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.source..
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)....
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