Globalisation (fdi) Essay

From the perspective of developing countries, critically discuss the impacts of FDI and its entry strategies on the economic development of developing countries.

1.0 Introduction

FDI plays a key role in the economic development of developing countries. The problem in developing countries is that the people there are less educated, informed, experienced and skilled. According to the world investment report (2008), FDI helps boost the economy in developing countries by creating employment opportunities, transfers skills, and technologies, this helps in increasing the production rate and also helps the country to develop in the long term. Görg and Greenway (2004) concluded that FDI stimulates the economic growth in developing countries.

1.1 The Impacts of FDI on the economic development of developing countries

To explain the impacts of FDI on developing countries economic development, first, it will cover on the positive impacts of FDI in the economic development. When MNCs operated in developing countries, they needed a huge workforce to carry out their operations. This provides employment opportunities to the local people. Furthermore, with the increase of employment opportunities, people will have income, which will allow them to save money in the bank. The increase of domestic savings will help provide capital for developing countries to finance their development projects (Aghion et al., 1999). For instance, the money from domestic savings can be reinvested in local education which will help further enhance the economic development by providing free education to people. When education is free, everyone will have the chance to obtain skills and knowledge. The more the people are educated and gain more skills and knowledge, the more they become innovative and creative. In line with Endogenous Growth theory, the more education helps to create, the more the opportunity to generate growth by implement and adopt new technologies because technology is changing so rapidly that education is essential to enhance a country’s capacity to absorb new technology (Aghion et al., 1999). Thus, free education in developing countries would not only improve in human capital and also helps the country to move up the ladder and produce more technologically sophisticated products which will thus improve the economic development(Aghion et al., 1999).

Furthermore, according to Endogenous growth theory, through technology transfer, expansion of the level of knowledge ascends through training and skills of labor (Romer,1986). Domestic firms can emulate from FDI through the introduction of alternative management practices and organizational arrangements. Thus, FDI may lead to output growth by increasing total factor productivity due to an observed distribution of technology and increased efficiency through better marketing, managerial structure, and superior technology (Blomstrom et al., 1996; Borenztin et al., 1995; de Mello 1999). Additionally, endogenous growth literature has shown country conditions that are relevant for FDI to have positive effects on growth such as the interdependencies between domestic and foreign investment, appropriate level of human capital, and well developed financial markets. Therefore, FDI has a positive impact on the economic growth of developing countries.

On the other hand, innovation is high-priced, uncertain. Therefore, it is recommended for developing countries to obtain foreign technology made in developed countries. If innovations were easy to distribute and follow regardless of their nature and type, an under developed country would catch up easily by absorbing the most advanced technologies (Romer, 1994; Grossman and Helpman, 1994; Eaton and Kortum, 1995). This will enable developing countries to benefit and profit from expensive research and development. Besides, trained workers or previously employed by multinational firms can provide added benefit to local business by aiding with technology transfer and management skill when they switch jobs or start new firms. So the introduction of technology helps improve efficiencies in production and encourages domestic technological development, thus, this will improve the economic as well. As a result, developing countries benefit from the introduction of technology.

Furthermore, by technology transfer, it boosts the economies of the developing countries. Technology spillovers from foreign to domestic firms can be performed through a variety of channels.

Firstly, in terms of skill, knowledge transfer can take place through labor mobility (Fosfuri, Motta, and Ronde, 2001; Glass and Saggi, 2002). Trained Workers of MNCs with knowledge and technical skills can move to domestic firms. Foreign firms will try to counter knowledge outflows by offering higher incomes to hold workers and also to attract skilled workers from domestic firms (Sinani and Meyer, 2004). Therefore, workers trained by MNCs may move to jobs in domestic firms, taking with them their upgraded human capital. These people make a substantial contribution to raising productivity when working for local firms or when setting up new entrepreneurial businesses. Hence, MNCs company would try to retain their employees by raising their income level thus this will help further improve their life style.

Secondly, domestic firms may become more proficient emulating the production, management, and marketing technology of foreign firms. Domestic firms are reluctant to adopt expensive technology and they will be more likely to do so when they see foreign firms utilizing technology successfully. It is considered as the “demonstration effect” (Wang and Blomström, 1992). Thus, demonstration effects enable local firms to study by monitoring MNCs operating a higher level of technology. After knowing a product innovation or a new form of organization fit to local conditions, local entrepreneurs may strive to replicate the innovation. As local businesses related with existing technology users, information is shared, the risk is reduced, and imitation levels increase (Blomström and Kokko, 1998). Thus, this will helps to increase the productivity of domestic firms.

Thirdly, due to the entry of foreign partners, a greater competition in the host country market is observed (Caves, 1974; Wang and Blomström, 1992). Competition makes domestic firms forcefully use resources more efficiently and adopt advanced productive technologies, which leads to productivity gains this eventually help in the economic development.

Finally, spillovers from backward and forward linkages exist through business transactions between foreign affiliates and both domestic suppliers and their customers. Foreign firms could buy