Foreign Direct Investment (FDI) - Essay Example

?FOREIGN DIRECT INVESTMENT Foreign direct investment has increasingly been a business trend of multinational corporations within the global economy. Foreign Direct Investment (FDI) is defined by Ho and Yiu Lau (2007, p. 39) as the investment of a company in a foreign country which aims at acquiring a long-term economic interest in business enterprises within the host country. FDI can also be defined as an investment of a company in a foreign country by building a factory within the host country. It is through a company’s direct investment in machinery, building and equipment in another country that foreign direct investment is made possible. With the emergence of globalization and the global economy, FDI has played a leading role in the development of global business enterprises. Kennedy (2001, p. 585) say that the definition of foreign direct investment has been broadened with the increased change in the patterns of global investment by companies. As a result, FDI includes acquisition of managerial interests in companies and enterprises in foreign countries. The managerial interest may not involve investment in buildings or equipment but managerial decisions are determined by executives who are foreign to the host country. The rapid growth of companies which is attributed to the internationalization and use of technology has expanded FDI to incorporate the growth patterns of world economies as demonstrated by Constant and Yaoxing (2010, p. 99) Foreign direct investment is a reaction to the increased liberalization of business activities, changes and advancements in information and communication technology and capital market changes. Jermakowicz and Bellas (1997, p. 33) explain that through the liberalization of national and regional business regulatory frameworks and governance, foreign direct investment has been achieved. Globalization has enabled foreign direct investment to be achieved by international companies and corporations. It is however argued that information and communication technology has played the most significant role in the achievement of foreign direct investment. Technology has allowed companies to invest in foreign countries due to the ease of management that is made possible through the adoption and implementation of information systems. In return, foreign direct investment has enabled the process of internationalizing businesses and companies hence promoting the growth of the global economy as said by Fahim-Nader and Zeile (1995, p. 57). Foreign direct investment can take several forms. According to Driffield and Munday (2000, p. 21), there are many forms of foreign direct investment and these include joint ventures, construction of facilities, acquisitions, mergers, strategic alliance, licensing and input of technology. Joint ventures as a form of foreign direct investment includes a company engaging in a business endeavor with another company within a foreign country. The business activities of the joint venture are usually carried out within the host country. Joint ventures within foreign direct investment include two companies from two different countries coming together with an intention of undertaking a business in a specific industry for achievement of common goals. Belderbos, Jie-A-Joen and Sleuwaegen, (2002, p. 155) assert that in foreign direct investment, companies may construct facilities such as factories, hospitals, institutions or infrastructure in a foreign country. This form of foreign investment thus involves direct and active input of capital for construction of these facilities. The investor company that ventures in the foreign direct investment through building structures usually takes the ownership of these structures even though they provide economic benefits to the host country. Lowe (2006, p. 34) explains that acquisitions as a form of foreign direct investment includes a company acquiring the assets of another company within the foreign country. The acquisition of a foreign company makes the investing company the owner of the assets of the company within the host country. Foreign direct investment may also take the form of mergers or strategic alliances. This is a business scenario in which the investing companies collaborate with companies in the host country with an aim of undertaking a given business project. Handy, Kaufman and Martinez (1996, p. 6) point out that in foreign direct investment, companies may decide to make strategic alliances with companies in foreign countries with an aim of inputting capital into these companies in return for gains in cheap labor or raw materials for the production processes. Through strategic alliances, both the company in the host country and the investing company gain from the benefits of a business alliance by sharing resources for their advantage and business gain. There are many effects or implications of foreign direct investment on the economic growth of the host country. According to Hansen (1998, p. 362), it is through foreign direct investment that a company within the host country receives investment from the investing company. Moreover, capital flows from the investing company to the host country which enables it to develop and grow its sectors of the economy. Tuomi (2009) adds that foreign direct investment may act as a source of information and communication technology for the firms within the host country which facilitates their business processes and managerial functions. Through foreign direct investment companies within the host country are therefore allowed to enjoy products, processes and management skills. As such it can be said that foreign direct investment is a strong impetus to the development of world economies. However it must be noted that FDI has its negative implications such as possible exploitation of raw materials and human capital and creation of unhealthy competition within the host economy. FDI has a significant impact on the production of goods and services in the sectors of the host country’s economy. Production is one of the most important functions of a company especially manufacturing firms. FDI enhances the production