Tuesday, May 15, 2007
Foreign Direct Investment - Facts & Myths
The bar graph above shows one aspect of economic globalisation - foreign direct investments. There have been a steady increase in FDIs over the years. Therefore, in my post this time round, I shall discuss on the facts and myths of Foreign Direct Investments and its increase in this globalised world.
Foreign direct investment has increased much over the last 20 years. It brings private overseas funds into a country for investments in manufacturing or services. However, although it can bring in impressive growth, it can also cause instability and economic distress, such as the Asian financial crisis. However, despite that, many governments of many poor countries continue to see foreign capital as a means of economic growth. Thus, they have put in much effort and take steps to attract it.
There are some myths to foreign investments. I shall now state 2 of them and show that actually these statements on FDIs are actually not true:
Myth #1 - Foreign Investment helps to create new enterprises, expands markets and stimulates new research and development of local 'know-how'.
This statement is not entirely true. This is because most foreign investments are more interested in buying profitable private firms and taking over existing markets, rather than developing one. Furthermore, instead of building on private capital, it FI undermines the emerging technological research centers.
Also, FI don't really expand the market much. In some sectors, the new foreign owners may have expanded the market. However, in some other sectors like transportation, the new foreign owners have reduced the market by raising charges, even beyond the means of most consumers.
Myth # 2: Most 3rd World countries depend on foreign investment to provide needed capital for development as local sources are not available or inadequate.
Actually, foreign investment is really a borrowing of national savings to buy local enterprises and finance investments. Foreign investors and MNCs directly receive loans from local pension funds and banks. The notion that 3rd World countries need FI because of they are short of capital do not really stand. In reality, the foreign investors actually compete for local savings from a privileged position in the credit market. This way, they are able to hold on to their assets and political influence to secure loans from local lending agencies.
Therefore in conclusion, I believe that FDI will continue to increase in the future. Despite these facts of FDI, most developing countries have accepted the fact that FDI offers a potentially significant source of financing. This is because although this does not really happen much, it does, a little, serve as a relatively stable source of capital. Also, it brings in up-to-date technology, organizational skills and distribution networks.
DONE BY: NUR ATIQAH ISMAIL
TA 2D'o6
ECONOMIC EXPERT(:
; i'm lovin' it
