Impact of Foreign Direct Investment in an Emerging Market - Dissertation Example

IMPACTS OF FDI IN AN EMERGING MARKET There exists a gap between the resource endowment by the developed economies and the third world economies majorly on capital resources and the technological ability. Foreign direct investments therefore comes about when investors from the developed economies transfer physical as well as financial resources towards the developing economies for the purpose of wealth creation and this has been rampant in the past years. Technological spillovers are other fundamental benefits that emerging economies derive from FDI flows from developed economies and which has absolute importance in general economic performance to these countries. The emerging economies therefore automatically experience effects of such investments from the foreign investors which would either be positive or otherwise negative. In fact, according to a report by Tarzi (2009), many emerging economies are having whole reliance on FDI from such countries like the US and China for boosting own domestic economies. Projections show that it is likely that FDI flows globally are likely to surpass the $1.8 trillion mark projected by 2016 owing to the current statistics. Problem statement Amidst the theoretical postulations discussed above to support the effects of FDI within emerging markets, there exists a gap on the literature on research studies in qualitative or quantitative methods that supports such positive and or even negative impacts that FDI has towards emerging economies. In fact, much of the supposed effects of the FDI in the context of emerging economies are viewed to be positive and the reality of negatives would be easily ignored. There would therefore be the necessity for a holistic study which would establish the qualitative impacts (both positive and negatives) of FDI towards emerging economies. This study will therefore be focused on qualitatively evaluating the impacts of FDI towards emerging economies; both positive and negatives. This paper therefore aims at measuring holistically the impacts of FDI towards the emerging economies. Thesis statement This study will adopt a rational position in evaluating the impacts that FDI flows towards emerging economies, and this will be holistic in order to establish the impacts in either positive dimensions or negative dimensions. Objectives This paper has the main objective as being to measure the impacts of FDI in developing countries in general (without particular preference towards any country in particular) Research questions a. What are the main ways through which FDI contributes positively towards emerging economies? b. In what ways are FDI blamed on impacts towards developing economies? c. Should FDI flows towards developing economies be encouraged in the 21st century and should there be a limit? Hypothesis Positive impacts of FDI towards developing economies outweigh by far the negatives and they contribute towards general improvement of these economies and should be therefore be encouraged for economic growth and development. Limitations of study Among other shortcomings, this study may suffer limitation of time for a quantitative research analysis, and may lack adequate literature for qualitative review, especially on the shortcomings associated with FDI flows towards developing economies. Methodology There are various and distinct methods that researchers employ while conducting such a research study as the current one. In this section, methodology will be used to refer to the systematic processes that will be adopted in conducting this study for data collection analysis and derivation of qualitative conclusions in answering the lead questions identified. It is however worth noting that research methods are part of the methodologies in any research study. The basis of choosing the various methods that are applied in this study is on first investigating literature through reviewing the methods that have been used in the past while studying the topic of such a related theme. This study notes that many of the past studies on FDI in emerging economies have been done through qualitative and deductive methodologies. This study also adopts a qualitative deductive methodology in analyzing the information presented through the literature reviewed for testing of the hypothesis guiding the study and effectively answering the questions posed for this study. The research paradigm adopted as being qualitative (or quantitative where applicable) is equally very instrumental in deciding on the methodology to be applied. Qualitative and quantitative research studies depend on the major differences notable on the nature of reality, epistemology (relationships being studied), use of language, role of values as well as the overall research process (Aylward & Clarke, 2005). This study will therefore be strategic by application of qualitative deduction methods for measuring and making conclusion on the relationship as is being studied. Research design This segment describes the unique procedure that researchers intend to use to go about the data collection exercise. This present study will wholly rely on secondary data and information deduced from past studies or literature that explains such impacts as developing nations derive from the FDI. Although empirical facts in support of or otherwise to the hypothesis may be derived from the literature, this study wholly adopts the qualitative design. The general procedure to be adopted in studying the impacts of FDI flow towards developing economies will be deductions on the literature to be reviewed which includes also findings from such other studies conducted under the same theme. Literature review From the background of this study, it was shown that among other benefits that developing nations derive from developed countries through flow of FDI is spillover of technology. From a macro level, studies have shown that FDI inflow into developing economies brings about social change in matters of positive social structures, especially so in matters of democracy as well as power. Soper, Demirkan, Goul and St Louis, (2012), undertook a study to ascertain the implications of ICT investments through FDI within developing countries and the future in institutionalized democracies and overall FDI investments within the developing countries. Through adoption of a multi-level change modeling focused on 48 emerging countries’ longitudinal data and over seven years, positive correlation between improvement in FDI and institutionalized democracy was confirmed. A quantitative analysis in correlation and causality were adopted for the methodology and ICT development through infiltration of foreign investors within the emerging economies was found to have significant impacts towards general improvement of the economy. Investment in ICT through the FDI was shown to have an indirect yet positive impact towards the institutionalized democracy within these emerging economies. In some instances, countries absorption of FDI has been shown to have significant influence in general economic performance in terms of development and or growth through the capacity to attract and embrace FDI. For instance, in a study (Sinha, 2007) studied the reason why such a country like India attracts barely tenth of what such a country like China attracts in form of FDI and the associated outcome. From the study, China has developed rapidly in the past couple of decades through FDI as compared to countries like India. Besides, countries within East Asia have been noted as the pioneers in understanding the positive effects that are associated with FDI through Transnational