Foreign direct investment theory foreign direct investment fdi theory has not been fully established in the literature, however, the pioneering work of hymer 1976 laid down the concept of fdi of which this study has builton. Foreign direct investment, finance, and economic development.
Katsikeas theories of international trade, foreign direct investment and. A theoretical framework edmore mahembe, nm odhiambo abstract the relationship between fdi and economic growth has attracted considerable attention over the years. Foreign direct investment, economic growth, primary sector. Impact of foreign direct investment on economic growth of. What impact does fdi have on the standards of living and prospects for economic growth of developing. Theories of international trade, foreign direct investment and. Foreign direct investment, economic growth, chaos, logistic map, bifurcation diagram, lyapunov exponent. Impact of foreign direct investment and trade on economic growth.
Fdi is different from when companies simply put their money into assets in another countrywhat economists call portfolio investment. Large multinational corporations will seek new opportunities for. The effects of foreign direct investment on the host country. Foreign direct investment, economic growth, primary sector, manufacturing sector, service sector, spillovers. An extensive exploration of theories of foreign direct investment patricia lindelwa makoni abstract the purpose of this study was to identify and examine the key foreign direct investment theories. Impact of foreign direct investment and trade on economic. The oecd benchmark definition of foreign direct investment sets the world standard for fdi. Foreign direct investment fdi is an integral part of an open and effective international economic system. Yet, the benefits of fdi do not accrue automatically and evenly across countries, sectors and local communities.
In theory, fdi can boost the host countrys economy via capital accumulation, the introduction of new goods and foreign technology according to the exogenousgrowth theory view, and also by enhancing the stock of knowledge in the. In general, economic growth creates a variety of demands which cannot be satis. Theories of international trade, foreign direct investment. Foreign direct investment theories papers in the ssrn. To understand foreign direct investment must first understand the basic motivations that cause a firm to invest abroad rather than export or outsource production to national firms. Neoliberal policy and foreign direct investment in africa. Effect of corruption on foreign direct investment inflows in. Economic theory has identified a number of channels through which fdi inflows may be. The core of this paper is the empirical analysis for the case of ireland, one of the leading fdi recipients in the eu. Foreign direct investment fdi acquired an important role in the international economy after the second. The purpose of this study is to identify the main trends in fdi theory and highlight how these theories were developed, the motivations. The paper investigates the relationship between foreign direct investment and economic growth. Foreign direct investment fdi acquired an important role in the international economy after the second world war. Foreign investment refers to the investment in domestic companies and assets of another country by a foreign investor.
The management dimension is what distinguishes fdi from portfolio investment in foreign stocks, bonds and other financial instruments. Foreign direct investment fdi is an integral part of an open and effective international economic system and a major catalyst to development. In fact, rugman 1980b asserts that the tci theory is a general theory of fdi and thereby considers the other existing theories of fdi as sub cases of the same. Chapter2 theories of foreign direct investment and. Dec 17, 2002 the paper investigates the relationship between foreign direct investment and economic growth. The theory of foreign direct investment fdi has so far been built most extensively around industrial organization economics, the theory of the firm and economics of internalization, with a particu lar focus on either market structure or the firm as a unit of analysis. Foreign direct investment, economic growth, indonesia. National policies and the international investment architecture. Impact of foreign direct investment and trade on economic growth foreign direct investment fdi and trade are often seen as important catalysts for economic growth in the developing countries. Foreign direct investments in the primary sector, however, tend to have a negative effect on growth, while investment in manufacturing a positive one. Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth. This paper examines, within a new growth theory framework, the role which foreign direct investment fdi plays in the growth process in the context of developing countries characterised by differing trade policy regimes. Foreign direct investment is an important issue that has attracted the attention of academic and professional economists as well as politicians and policy makers. This paper examined the contribution of fdis inflows for the selected sectors on economic growth in rwanda and to ascertain the long run sustainability of the.
Foreign direct investment fdi is an investment from a party in one country into a business or corporation in another country with the intention of establishing a lasting interest. Large multinational corporations will seek new opportunities for economic. Foreign direct investment fdi is a major driver of globalisation. Hymer 1976 posits that fdi was a way of transferring skills.
Development economists know that rapid growth requires a high level of investment, which in the absence of foreign direct. Internalisation as a general theory of foreign direct. Foreign direct investment theory and strategy the theory of comparative advantage the theory of comparative advantage provides a basis for explaining and justifying international trade in a model world assumed to enjoy free trade, perfect competition, no uncertainty, costless information, and no government interference. We build an original database by merging several data sources for the period 20002015, and we develop a theoretical. Chapter for encyclopedia of international economics and global trade september 2017 research has sought to understand how foreign direct investment affects host economies. Pdf the paper investigates the relationship between foreign direct investment and economic growth. This is basically the capital markets disequilibrium hypotheses. What is foreign direct investment fdi according to the imf and oecd definitions, direct investment reflects the aim of obtaining a lasting interest by a resident entity of one economy direct investor in an enterprise that is resident in another economy the direct investment enterprise. The effect of foreign direct investment fdi on growth has been debated extensively in the economic literature.
This paper examined the contribution of fdis inflows for the selected sectors on economic growth in rwanda and to ascertain the long run sustainability of the ones that contribute most on rwandan economy. This pdf is a selection from an outofprint volume from the national bureau of economic research volume title. The economic rationale for offering special incentives to attract fdi frequently derives from the belief that foreign investment produces externalities in the form of technology transfers and spillovers. Foreign direct investment theory, evidence and practice i.
Although the theoretical work on fdi points to advantages, conceivably, spillovers. Foreign direct investment and economic growth literature. Since the early 1980s and the ascendance of the washington consensus,many economists have shifted to the belief that a more liberalized economy will promote more economic growth and development. Foreign direct investment fdi is when a company owns another company in a different country.
This study investigates the empirical relationship between foreign direct investment and economic growth in nigeria. Foreign direct investment theory and strategy comparative. As investment patterns of multinational enterprises become more and more complex, reliable and internationally comparable, fdi statistics are necessary for sound decision making. Foreign direct investment is considered a key element for a countrys economic integration and represents a key source to. Foreign direct investment, economic freedom and economic. Does foreign direct investment accelerate economic growth. The relationship between foreign direct investment and. This greatly diminishes the theoretical case for fdi to boost growth, especially when domestic credit creation for the real economy is. Theories of foreign direct investment foreign direct investment, or fdi, is a type of investment that involves the injection of foreign funds into an enterprise that operates in a different country of origin from the investor. Foreign direct investment has been a controversial issue in international economics. In particular, there are three areas where internalisation appears to provide an explanation of fdi as a specific form of international involvement by the mne. From a certain point of view this is a desirable state of affairs.
433 1047 522 805 1030 1430 1114 931 1061 362 1350 577 1266 1284 421 732 1164 101 698 906 38 380 723 892 1575 1445 1141 199 1493 718 1273 152 929 1240 934 212 775 56 1321 541 611 1207 322 80 708 275