Foreign Direct Investment Advantages and Disadvantages

Foreign Direct Investment Advantages and Disadvantages Executive summary Foreign Direct investment has both positive and negative effects on the economy of a country. The effects, however, differ from one country to another. When a country embraces FDI, it has an opportunity to gain a significant foothold in the world’s economy since it is accessible to a wider global market.Advertising We will write a custom essay sample on Foreign Direct Investment Advantages and Disadvantages specifically for you for only $16.05 $11/page Learn More It also introduces the host country to top level technology. Because of the competition it creates; FDI stirs local companies to adopt quality as a requisite to stay in the market. It can, therefore, be concluded that FDI improves the quality of products. Because of exposing and training workers, FDI enhances the value of human resources in a host country. Moreover, other benefits connected with FDI include; creation of employment, sources of valuable technology and knowhow, physical capital and labor, among others. There is, however, some negative effect connected to FDI. It has been argued that foreign investors are not genuinely interested in growing the economy of the host country (Balasubramanayam, 1996). Rather, they are interested in accumulating profits and investing in their own countries. This is especially when there is political instability or any signs of a collapsing economy in a host country. Similarly, some governments look at Foreign Direct Investments as a form of modern day economic colonialism. Hence, they are skeptical about any foreigners who want to make investments in their countries. Local firms in the host countries face competition unfairly from the foreign investors. This puts a strain on the private sector and displaces its investments Introduction Foreign direct investment can simply be defined as a company making a physical investment in a country other than its own, which then goes into building a factory or investment i n that country (Aitken and Harrison, 1999). The direct investment could be in the form of buildings, equipment and machinery, mines and land, which is acquired through mergers acquisitions. It can also be defined as a measure of foreign ownership of domestic productive assets (Agarwal, 1996). Foreign direct investment is different from making a portfolio, which is defined as an indirect investment (Aitken and Harrison, 1999). Foreign direct investment benefits the company that is making the investment with means of marketing, new products and technologies and cheaper facilities for use in production. The host country may also be a beneficiary of information, expertise, and job opportunities among others. For a long time, Foreign Direct Investment has been directed at developing nations. Statistics indicate that the stock and flow of FDI is increasing and shifting towards these developing nations. Developed countries, however, still account for the biggest share of FDI inflows (Agar wal, 1996).Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Various forms of FDI exist. Horizontal FDI comes to being when a firm or a company exports its activities or services to another country at the same value chain. A good example is â€Å"Toyota building an auto manufacturing plant in Kenya†. Horizontal FDI helps a country to save on transport costs and tariffs (Borensztein, 1998). Vertical FDI occurs when an investor expands the activities of an industry. The expansion can be geared towards marketing the finished product or investing in the raw materials that make the product. Vertical FDI is advantageous in that it allows firms to exploit cross country differences in factor prices. FDI can also be classified into inward FDI and outward FDI. This paper defines the term Foreign Direct Investment (FDI). It also explores the advantages and disadvantages brought about b y the term in a host country. It is argued that FDI creates a series of opportunities for the host country through activities such as creating employment, advancing technology, investing in human capital and encouraging fair competition with local investors. Despite the benefits it brings, FDI can negatively impact the economy of a nation. These effects are illustrated in biases and skewed investment, exploitation of cheap labor, environmental pollution and political interference. Positive Effects of FDI on host country economies FDI provides valuable benefits on host country development efforts. Balasubramanayam et al (1996) argues the benefits connected to FDI assist the host country towards achieving higher per capita growth, hence improving the economy. In addition to creating employment in a host country, FDI provides the host country with technological know-how, promotes physical capital and labor, builds human capital and enhances Greenfield and brown-field effect among other benefits. Employment FDI contributes to the economic growth of a host country by creating direct and indirect job opportunities. This is achieved through introducing new industries and establishing new firms in a host country. Besides, foreign firms may purchase inputs of goods and services from local firms, thus supporting local people. According to Agarwal (1996), FDI introduces new and efficient quality inputs to be used in production of upstream local firms, making them more competitive and enable them to expand production and employment. Additionally, the inflows accruing from FDI increases the competitiveness of a host country.Advertising We will write a custom