capacity of host countries which boosts their economies as said by Trakman (2009, p. 11). Foreign investors often build factories within the host country in addition to their investment in equipment. This often leads to the general economic progress of the host country which is achieved through an increased production capacity of its manufacturing companies. Kennedy (2001, p. 585) adds that it is through FDI that companies within the host countries gain opportunities for co-production through mergers and joint ventures with foreign investors. In return, this causes a significant increase in production capacity of the host country which is often a measure of economic growth. Through foreign direct investment, the supply of the host country’s products will at the long run shift outwards. Zamborsky (2008) explains that this leads to the gain of foreign exchange by the host country which promotes its economic development. Additionally, aggregate demand of the host country is likely to shift outward as a result of FDI and thus enable it to gain an international market for its products. These arguments illustrates that FDI not only enables host countries to increase their production, but also enhances the supply and demand of the products from the manufacturing industries. The enhanced supply and demand is often within the host country, the economic region and the international market for the products of the host country. In return, the country’s economy is shifted upwards and thus revealing the positive implication of foreign direct investment on the production, supply and demand of the host country and thus economic growth. Zemguliene and Zaleskyte (2006, p. 195) demonstrate opposition for foreign direct investment by noting that it causes domestic companies to have weaker power of production as compared to the multinational corporations. Thus the local companies may be driven out of competition in production and supply of their good which leads to a negative implication on the economy of the host country. Swann (2005) adds that the host country may become dependent on FDI especially when there are many mergers and joint alliances of local companies with multinational corporations. In return, the host countries risk losing value added opportunities and services which include research and development. Lowe (2006, p. 34) argues that the strategic control of multinational corporations in the production of host country industries usually leads to exploitation of the country’s natural resources and raw materials. This exploitation is worsened by the fact that the multinational companies exhaust the host country’s resources and invest the returns in the home countries of the investors. This shows how FDI would impact negatively on the economy of the host country. Hansen (1998, p. 362), adds that multinational corporations which enter mergers with local companies often lead to the degradation of the environment of the host countries through environmentally unfriendly manufacturing processes. This includes pollution and exhausting of the forest cover of the host country and thus leading to negative implications on the host country. The advancement, adoption and implementation of technology through information systems within companies of a country have been influenced by FDI. The advancement in information and communication technology has led to efficiency in both the management and business activities of many businesses and companies across the world. As a result, technological needs has necessitated the need for FDI though mergers and strategic alliances which aim at gaining technological advantages. Kosteas (2004) says that multinational corporations have invested heavily on technology within the business functions of host country’s companies. In return of the efficiency that technology enables, domestic companies have enhanced management, production processes and business activities. Supply chain management has also been facilitated by technology in addition to effectiveness in marketing and promotion. Therefore, FDI and the associated investment in technology have promoted the economic activities of the host countries leading to significant economic growth. Park (2000, p. 211) argues that mergers that are based on technology often have relatively long incubation period. This is because the development time of a technology based product usually takes a long time. The processes of acquiring patents and intellectual products lead to uncertainty within domestic companies. The companies within the host countries therefore risk losing intellectual property and patent rights to the investors which would eventually have a negative implication of the host country’s technological and economic development. Marketing as a crucial function of any enterprise has been affected by foreign direct investment to a large extent. Foreign direct investment is described by Trakman (2009, p. 9) as a force behind the competitive advantage that companies in developing countries attain in the market through foreign investment. The competitive advantage is attained through the marketing function of brands which is enhanced by the capital flow from foreign investors. The marketing function of a company is very important especially for the manufacturing industries because it is through marketing of products and services that they are made known to the consumers which leads to increased sales and thus success of the company. Therefore it is through the marketing enhanced growth of a company that the economy of the host country grows because the industrial sector, franchises and businesses of countries form the backbone of their economies and thus determine growth. Many mergers and acquisitions as forms of FDI target marketing of a company’s products within the local market in the host country and internationally. Marketing usually requires a lot of funding and thus the financing of the marketing of functions by foreign inventors enables companies in the host countries to achieve success in the market by widening their market base through awareness campaigns and promotion of products and services. Alam (2009) explains that, the