The Benefits Of Fdi To Developing Countries Economics Essay

Harmonizing to Weigel and others, who portion similar positions with Ngowi, developing states can profit from FDI in assorted ways: through the engagement of the endeavor proprietor in direction of the endeavor ; entree to engineering ; entree to selling expertness and market links ; fiscal flow ; investing expertness and market entree non available in the host state ; and the host state basking extra economic activity, revenue enhancement gross and occupation creative activity. They go on to state that FDI stimulates economic growing, and has a much larger consequence than domestic investing. In the domain of occupation creative activity, developing states can profit from foreign direct investing as investors have a inclination of puting in states where there is a excess of low-priced labor. Investors are besides attracted to states that have a extremely skilled and literate labour force. It is deserving observing, nevertheless, that in most developing states particularly in sub Saharan Africa there is still a deficiency or deplorably unequal figure of extremely skilled and literate labour force. South Africa, in malice of her better degree of economic development compared to other developing states in the SADC part still lags behind when it comes to the issue of an educated and skilled labour force.

Another facet of FDI which could be of benefit to developing states is the transportation of more sophisticated and efficient engineering. Through transportation of engineering productiveness may be increased in the host state every bit good as betterment in direction. It has been noted, nevertheless, that it is non a foregone decision that FDI will take to engineering transportation and give the expected consequences. Cited in Jenkins and Thomas ( 2002 ) Cockcroft and Riddell ( 1991 ) argue that FDI made a “ negligible part to productiveness in most African states during the 1980s ” ( Jenkins and Thomas, 2002:13 ) .

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While Ngowi, Weigner and others are optimistic about the benefits of FDI to developing states, there are bookmans who have different positions. Devarajan, Easterly and Pack ( 2003 ) argue that there is no correlativity between the growing rates of African states and degrees of investing. Furthermore, Akinlo ( 2004 ) and Durham ( 2002 ) , in different research surveies, conclude that the consequence of FDI on end product growing is non ever positive.

Furthermore, Jenkins and Thomas ( 2002:14 ) besides argue that even if FDI can win in making occupations, inequality in income and distribution of wealth can be exacerbated. This occurs in state of affairss where employment is received by the educated and the affluent elite. Developing states like South Africa have experienced a state of affairs where double economic systems have emerged because it is the educated and the affluent elite who enjoy the benefits of development while the remainder of the population in townships and rural countries is sing unemployment, poorness and underdevelopment.

2.5 Criticisms of Foreign Direct Investment

It is of import to province that non everyone is optimistic about the benefits of FDI in developing states. In analyzing the unfavorable judgment levelled against FDI, the research worker will see the impact of FDI on the undermentioned three critical issues.

i‚· Economic growing

i‚· Transfer of engineering

i‚· Environmental public presentation

One of the grounds for prosecuting FDI in developing states is to hike economic growing. However, the inquiry is whether or non this is achieved. Mainstream economic theory, the IMF, and other planetary development administrations, have documented good the overall benefits of FDI for developing states. Foreign direct investing is said to trip engineering spillovers, human capital development and a more competitory concern environment which in bend lead to economic growing ( Gallagher and Gallagher and Zarsky, 2005 ) . In other words, if FDI does non trip economic factors like technological transportation, human capital formation and international trade integrating, economic growing will non be promoted.

