FINANCE



FDI: Foreign Direct Investment

FDI: Foreign Direct Investment

Introduction

The global economies from 1980's to 1990's have witnessed an unprecedented surge in flows of foreign direct investment (FDI). The financial analysts termed FDI as a sign of booming economy. There is a direct relationship between FDI inflows and economic growth. Greater the FDI greater will be the business in a country. India, Africa and other Asian countries have topped in attracting FDI from different parts of the world. Governments always welcome FDI wholeheartedly because it increases growth as well as, provide employment and generate taxes (Schneider, 2008, pp. 165).

Discussion

Current Position of FDI in Africa

The FDI flows directed to Africa increased from about 18 billion dollars in 2004 to about 88,000 in 2008, which represented an average annual growth rate of 48%. This growth is proof of the importance attached to Africa in recent times by investors from different parts of the planet. While in 2007 the sub region of Northern Africa hosted 36% of FDI flows to sub-Saharan Africa and received the remaining 64%, in 2008, the relative proportions were 27% and 73%, respectively, which is highlighting the shift operated in the relative importance of the two regions. The behaviour followed by foreign direct investment to the continent shows paradoxical features. Despite the outbreak of the current global crisis, flows continued to grow in 2009 to total about 61.9 billion dollars. This was a favourable factor for African economies, which saw it as beginning to restrict their access to loans in the international financial markets, reduced foreign aid and remittances decrease of migrant workers. Despite this growth in flows, the continent continues to occupy a marginal position in the global flows of foreign direct investment: 2.4% in 2004 and 5.2% in 2009 (Tosin, 2012, pp. 12).

The global financial crisis and political unrest in Middle East were the core reasons of decline in foreign direct investment in Africa. The researcher claimed that foreign direct investment stood at 43.1 billion dollar in 2010 while it witness decline and reached to the level of 42.7 billion dollar in 2011 (Tosin, 2012, pp. 12).

According to Organization for Economic Co-Operation and Development, the inflow of foreign direct investment in Africa has reached to the level of 60.5 billion dollars at the end of third quarter of 2012 (Bertrand & Kothe, 2013, pp. 3). The researchers claimed that there is huge room for improvement in foreign direct investment in upcoming years. Another renowned corporation name Ernst & Young claimed that it is expected that the foreign direct investment will touch the level of 150 billion dollar by 2015 (Bertrand & Kothe, 2013, pp. 5).

OLI Paradigm

The OLI electric theory was evolved by John Dunning and is a mix of other three theories for FDI. Both the three letters shows their advantages i.e. O (Ownership advantages), L (Location advantage) and the last one I (Internalization advantage).

FDI = O + L + I

Ownership Advantage

The ownership advantage is very significant for foreign direct investments because it motivates ...