investment in technology by foreign companies enables the marketing function to apply this technology in marketing communication which enhances the achievement of marketing goals and objectives. Marketing success is made possible through investment on market information management. In foreign direct investment, companies that form strategic alliances agree on the roles that each of the companies will play within the alliance. This includes service or product management, pricing and promotion. The contribution of the investors into the marketing functions companies within the host country can therefore be said to have a positive implication for these countries and the growth of the economy of the host country in general. Lowe (2006, p. 36) argues that through FDI domestic firms usually fail to compete in the market because they lack marketing abilities and as a result they are down throated. This would have a negative implication on the economy of the host country. This is because failure of domestic companies to compete within the economy means that they are doomed to have a limited share in the market and ultimately incur losses. Domestic companies which enter into strategic alliances with foreign investors become dominant in the marketing due to awareness and promotional campaigns that causes other domestic companies to suffer economically because they are rendered uncompetitive. Financing is one of the most notable features of the various forms of foreign direct investment. Kennedy (2001, p. 585) illustrates that FDI has caused a profound positive effect on countries especially within the developing economies. Park (2000, p. 211) adds that investment within developing economies through foreign direct investment has grown steadily since 1970s when the yearly average of FDI into developing nations was, on yearly average, below $10 billion. The FDI into developing nations exploded in the 1990s up to $208 billion in the year 1999. Kosteas (2004) asserts that in the globalized economy, the financial investment that is achieved through FDI has grown out of proportion. This is demonstrated by the $1.3 trillion in of FDI outflow that was recorded by the year 2000. It is therefore said that FDI is playing the leading role in the economic development of nations especially within the developing economies. FDI has a positive effect on host countries through financing of business operations of companies by foreign investors which in return causes expansion of companies and businesses within the host country. Hansen (1998, p. 362) illustrates that one of the greatest growth in financing of companies was recorded in 1999 when the capital investment in foreign countries through mergers and acquisitions grew up to $636 billion from $481 of the previous year. These figures illustrate the significance of the contribution of financing of companies through FDI on the host country. The financing that is achieved through FDI benefits host nations through expansion of its industries through the forms of FDI such as mergers with foreign investors. Song (2008) argues that investors who finance companies and enterprises within host countries often target very high returns from their FDI financing. This means that the benefits of foreign investor financing gains the investing countries to a greater capacity as compared to the host countries. Kosteas (2004) emphasizes that in most cases, the returns on the financial investment of foreign investors are used to invest in the companies within the foreign investors’ countries. Since it is a small portion of returns in capital that is invested within the host country, it can be said that FDI has negative implications on the host country’s economy. Foreign direct investment has a direct implication on the human resource of the host country including skills and employment of labor. Zhang (1997, p. 32) points out that management skills and expertise are usually gained by domestic companies as a result of FDI. This is made possible through its joint ventures and strategic alliances. Skills in technology are also gained by domestic companies from foreign investors through foreign direct investment. These skills are applied in the promotion of production, company management, marketing and supply chain management. As a result of skills and expertise, effectiveness in management of domestic companies is achieved which leads to an overall growth of the economy of the host country. According to Trakman (2009, p. 9), foreign direct investment benefits the host country through provision of employment opportunities within the expanded local industries, enterprises and companies. Lowe (2006, p. 38) asserts that foreign direct investment often leads to exploitation of domestic labor force. Multinational corporations which engage in FDI often aim at acquiring maximum returns for their investment. As a result, they minimize on wages which reveals exploitation of local human resource for their own economic gain. Moreover, some of the multinational corporations provide poor working conditions for the local employees. These arguments shows that the multinational companies fail to promote individual economic development of the local worker which leads to an overall negative implication on the economy of the host country. In conclusion, it is true to say that foreign direct investment flow is growing much faster as compared to world output and world trade. This is due to the necessity for FDI which is caused by the advancement in technology and the advent of globalization and liberalization of the global economy. FDI has therefore led to both positive and negative implications on the economy of host countries. These implications include the effects of FDI on production, marketing, technology, financing, skills and employment. References Alam, A 2009, “Foreign direct investment and supply chain capability of nations: A conceptual and empirical analysis”, The George Washington University. 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Zhang, D 1997, "Inward and outward foreign direct investment: The case of U.S. forest industry", Forest Products Journal, vol. 47, no. 5, pp. 29-35 Read More