The world of the state of affairs, nevertheless, is that in most developing states FDI flows have been really low. Harmonizing to Chudnovsky and Lopez ( 2005 ) the bulk of developing states, particularly in Africa, have received little, if any, sums of FDI. Chudnovsky and Lopez besides raise the issue of competition among states to pull foreign investing. They argue that this has grown as states have attempted to pull foreign investing. This competition among developing states is based on the impression that foreign investing is a cardinal factor to further growing. They, nevertheless, argue that it must non be a bygone decision that FDI contributes to the economic growing of host states. This is based on the fact that the transnational endeavors ( MNCs ) might hold ends that are different from the ends of the host state. While MNCs may be interested in a limited figure of private economic ends, host states may be interested in a wide scope of economic and non-economic aims ( Chudnovsky and Lopez: 47 ) . Chudnovsky and Lopez farther province that while FDI may take to economic growing, it may besides hold a negative impact on host states. This happens when MNCs fail to pay attentiveness to issues of environmental desolation, or development of natural resources, or when they crowd out local rivals. Mwilima ( 2003:32 ) supports Chudnovsky and Lopez when he argues that “ … in some instances, foreign investors enter a market entirely with the intent of shuting down domestic rivals and set uping a monopoly in the economic system. ” However, Chudnovsky and Lopez besides province that FDI can do a positive part to economic growing, fight and sustainable human development in host development states. Bond ( 2002:7 ) concurs with Chudnovsky and Lopez when he argues that there is no rush of FDI in Africa, as is the instance across the universe. Mbeki, cited in Bond ( 2005:5 ) , points out that there is a low flow of FDI to Africa because developed states have a inclination to comprehend and handle the African continent as one state. In other words, if there is a job in one African state, so that job would be perceived as a job of the full African continent.

John Mugabe ( 2005 ) , in his analysis of FDI in sub-Saharan Africa ( SSA ) , argues that FDI flows to SSA states are still at degrees far below those of other developing states. Mugabe goes on to state that SSA states accounted for merely 0.7 per cent of entire FDI planetary influxs ( 2005:75 ) . This is the state of affairs, though these states made attempts to better their investing clime for intents of pulling FDI influxs. He besides states, nevertheless, that low FDI influxs to SSA states stem from factors such as hostile policies and political instability, every bit good as hapless and deteriorating substructure.

Donaldson ( 1992 ) agrees with the position that hapless and deteriorating substructure has a negative impact on FDI. He argues that many states have realised that one of the ways of developing substructure is by affecting the private sector, as it offers a much better service at lower monetary values. He states, nevertheless, that the engagement of the private sector in substructure development in Africa has been minimum. He goes on to reason “ of the 64 undertakings recorded for sub-Saharan Africa as a whole, merely 17 are located in Southern and Eastern Africa, and these undertakings are concentrated in merely six states ” ( 1992:7 ) .

Although there have been attempts to pull FDI in developing states, there are concerns from militants and policy shapers about the impact of FDI on the environment and sustainable human development. One of these concerns pertains to the impact FDI might hold on infant domestic industry in host states. In other words, FDI can queer economic development of infant domestic industry in host states as these will non be able to vie with the advanced transnational corporations ( MNCs ) . This averment is supported by Brooks and others ( 2004:8 ) who posit that transnational endeavors can extinguish competition by “ herding out domestic manufacturers ” . Furthermore, the deduction of sabotaging domestic baby industry will take to underemployment.

The other concern is about the overuse of natural resources every bit good as the issue of protection of homo and economic rights ( Mugabe, 2005 ) . Overexploitation of natural resources occurs when foreign investors choose to put in states with abundant natural resources, but low-quality establishments. This leads to the extraction of natural resources at a fast gait, therefore ensuing in environmental debasement ( Brooks, Fan and Sumulong, 2004 ) .

Overexploitation of natural resources has inauspicious effects on local communities. Destruction of the environment for local communities implies devastation of their beginning of support. The other important issue on the impact of FDI in developing states is the critical issue of technological effects. Harmonizing to Araya ( 2005:53 ) , technological effects relate to the reaching of advanced environmental engineering, the diffusion of environmental engineering to the local industry and productiveness spillovers. Foreign direct investing is expected to convey advanced environmental engineering to host states. This would be in the signifier of, among other things, machinery, equipment and technicians. This technological transportation is expected to include human sustainable development which would imply on-the-job preparation, seminars and educational promotion of employees. Any FDI enterprise would be considered successful if it managed to reassign engineering to the local industry.