essay sample on Foreign Direct Investment Advantages and Disadvantages specifically for you for only $16.05 $11/page Learn More This is achieved by combing firm and country-specific assets. The combinations make a host country access foreign markets and embrace new technology, whereas utilizin g cheap labor. Such a combination of firm and country specific assets with the product and labor market ultimately improves and expands existing industries, introduces production in new industries and creates more job opportunities. Source of valuable technology and know-how Appropriable technology can be defined as any tangible or intangible resource that can produce economic rent in the host country. This is in terms of improving total factor productivity. Borensztein et al states that traditional appropriable technology can be termed as the personalized or disembodied knowledge about production and distribution (1998). Foreign direct investments help the host countrys economy directly by injecting direct capital, giving advanced/ valuable technology and know-how and establishing linkages with the local firms. If the parent countries have a better or advanced technology, they influence the technologies in the host countries and make them better. Balasubramanayam et al (1996) alleg es that contagion can be in two ways namely replication of processes and increased competition. These can drive other firms to take up new technologies and modernize their systems. However, in recent surveys Borensztein (1998) argue that evidence that FDI generates positive results for host countries is weak. Haddad and Harrison (1993), after a review of micro data spill-over’s from both foreign and domestically owned firms, conclude that the effects are mostly negative. Physical capital and labor Borensztein (1998) cite that FDI is known to generate an inflow of human and physical capital to the host country. The rate of increase of physical capital stock of the host country is directly proportional to the capacity of production. Physical capital and labor can, however, not be used as a perennial determinant of per capita growth. Accumulation of physical capital cannot act as a permanent source of growth in the long-run. Its growth enhancing effect of growing stocks of physi cal capital eventually ends. Physical capital thus, becomes a short term effect of FDI as the economy of the host country transit towards a steady state.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Haddad and Harrison (1993) after using a growth accounting framework, came to the conclusion that investing in physical capital is in a way not decisive in explaining long run economic growth. This was because technological progress gives an account for most of the cross-country disparity in growth. Aitken (1999), however, does not seem to agree with Xu (2000). He argues that their modeling framework is excessively restrictive and hence their conclusion is not true. He says that an inflow from FDI is not likely to produce a large labor inflow into the country in which foreign investments are made (Xu, 2000). From this argument, an inflow from FDI is unlikely to alter the economic growth of a country by changes in the size of labour. Greenfield and brown-field FDI Greenfield FDI means that the Multinational Enterprise, MNE, builds new production facilities, distribution facilities or research facilities in the host country. This leads to a substantial growth of physical stock (Haddad and Harrison, 1993). In brown-field investment, investors are interested in existing business that has potential to grow. This leads only to a small or limited growth of stock of physical capital. The mode of FDI is, therefore, significantly beneficial for the effects on economic growth in the host country. Investments in Human Capital Technology is personified not only in equipment, machinery, technicians, expatriates and patent rights, but also in the human capital of the affiliate’s local employees. Employers facilitate this acquisition of human capital by training, either directly or indirectly, the employees (Haddad and Harrison, 1993). The employees end up paying for this through the low wages they receive. According to Balasubramanayam et al (1996), the diverse skills gained while working for foreign-owned affiliates may, in turn, generate spill over benefits for the host countrys economy. This is because trained employees transfer to local owned firms. In other cases , they form their own businesses using the skills and knowledge gained to improve their productivity in other organizations. For example, China, in an effort to increase the quality of their workers has taken an interest in training their workers to increase their quality. This is important because the status of human resources in a country is a critical factor in FDI in overseas countries. Negative Effects of FDI on host country economies Although FDI has provided a window for growth and development in host countries, many authors argue that it has created more negative effects. Balasubramanayam et al (1996) provides some effects such as environmental degradation as a significant negative effect of FDI. The FDI has contributed to environmental pollution, especially where they are involved in resource extraction. Other negative effects of FDI cited include; biases and skewed investment of their activities, exploitation of labor force and disparity in wages. Environmental Pollution A s investors look around the globe for the highest possible returns, they are often attracted to places endowed with many natural resources but do not have