corporations especially for economic development of these economies. As led by growth objectives, the East Asian countries attracted high levels of FDI which has contributed to great growth of these economies. Singapore, Taiwan, Hong Kong and South Korea (collectively called Asian tigers) have therefore been studied as models to the positive effects that such other developing economies would derive through effective and strategic use of FDI. This study therefore pointed towards general improved performance of an economy through FDI facilities as against those countries that fail to appreciate FDI inflows. In a case study, Sooreea and Sooreea (2012) evaluated the success factors that saw Mauritius rise in the success path through FDI and what other countries especially the third world can learn from the case. Through a policy analysis approach, the study evaluated the effects of FDI towards revolutionizing the Mauritian economy for the better as we currently have it. From the study, the government invested purposefully towards industrializing the country by attracting foreign investors. The study identifies that general economic development and growth resulted from the ‘spillover’ effect as technology found way into the market and through such, native as well as foreign investors would enjoy production efficiencies and or effectiveness. A heavily-driven export production and processing for the economy led towards the general great economic performance as we have in today in the country. In yet another study, Kim, Lyn and Zychowicz (2003) were interested in identifying whether there is any effect in a developing economy by getting FDI from a particular country as against another. Through a comparative analysis, they found that indeed, FDI causes great economic influence towards economic performance of emerging economies and especially so as depends on the country of origin of the FDI. For instance, technological advancement by developed countries differed and therefore, multinationals extending FDI to developing countries have a lot of influence by initial countries of operation. Nevertheless, the study established supportive evidence that FDI flowing from developed nations towards the developing countries positively impacts on general economic performances. Technology is such a great contributor towards the success of an economy and as such, contributions by the foreign investors in bringing technology should be a welcome move. Nevertheless, it must be appreciated that not all outcomes from FDI are desirable in developing economies, with the example of poor policy frameworks by the government which may fail in attracting FDI into the country or invest investment in unimportant sectors in the economy (Simons, 2009). Discussion Supporters of the foreign direct investments towards the emerging markets reason that FDI may be better on economic development and growth than any other forms of capital flows from the developed economies towards the emerging economies. First, there is a perceived low volatility from FDI flows as compared to other forms in which capital flows occur. Secondly, in times of crisis, foreign investors are disadvantaged in that they are not able to ‘uproot’ plants and as such, the plants and such infrastructures developed by the foreign investors presents a higher benefit towards the emerging economy within which the investor had created the infrastructure. Thirdly, the neoclassical argument that developed economies realize diminishing returns from capital and that they realize higher rates in return from developing economies support the benefits that FDI brings about in investing within emerging economies as against the reverse flow in FDI. There is also a perceived benefit of FDI towards emerging economies in that the economies realize growth from externalities associated with such investments that brings about technological spillovers towards the nations within which they invest (Erdal & Tatoglu, 2002). FDI therefore would contribute towards efficiency and effectiveness in productivity within an emerging economy by improving the capacity of these companies to produce through technological advancement. The presence of multinational companies which bring about the FDI increases general economic productivity of an economy as well as increases competition which necessitates that the local firms improve on own efficiency and effectiveness hence general improved productivity within these economies (Bardy, Rubens & Jackson, 2013). Conclusion and recommendations From the discussion and the literature reviewed, one would argue that the main ways through which FDI benefits emerging economies are together with boosting overall economic productivity, technological advancement as well as on infrastructural development. Overreliance on FDI would however result to bad policies which may adversely the domestic investors and the effect would be adverse to such an economy. This therefore supports the hypothesis of this paper that positive impacts of FDI towards developing economies outweigh by far the negatives and they contribute towards general improvement of these economies and should be therefore be encouraged for economic growth and development. Nevertheless, this paper identifies the importance of FDI flow towards developing economies and therefore recommends developing countries to have appropriate policies that would favor much of FDI flow from developed economies for boosting own economies. Besides, empirical studies could be done for specific countries in order to establish how FDI inflow would impact on such economies due to the difference in economic and social cultural factors at play within each country as against such a generalized study as the current one. References Aylward D. & Clarke R. (2005). Research models and methodologies. HDR seminar series. Faculty of commerce spring session 2005. Retrieved from: Bardy, R., Rubens, A., & Jackson, G. (2013). Contributing to changes of social order in emerging nations: The spillover effect of foreign direct investment. Journal of International Management Studies, 8(1), 47-58. Erdal, F., & Tatoglu, E. (2002). Locational determinants of foreign direct investment in an emerging market economy: Evidence from turkey. Multinational Business Review, 10(1), 21-27. Kim, W. S., Lyn, E., & Zychowicz, E. (2003). Is the source of FDI important to emerging market economies? evidence from japanese and U.S. FDI. Multinational Finance Journal, 7(3), 107-130. Simons, G. P. W. (2009). Foreign direct investment in emerging markets: The problem of policy uncertainty. The Journal of Applied Business and Economics, 10(1), 1-8. Sinha, S. S. (2007). Comparative analysis of FDI in china and india: Can laggards learn from leaders? (Order No. 3251222, Golden Gate University). ProQuest Dissertations and Theses, , 265-265 Soper, D. S., Demirkan, H., Goul, M., & St Louis, R. (2012). An empirical examination of the impact of ICT investments on future levels of institutionalized democracy and foreign direct investment in emerging societies. Journal of the Association for Information Systems, 13(3), 116-149.  Sooreea-Bheemul, B., & Sooreea, R. (2012). Mauritius As A Success Story For Fdi: What Strategy And Policy Lessons Can Emerging Markets Learn? Journal of International Business Research, 11(2), 119-144. Tan, D., & Meyer, K. E. (2011). Country-of-origin and industry FDI agglomeration of foreign investors in an emerging economy. Journal of International Business Studies, 42(4), 504-520. Tarzi, S. M. (2009). China and foreign direct investment: Market-oriented policies and FDI inflows. The Journal of Social, Political, and Economic Studies, 34(3), 275-289. Read More