Furthermore, Araya, mentioning other research workers like Eskeland and Harrison ( 1997 ) ; Blackman and Wu ( 1998 ) , gives empirical grounds of engineering transportation from foreign companies to local industry in developing states. Harmonizing to Araya, Eskeland and Harrison ( 1997 ) , province that foreign companies in Mexico, Venezuela and Cote d’Ivoire were cleaner and used lower degrees of energy. Furthermore, Araya goes on to reason that foreign investing in electricity coevals in China led to an addition in energy efficiency, every bit good as a decrease in emanations ( Araya, 2005:54 ) .

Araya ( 2005 ) , nevertheless, asserts that, in malice of the positive effects that environmental engineering might hold in developing states, there is besides grounds that foreign investors engage in hapless environmental patterns. She supports her averment with grounds from the work of Guoming et Al ( 1999 ) , who argue that, in the yesteryear, investors bring forthing plaything, leather, footwear and plastics in China did non pull off good natural resources. Araya besides cites Rasiah ( 1999 ) who argues that in Malaysia there are some transnational endeavors ( MNC ) that engaged in destructive environmental patterns. Simon and others ( 2005 ) support this averment when they argue that there are MNCs in some development states which are exploitatory and embark on unsustainable patterns. Furthermore, they go on to state that these MNCs displacement substandard industrial workss to developing states and usage risky production procedures. Brooks and others ( 2004:8 ) concur with Araya when they province that non all investings by MNCs lead to engineering transportation and positive spillovers, because of protectionism in the industrialized states.

Araya ( 2005 ) , in malice of destructive environmental inclinations by some MNCs operating in developing states, provinces that there is empirical grounds of environmental engineering transportation from foreign endeavors to developing states. She goes on to state that in some states, like China, there is empirical grounds of engineering transportation where MNCs helped domestic industry to industry merchandises utilizing less energy, and doing less pollution. Furthermore, Araya, mentioning Warhurst ( 1999 ) , references that coaction between providers and receivers has the potency to better public presentation of domestic industry, every bit good as environmental direction capacity. Araya, nevertheless, provinces clearly that engineering transportation is “ far from automatic ” . This implies that engineering transportation does non happen spontaneously, as there must be willingness of the local receivers to tackle the chances for transportation.

Araya besides gives a critical position to the impression of engineering transportation. She argues that it may non go on at all, or may be really weak ( Araya, 2005:56 ) . Mentioning a survey by Ruud ( 2002 ) on environmental engineering transportation in India, Araya argues that there was no grounds of engineering transportation from MNCs to local Indian houses. One of the grounds for this failure is that MNCs tend to concentrate on bettering environmental public presentation in their states and pay small attending to host state ‘s environmental ends and demands.

In add-on to the issue of engineering transportation, there is besides the issue of policies of both the host states and the place states of MNCs which might non be in harmoniousness with each other. Lack of policy harmonization may ensue in activities of puting MNCs beliing the development aims of host states. Harmonizing to Simon and others ( 2005 ) some MNCs invest in developing states so as to get away wellness and pollution criterions in their place states. This implies that there must be correlativity of policies of MNC place states with those of host states, and that host states must beef up their jurisprudence execution and enforcement.

It is obvious that while there is a move by states towards pulling FDI so as to hike economic growing, particularly in developing states, there is besides empirical grounds that proves that FDI can non be the solution to the socio-economic ailments of developing states if non decently implemented. Proper execution of FDI in this context implies a consideration by the foreign investors of the socio-economic state of affairs of host states. As pointed out before, Araya ( 2005 ) , for illustration, while admiting economic benefits that are brought by FDI, gives ample grounds that FDI can be harmful to host states. It, hence, becomes imperative that when host states attract FDI, particularly in developing states, they must take awareness of the critical issues such as environmental debasement, engineering transportation and sustainable human development.



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