Foreign Direct Investment

Introduction

The Foreign Direct Investment (FDI), is an integral part of an open and effective international; economic system and a major contributor for development. The investment was motivated by the possibility of high profitability in foreign markets, along with the possibility of financing the interested developing countries. The other determinants were the necessity to overcome trade barriers and securing the sources for raw materials.

Foreign Direct Investment

FDI are basically dominated by the sector of oligopolies. The existence of FDI is related to trade barriers, in part to avoid the uncertainties in supplies, and with external market. The direct investment is determined by specific assets to accommodate the disadvantages faced by foreign firms in relations to local firms. The contribution of the investment increases as countries become more similar in terms of income, and the allotment of factors and technology.

The foreign firms hold advantages over domestic firms like the foreign firm can decide about the internalization of the ownership. The foreign firm can decide to produce in the host country if there are sufficient local advantages. The firms can justify the production in the same country because of the compatibility between the foreign investment and the firm’s long stream strategy (Nonnemberg & Mendonca, 2000).

The Determinants of FDI

The determinants of FDI are presented in the work of Banga (2005), which is summarized in the following discussions. The market size is the most important determinant of FDI in terms of goods. The impact of host country’s market size on the FDI services which arrived at mixed results. The home country business presence can be another determinant for FDI services for this increases the number of market share in the host country and created a demand. The producer needs to locate where the firms find the large amount of customer base.

The FDI embodied the rule of law as the major barrier to FDI in services and therefore, the host government policies and openness. The various host countries have different cultures, taste, and preferences. In respect to culture, which is also the determinant of FDI, it needs to be adapted to the tastes of local customers. The competitive advantages of service firms are another determinant, which have been elaborated in terms of ownership, location and internalization advantages. The competitive advantage becomes an increasingly important as international competition services grow and became intense. Competitive advantages are difficult to measure especially in terms of the culture and it is revealed with the high exports.

The tradability of services which are largely intangible and non-stable that implies international transaction can serve as another determinant in FDI. Another determinant is the oligopolistic reaction that appears when firm are mutually interdependent. In manufacturing, the domestic and international competitors are setting up the units in host countries as their own version of defense strategy. The international expansion as one of the major growth strategies of the firm is also considered as a determinant. The size of the firm has been proved as a significant factor in the international behavior in service industries like banking and advertising.

The Drawbacks

The discussions of drawbacks were taken from the study of OECD (2002) or Organization for Economic Co-Operation and Development. A good example for a developing country is the Philippines. As a country focuses in maximizing the benefits of foreign corporate presence, while also taking stock of the possible costs.

The potential drawbacks for the developing economies includes a deterioration of the balance of payments as profits are send back, the lack of positive links with local communities, the potentially harmful environment of FDI as a impact, the social disruptions of commercialization in less developed countries, and effects of competition in national markets. If the Philippines is in current state of economic development, cannot channel or use the advantage of the technologies about the FDI then, it is not clear whether the benefits to the domestic economy. The costs and the risks of creating the relationship of domestic and foreign enterprises can trigger market wars.

Conclusion

The FDI can make economic change to produce some poor distribution and employment effects in the developing countries. The problems should be temporary but can last long and aggravated in the absence of appropriate policy responses. Another potential drawbacks of FDI have some micro-oriented problems could arise. The overall impact of FDI for development and productivity is always positive and brings distributional changes and emphasizing the need for restructuring the system and the host economy. The changes needs adjustment costs as it matched with the appropriate practices and macroeconomic stability and the implementation of economic plans.

References:

Banga, R., 2005. Foreign Direct Investment in Services: Implications for Developing Countries. Asia-Pacific Trade and Investment Review Vol. 1, No. 2. [Online] Available at: http://www.unescap.org/tid/publication/aptir2383_banga.pdf. [Accessed 12 October 2009].

Nonnemberg, M., & Mendonca, M., (2000). The Determinants of Foreign Direct Investment in Developing Countries. [Online] Available at: http://www.anpec.org.br/encontro2004/artigos/A04A061.pdf. [Accessed 12 October 2009].

OECD, 2002. Foreign Direct Investment for Development: Maximizing Benefits, Minimizing Costs. Organization for Economic Co-Operation and Development. [Online] Available at: http://www.oecd.org/dataoecd/47/51/1959815.pdf. [Accessed 12 October 2009].