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Mathematics & Economics
Research Paper
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Examine The Impact Of Foreign Direct Investment (FDI) On Host Nations (Research Paper Sample)


The paper examine the impact of foreign direct investment (FDI) on host nations, especially developing countries.


Foreign Direct Investment
by [Name]

Professor’s Name
Location of Institution

Executive Summary

The paper examines the impact of Foreign Direct Investment (FDI) on the economic growth in host nations among developing countries. To respond to this question, the paper undertook a comprehensive review of literature, which showed a close association between the activities of Multinational Corporations (MNCs) in host nations.  This was then corroborated by a quantitative analysis of statistical data from the World Bank database. Approximately 50 developing countries were sampled. To determine whether there was an association between FDI and economic growth in terms of Gross Domestic Product (GDP), a correlation statistics was done using SPSS software.  In conclusion, the paper determined a close relationship between FDI and GDP, hence rejecting the null hypothesis.
Table of Contents
Executive Summary. 2
1.0        Introduction. 4
1.1 Introduce and justify your report idea. 4
1.2 Justify the importance of your IB topic and gaps. 5
1.3 Objective. 6
1.4 Outline of the report 6
2.0 Literature review.. 6
2.1 Effects of MNEs on host nations’ trade. 6
2.1.1 Processing of local available raw material 7
2.1.2 Converting imports or substitutes products for exports. 7
2.1.3 Export of final products. 8
2.1.4 Labor intensive and vertically integrated global industries. 9
2.2 Non-competitive and competitive Impacts. 10
2. 3 Conceptual Framework. 11
2.3.2 Endogenous growth. 12
2.3.3 Innovation-based growth by Grossman and Helpman. 12
3.0 Research Methodology. 13
3.1 Data Collection strategies. 13
3.3 Data sources and variables. 14
4.0 Data Analysis and Findings. 15
4.1 Descriptive data analysis including visualisations. 15
4.1.1 Frequencies. 15
4.2 Any preliminary results. 17
5.0 Conclusion and recommendations. 19

1.0      Introduction

1.1 Introduce and justify your report idea.

Economic theory presents two methods of exploring the impacts of foreign direct investment (FDI). One of the approaches is based on the international business, which is a standard theory and the partial comparative technique that examines how marginal increment from foreign investments are allocated (Tausch & Heshmati 2012, p. 314). The major prediction is that inflows of foreign investments whether portfolio capital or FDI can increase marginal product of labor while reducing the marginal product of capital in the host nation (Lu, Liu, Wright & Filatotchev 2014, p. 429). Furthermore, Lu et al. (2014) state that FDI is associated to other benefits. Primarily, direct gains from tax revenues of foreign revenue, economies of scale and external economies where local companies acquire know-how or forced by multinational enterprises to implement efficient techniques.                                                                    Another approach arises from theory of industrial organisations. The main issue is why   MNEs expand to emerging markets to manufacture similar products and services as home nations.  Based on these view point, there cannot be direct investment. Evidence demonstrates that to ensure the success of foreign direct investment there should be impaction in the market of products or factors such as technology, companies or government interference in competition (Ozawa 2014, p. 43). For this fact, to penetrate in emerging markets, organisations should have assets including technology, products, marketing and management skills to be used in the overseas affiliate.  Companies penetrating in foreign emerging markets hence present a unique form of enterprise and features important when it comes to analysing the effects of FDI on host nations. The expansion of MNEs offers useful benefits besides capital into host nations.                  Such a distinction is useful for emerging economies where local organisations are not only weak but also relatively small and technically backward. Emerging economies also differ from developed economies in terms of market size, level of protection and skills. The penetration of MNEs into emerging markets therefore has negative and positive impacts. While the traditional business and industrial organisation theories are not equally exclusive, they put emphasis on various elements of capital flows. Traditional business theorists have focused on direct impacts of foreign and portfolio investments on rewards, capital movements and employment opportunities (Navaretti, Dasgupta, Mäler & Siniscalco 2013, p. 280). On the other hand, supporters of industrial organisation theory concentrate on externalities or indirect impacts (Navaretti et al. 2013, p. 280).

1.2 Justify the importance of your IB topic and gaps.

Currently, the attractiveness of FDI is the main strategic development issue globally particularly for emerging markets. The IB topic is selected because FDI have long term engagement with investment of host countries. In addition, FDI is attractive for its ability to increase economic growth by developing local investment, employment opportunities, and added value by MNEs. Moreover, FDI can boost host nation’s economic growth by providing the required capital, create jobs, and generate productivity spillovers and transfer technology and know-how (Lederman, Mengistae & Xu 2013, p. 3640). Much as FDI play helps host nations in terms of transferring technology and know-how, attracting FDI is not a guarantee to economic growth. Previous findings show that the importance of FDI on economic growth relies on structural conditions as well as macroeconomic factors (Farole & Winkler 2014, p. 102). Due to the importance of FDI on manufacturing sector, findings are ambiguous. Furthermore, because of uncertainty, investigations in broader contexts might be important in detailed understanding and suitable recommendation.

1.3 Objective

The objective of this report is to explore how FDI impact the economic sector in 50 emerging markets.

1.4 Outline of the report       

The report is divided into five sections. Section 1 introduces and justifies the report idea while outline the objective and importance of the selected topic. In section 2, critical overview of the literature is provided and the conceptual framework. Section 3 presents data collection strategy, data sources and data analysis strategy.  Section four concentrates on descriptive data and preliminary results while section five presents a summary of key findings and recommendations.

2.0 Literature review

2.1 Effects of MNEs on host nations’ trade

To penetrate into an emerging market and become successful, it is necessary for the organisation to be a proficient manufacturer, properly manage its international promotion and distribution activities that are related to considerable fixed costs (Lederman, Mengistae and Xu 2013, p. 3637). A few domestic companies in emerging markets have the skills and resources to take these challenges. Nonetheless, MNEs affiliates in emerging markets have the ability to set up export activities because they can benefit from their international network of the whole corporations. The agreements with other departments of the corporation offer a detailed understanding of global market conditions, access to distribution channels and overseas markets. MNEs are bigger than domestic organisation and can be in a position to meet the significant fixed expenses for communication, transport and financial services required for export tasks (Roberts, Kayande & Srivastava 2015, p. 246). Investigating the effects of FDI on host nations’ business performance is imperative in differentiating between indirect and direct effects. With respect to direct impacts FDI on host nation, previous literature categorise exports and MNEs activities into groups based on production features;

  • Processing of local available raw material

  • Converting imports or substitutes products for exports

  • Export of final products

  • Labor intensive and vertically integrated global industries

2.1.1 Processing of local available raw material

In processing available local raw material, MNEs have a greater ability compared to local firms in emerging markets (Williamson 2015, p. 221). A fact attributed to MNEs business agreements, marketing abilities, sophisticated technology and know-how. Specially, for emerging markets that lack these assets, MNEs may be the available options to enhance exports....
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