Domestic problem over foreign investment (Term Paper Sample)

Domestic Problem over Foreign Investment
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Introduction
In the modern world economy, the importance of foreign direct investment has risen. As a result of the gush in foreign direct investments accompanied by rising economies, which have seen the formation of multinational corporations in major economies, debates on whether the countries receiving it should devote their local resources to Multi-National Corporations and use foreign domestic investment as a strategy for their development has risen. A major controversial concern about the effects of foreign direct investment to the hosting countries is whether inflows in the foreign domestic investments crowd in or crowd out domestic investment (Davis et al. 92). After opening up foreign direct investment inflows to domestic investments, the impacts that result depend on the domestic environment and the previous trade system of the host nation. Foreign domestic investment could outdo native investors who have no the strength to compete efficiently with multinational corporations.
Often, the multinational corporations have more advanced technological facilities and powers to crowd out local investors who greatly rely on government trade regulations for the protection from foreign investors. On the other hand, foreign direct investments could crowd in local investment through generation of spillovers. This can be achieved where application of new technologies takes course to aid creation of more production links (Desia et al. 1012). This paper seeks to evaluate the effects of foreign domestic investments on domestic investment within the United States context. This is achieved through an analysis of the impacts of inflow and outflow of foreign domestic investments on the local investments within the United States of America.
Definition of Foreign Direct Investments
Foreign Direct Investment defines the investments taking place between nations in which the investing country gains interest in the enterprise of the host country. This could be achieved through acquisition or construction of production units in a foreign country or improvements to the facility in terms of plants, equipment and other properties (Blaine 397). When determining the value of direct foreign investment, all types of capital expenditures, including purchased stocks, and the earnings reinvested by a company wholly belonging to foreigners should be included. The funds loaned out by a foreign company and other subsidiaries if any should also be included in the calculation of foreign direct investment worth. From a report by the United Nations Conference on Trade and Development (UNCTAD), it is clear that the current expansion of foreign direct investments globally has been driven by thousands of multinational corporations operating different affiliates in different nations. To determine the value of foreign direct investment, the flow is calculated which involves determining the total worth of investments made in a year. Else, the use of stocks will be used in which the wholesome amount of investments made in a year is determined. The diagram below shows an example scenario in which two countries associate to facilitate foreign direct investments.
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Figure 1: Illustration of the activities taking place between two investors (Adopted from: < /what-are-the-different-kinds-of-foreign-investment/>)
Background
Foreign Direct Investment (FDI) can be viewed as an element of integration within the global economic context that has its course in the 19th century. The foreign direct investment flows have been in the rise for the last few decades except for the decline that first appeared in 2008 due to the global economic crisis. The rise in FDI took back its course later to recording values of up to 1.5 trillion dollars (UNTCAD 201). The gush of global foreign direct investment flows in the 1990s marked a major transformation in which investors looking for more profitable opportunities and countries pursuing technological advancements and investments were involved (Markusen 3).
FDI inflows can impact either positively or negatively to a country’s growth, the structures of employments, balances in the payments, the productivity of international trade and the local investments. However, there has been an expansion in the use of local incentives to attract foreign direct investments in terms of value and frequency despite the potential risks associated with its implementation (UNCTAD 203). This has been motivated by the desire for countries to effectively utilize their local resources and to ensure that idle resources are put into use in an effort to; improve the competitive structure of their local economies, create employment, utilize the technology effectively and also the expansion of global markets.
Debates as to whether foreign direct investments crowds local investments in or out have been on the rise. Often, FDI is expected to crowd in local economies since inbound foreign direct investment could result to more local investments in places where it could have been otherwise (Markusen 37). The fact that FDIs creates avenues for introduction of new products into local markets makes its implementation a worthy course. It is thus associated to the formation of capital goods in the country hosting it through introduction of new products and technologies.
Effects of foreign direct investments
Multinational corporations are an important component in any economy where growth is a taking course and mechanisms to escalate the growth are vital. It is, therefore, a common element beneficial to developing countries where the supply of labor and the demand for goods and services are high, but the necessary capital required for sustaining production is limited. Therefore, it would be right to say that foreign investments act to provide the necessary capital that aids in sparking the development of a productive nation.
In the United States, capital inflows resulting from FDIs has been of much benefit to the economy as it led to increased capital investments. This enabled the government to provide investors with incentives at lower interest rates to promote investments and creation of employment opportunities. The United States have for years been the greatest recipient of foreign investment putting it in a great position to developing constantly. Developing nations are highly encouraged to foster their international relations to attract foreign investments as this will be a way of accelerating development.
Figure 2: Illustrating the effects of capital inflows to an enterprise. (Adopted from: < /what-are-the-different-kinds-of-foreign-investment/>)
Foreign investments are an incentive in creation of employment to locals as the investing companies will hire labor, both skilled and unskilled nation (Friedman and Wladimir 58). Relocation of a factory from one country to another is seen as a threat to the nation as the employees of such a firm will be left jobless. It is, therefore, the mandate of governments to improve the work environment in their nations in a manner that attracts foreign investors.
Other advantages associated to the foreign investments includes improved transfer of technologies, exchange of production techniques, productivity spillovers and improved processes of production all which spur economic growth.
Conversely, foreign direct investments can lead to financial volatility, a factor prominent in escalation of inflation and thereby affecting the economic stability of nation (Friedman and Wladimir 58).
Another effect with foreign direct investments is the "contagion" effect. This defines a phenomenon in which investors chooses...