The effect of FDI on host economies has been the subject of extensive research. As pointed out by Hanson (2001), both theory and empirical evidence provide mixed results on the net welfare effect of inward FDI on recipient countries. The attitude towards inward Foreign Direct Investment (FDI) has changed considerably over the last couple of decades, as most countries have liberalized their policies to attract investments from foreign multinational corporations (MNCs). In fact FDI has proved to be resilient during financial crises. For instance, in East Asian countries, such investment was remarkably stable during the global financial crisis of 1997-98. This crisis mainly involved four basic problems (CRS Report, 1998):
Economists argue that the primary cause of the crisis was too much government intervention in economic activity, leading to misdirected and inefficient investments in both public and private projects. As an aftereffect of the crisis short-term capital inflows were viewed as unstable and thus dangerous; long-term capital movements were seen as stable and thus desirable. Therefore an emphasis was put on de-emphasizing short-term capital inflows and encouraging long-term capital inflows, especially FDI which was seen as directly enhancing domestic productive capabilities. There's one school of thought which puts the blame for this crisis on FDI itself. They argue that the crisis had shown that over-reliance on FDI carried its own dangers. Rapid FDI inflows had been a major factor enabling these countries to maintain their overvalued exchange rates. No doubt such exchange rates helped keep domestic inflation under control, but they also increased East Asian vulnerability to speculative attacks. And therefore it was the drying up of FDI, largely as a result of competition from lower wage countries (especially China) and the mobility of regional investment by Japanese, South Korean, and Taiwanese companies, that forced the East Asian countries to open themselves up to heavy short-term capital inflows as a way of financing their growing trade deficits.
In general, international firms are of three types;
Resource seekers: firms looking for natural and human resources
Market seekers: firms are looking for better opportunities to enter or expand within market
Efficiency seekers: Firms attempting to obtain the most economic sources of production.
If the latest trends are an indication Foreign Direct Investment (FDI) is on the rise again. Emerging market countries are the most attractive FDI locations in the world. Led by China and India, emerging markets have achieved unprecedented levels of investor confidence (ATKEARNEY, 2006).
Host governments often lure foreign investors by large investment grants. Economists tend to favor the free flow of capital across national borders because it allows