In the past few decades, there has been a rapid increase of the amount of Foreign Direct Investment, (FDI). In earlier years, FDIs were defined as companies or firms moving into other countries for investing through building of factories (Graham & Spaulding 2005). Today, the meaning has broadened due to new forms of business, and the practice is presently defined as any kind of investments such as acquisition of another firm in another country, joint ventures, allowing of intellectual property to another firm and actively taking part in management (Graham & Spaulding 2005). To understand the current rapid growth in Foreign Direct Investments, it is crucial to recognize drivers that contribute to their growth, and as such, it mandates an assessment as to why foreign direct investments are growing at such a rapid rate. This essay looks at the international trade agreements, technological advancement in production, communication and advent of internet, eased trade barriers and restrictions as the major drivers of (FDI). It also looks in to its benefits that many players and host countries have recognized as crucial for economic development hence making their market more attractive as reasons for the rapid (FDI) increase (Graham & Spaulding 2005). The benefits are such as, cost reduction that comes with instituting investments in locations with cheaper labor, materials and the need to expand to other regions enhance competition advantages. With these drivers as well as benefits in host nations reflects an explicit knowledge as to why foreign investments have increased so rapidly in the recent decades (Graham & Spaulding 2005).
Many international trade agreements have been created between many countries towards governing investments as well as assuring investors of the given benefits. In earlier years, most nations emphasized on maintaining their domestic policies thereby making it quite hard for foreign firms to engage in investing ventures. Today, with international trade agreements, it is easy to achieve cross-country investments without having to change to policies that might be unfavorable (Dixit 2011). Hence, governments are faced with the role of making policies towards maintaining a conducive environment for investments and businesses, as well as making sure that its people benefit from the associations. Buthe and Milner (2008) strengthen this argument by citing that FDIs are involved in the “acquisition or creation of productive capacity,”(pp. 745) that is of long-term in nature since it involves investment in assets that may not be movable without making a considerable amount of loss. Hence, governments have some power over foreign direct investments, by the fact that it can change the investment terms towards creating more benefits since they have a bargaining power over the investors when the investment is too huge to transfer without significant losses or liquidations. Today international trade has intensified with people recognizing that countries need to have common trading policies to ensure ease of foreign business transactions. With such international trade agreements as Common Wealth, there is a widespread agreement amongst members that permits trading to take place with ease, hence contributing to foreign direct investment (Dixit 2011).
Many countries have recognized that FDIs make a large contribution to economic growth and other added advantages such as new ideas and technological advancements especially within the developing countries (OECD 2002). Most of the developing countries need the technology that comes with such investments, as well as securing employment for its citizens.
FIGURE 1 PTAs and FDI Flows into Developing Countries
Buthe, T & Milner, HV 2008
It is due to these reasons that underdeveloped nations have adopted conducive edicts for foreign investments to attract international investors (Chowdhury & Mavrotas 2006). This has been achieved through lessening restriction barriers by eliminating some regulations that are not favorable with outside investors since changing such rules attracts investors by ensuring that the environment is good for business (Chowdhury & Mavrotas 2006).
One example is China that has recently acquired many investors by revising its trading regulations and laws. In very restricted markets where the government controls markets through imposing numerous regulations, growth is minimal than in free markets where there are more deregulations and businesses have decisive powers to accord their own decisions. Some of the factors that a government can change towards enhancing FDIs include taxation, operating tariffs, fees, and elective law enforcements. Note that, such changes could affect an FDI positively or negatively. Countries that have not privatized governmental institutions for monitored market dominance have noted extremely slow growth as cited by the United Nations (2008) as evidenced by nations in western Asia countries. The United Nations also states that these countries are suffering from government dominance and some fear that privatization will favor only a few foreign firms (United Nations, 2008).
Today, communication has taken advanced measures hence the realization of significant reduced costs, time effectiveness due to instant relaying services from one point to another through the internet, and flowing information exchanges. Therefore, managing and tracking businesses can be done from any location without the need of being physically present within the investment location. This has been made possible by the advent of the internet in the past few decades and its diverse effects within the world. With such information delivery speeds very low transaction costs are noted and hasty decisions can be made from the investment nation to the host country. Information also tends to be easily monitored due to the real-time element especially in highly volatile activates like stock transactions. One of the defining features of foreign direct investment is that a firm acquiring an asset in another country can manage it directly over special constraints unlike other investments where investors can just make equity investments. Since the internet provides a means of easy management and monitoring of businesses abroad, it is easy to have foreign direct investments without incurring much cost that would otherwise be noted without direct information flows.
