FOREIGN DIRECT INVESTMENT

Foreign Direct Investment

Foreign Direct Investment

Q: To what extent has Foreign Direct Investment in the developing world lead to economic growth?

Much of the financial capital available in a developing country arrives from outside its borders. Capital inflows from other countries' lending institutions may be substantial, but these nations carry the obligations to please the lenders. This capital may take the form of foreign aid or foreign direct investment (FDI), which includes activities such as hosting foreign firms that provide jobs, increase domestic capital flows, and generate tax dollars (Tarp, 2006). However, FDI also may generate problems. Foreign firms from developed nations typically dominate the local market, preventing or discouraging the development of local industries. Moreover, the administration of the host country may be asked to provide tax incentives to keep the foreign company in the country.

While intratriad investment dominates international capital movement, FDI continues to be an important source of external capital for developing countries (Sachs, 2006) . FDI impacts on economic growth, while there is little argument about the idea that FDI is a source of capital and tax revenues and thus provides benefits in the short term, what is of even greater concern for long-term development is domestic investment.

For example, in spite of constantly increasing FDI, current accounts in most Latin American countries remain in deficit. In Africa, problems of corruption and lack of transparent regulations have limited the impact of foreign direct investment (Moran, 2007). The link between FDI and the gross domestic product has been challenged by studies on central and eastern European countries. In this area, foreign direct investment has grown steadily since 1990, yet GDP has dropped. Therefore, the benefits of foreign direct investment are not merely proportionate to the host country's ability to attract foreign capital. The impact of FDI largely depends ...