Foreign direct investment (FDI) is an integral part of an open and effective international economic system and a major catalyst to development. Yet, the benefits of FDI do not accrue automatically and evenly across countries, sectors and local communities. National policies and the international investment architecture matter for attracting FDI to a larger number of developing countries and for reaping the full benefits of FDI for development. The challenges primarily address host countries, which need to establish a transparent, broad and effective enabling policy environment for investment and to build the human and institutional capacities to implement them.
According to the report, after four years of high GDP growth, a slowdown is expected in 2008 due to the financial and credit crises which are now affecting a number of countries worldwide. High levels of energy and food prices may aggravate this situation.
In recent years, Foreign Direct Investment, hereinafter FDI, has played a fundamental role in the economic system of developing countries as it is a key catalyst to economic growth and development. FDI was referred by the Economist as the cutting edge of globalisation as it provides a bundle of capital inflow, contacts as well as managerial and technological knowledge (Economist: 2001). However, it is argued that the benefits of FDI do not amass automatically and equally across regions and sectors. Nevertheless, these developing countries can reap the full benefits of FDI if transparent and effective policies that provide adequate infrastructures are enforced. The purpose of this essay is to identify and evaluate the policies that can be imposed to ensure the potential benefits of Foreign Direct Investment can be maximized.
In 2007, FDI inflows into developing economies reached a record of 471 billion dollars, which is a surge of approximately 30 per cent (OECD: 2008). However, it declined in the following years arguably due to the recession and economic slowdown resulting in an increase in energy levels and food prices. Nevertheless, global FDI inflows increased in 2011 with developing and transition economies accounting for about 50 per cent of global FDI, which totalled an estimate of 755 billion dollars (UNCTAD: TABLE). This also reflected in the higher profits declared by trans-national companies as well as increase in economic growth in developing countries. It is argued that an increase in cross-border merger & acquisitions triggered this. Despite the increase, Greenfield investments still remain more dominant than cross border M&As in FDI in developing countries.
The overall benefits of FDI in developing economy are well acknowledged. There is enough empirical evidence to conclude that FDI is beneficial to the development of a country’s economy. Beyond the initial impetus that FDI gives the economy as a whole, it also has effects on economic growth through increase in factor productivity as well as efficient resource maximisation in the host country. This provides the platform for the host country to gain a long term benefit of trade in the international markets by increasing import and export levels. An added advantage of multinational enterprises is the provision of financial investments to be able to promote export. For instance, “”some developing countries have a mineral resource such as Nigeria”. Another benefit that can be identified is the substantial technological spillovers. This is a major manifestation of multinationals in developing countries as it offers research and development, training and quality control. These