More so, with such communication efficacy, people are able to follow trends in the global markets without having to be at the host country; hence, it is also easy for a financier to conduct research towards identifying good investment locations. Considering that the internet has evolved recently, its influence is more concentrated on making the communication more affordable through enabling firms to communicate worldwide with least costs possible. This in turn makes it possible to improve production through fast decisions. According to Choi (2003), internet contributes to FDI in several ways such as reducing prices through lowered search costs for business to business (B2B), business to customer (B2C), and for governmental transactions. Choi also identifies that through the internet, entry into other markets can be achieved at a lower cost hence encouraging competition that triggers better output (Choi 2003).
Another way that the internet has contributed to FDI through production improvements is through lessening costs attached to holding inventories by allowing direct transactions between suppliers and customers without necessarily employing retailer services. Lastly, the internet can improve transparency in operations in the hosting countries through eliminating corruption since monitoring activities are easily achieved. In addition, many firms choose to invest in countries with infrastructure that enhances production levels as well as quickening other commercial operations. The internet has managed to deliver these tasks as well as reduce the overheads attached to each; hence, countries with good internet bases are more preferred by investors. The internet is also currently used as a marketing tool due to its affordability and efficacy in terms of information relays. Additionally, it acts as a good selling point where customers can directly transact with the supplier and producers. Hence, the internet is presently regarded as a crucial business tool since it has contributed to greater firms’ growth. It has also managed to eliminate spatial barriers (Choi 2003). Technological factors have actually played a significant function in FDI growth.
The transport industry has also enhanced FDI growth. It can be argued that transport functions have been present for a long time however, without the same there can be no foreign investments since there is need to transport materials from one nation to another. Today marine and air transport especially for landlocked countries has intensified. Transport infrastructure is one of the major investments in almost all countries since they determine the ease of accessibility by other trading regions. Despite having the internet factor, transport of materials and working teams is highly necessary for allocation efficacies. Presently, many manufacturing firms import diverse product parts from all over the world rather than having to produce them from scratch. This saves time and allows cost reduction since upon the materials acquisition, little or no further processing is required. Therefore, the transport and assembling costs tend to be more beneficial as opposed to full production overheads.
Note that, transacting with different nations for the products acquisitions is a form of FDI. Today, many firms have become cost sensitive due to the deepening economic conditions that mandate manageable costs or business closures. One way that has been highly used for the given need is the just-in-time delivery and management approach that requires effectual transport facilities to ensure that goods are delivered upon demand. This method seeks to reduce warehouse inventory costs by keeping them as low as possible. Therefore, transport plays a crucial role in facilitating foreign direct investments.
Regarding cost reduction as mentioned above, many firms have realized that having foreign investments in countries where the human resource is in plenty is crucial since it reduces business overheads. Acquiring materials from foreign countries or establishing factories that supply raw materials rather than having to import them has proved to be cheaper. This has led to many firms seeking direct investments in foreign countries where there are plenty of raw materials. Due to cost reductions and ease of production and less restrictions, owing to trade organizations, it has become easy to access new markets thus resulting to stiff competition that allows innovations and investment in research and design requirements. According to United Nations (2008) some of the reasons that led to increase of FDI in Asia were the cost of oil, which is a source of energy in manufacturing hence many investors, saw it as a good climate for investment.
Other than the drivers, there are notable benefits within the host nation that makes them open to free markets as the basis for foreign direct investments. According to Alfaro (2003), Many economists and scholars have recognized that FDIs “can have important positive effects on host country’s development effort,” (pp.1). However, it is further argued that benefits will depend on the relationship of inflows in manufacturing sectors rather than primary sectors that have effects that are more negative than positive especially in technology transfer benefits (Alfaro pp.2). Such investments intensify competition in the host country reducing prices and leading to a better flow of products in the market. Despite being foreign investments, such practices result to increased domestic investments and the enhancement of consumers’ wellbeing. Additionally, there are import and export advantages that come with the ability of the investing firms to access foreign markets hence opening up the host country to other markets as well as acting as a bridge between the host country and other nations. Brooks, Fan and Sumulong (2003) have asserted, “It can aid a host country’s foreign exchange gap,” (pp. 5).
As evidenced, foreign direct investments have grown rapidly in the recent decades because of the aforementioned drivers and benefits, as especially noted by host countries. Some of the drivers include technological advancements and communication due to advent of the internet in managing the reduction of production costs and time taken to make decisions, deliver goods, and enhancing operations in terms of efficacy levels. According to the United Nations (2008) a free market would best suite FDIs evidenced by their report where government controlled markets have the least FDIs. With the international trade having eased commercial regulations and restrictions across borders through bilateral agreements, it has largely contributed to the growth of FDIs. One notable result of foreign direct investments is the practice of globalization that has in turn created a need for interdependence among countries; this has been achieved through FDI investments. Foreign direct investments are a way of bringing exchanges closer to the people through establishing firms in foreign nations to market goods with ease rather than having to export the products to a particular country. These are the reasons why FDIs in the past decades have grown at a steady rate.
Alfaro, L 2003, Foreign Direct Investment and Growth: Does the Sector Matter,
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