strong environmental laws to control their explorations (Xu, 2000). Foreign investors may engage in economic activities that harm the surrounding communities. For example, timber companies may clear forests to pave the way for constructions. Given that vegetative cover is important for the hydrological cycle; such activities affect the environment negatively. Similarly, FDI promotes western-style consumerism, boosting car ownership and paper use. This negatively affects the natural world, the stable nature of the earth’s climate, and food security (Xu, 2000). Biases and Skewed Investment It is not entirely true that FDI benefits the host country. Many foreign investors are not keen to invest in countries without a success story. They invest in countries that are either growing or showing a significant potential for growth, have a sizeable purchasing power and are politically stable. If there is any sign of the political instability of unrest in some countries, foreign investors are quick to withdraw to their own countries with their savings. This makes FDI unreliable, just like portfolio investments. This has been termed by critics as dependent, or restricted, development enhancing bias and skewed investment. The most influential determinants of foreign direct investment are the size and the ability of the economy to grow in the host country. It is, in most cases, assumed that if the host country has a vast market, it will have higher chances of quickly growing economy and hence investors would be able to make the most of their investments in the country of investment. Host countries with large dimensions provide opportunities for bigger economies of scale and spillover effects, and this is particularly helpful when the FDI is based on export. On the other hand, if the host country has less market and dimensions, investors have a tendency of avoiding it. Hence, FDI, in this case is anchored on discrimination. This is a critical challenge to countries which face political instability and unrest. Besides, the population of a country plays a vital and undeniable role in attracting foreign investors to a country. Here, the investors are attracted by the hope of a vast customer base (UNCTAD, 2001). If the country has a high per capita income or has citizens belonging to either upper or middle class, then it would give foreign investors a high prospect of success. Therefore, a country with a low population growth is disadvantaged in attracting FDI because it has low per capita income, a small labor force and fewer spenders. Wage differences Most foreign owned companies focus their investments on machinery and intellectual property but not on wages. They source their workers from across continents. This move prevents the local people from enjoying the benefits of FDI. According to Bala subramanayam et al (1996), only skilled laborers get a decent pay. Short-term and unskilled workers are exploited because of the poor wages they receive. This is a negative picture of FDIs in host economies. In order to maximize their profits, just like any other investment entity (UNCTAD, 2001). FDIs may enter the host country for different and unique reasons, but, the ultimate goal is to generate returns on investments. Although foreign investors pay a premium on top of local wages, the premium does not benefit the host economy (Caves, 1974). Premiums slightly increase the earnings of workers but on the other side, it disrupts the local employment or labor market. This disruption easily leads to unemployment because other local jobs no longer match with the created jobs. Unfair Competition with Local firms It has been argued that FDI does not by design translate to net foreign exchange inflows. Some investors do not self-finance their investments but instead they get loans from th e local governments at local rates, which are more favorable, to fund their investments. This puts a lot of pressure to the domestic sectors because of the unfair competition. According to Agarwal (1996), local firms in most countries lack the expertise in terms of technology, capital and other resources needed for growth and expansion. Hence, because foreign firms have all the needed resources to jump-start and expand their business interests, it establishes unhealthy competition. Conclusion Different countries experience different effects of FDI on their economic growths. Attitudes and policies towards FDI have changed drastically over time. Some countries started with being skeptical of the whole foreign domestic investors. Upon observing other nations some confidence was developed that FDI was a positive course towards building their economies. Before making an FDI, an investor needs to assess the viability of the venture in order to have a competitive standpoint. One needs to f actor in the company’s competitors, availability of internal resources in the host country, market analysis and market expectations. Agarwal (1996) alleges that most investors have utilized this information and have contributed to the growth and development of host countries economies. This has been achieved through the creation of employment opportunities, investing in technologies and improving human capital through trainings among others. However, though these positive contributions are evident in a host country, FDI has established other undesirable effects on a host country. Clear evidence is seen through the exploitation of the labor force, biases and skewed investment, environmental pollution, and wage differences among other undesirable effects. References Agarwal, J P 1996, Impact of â€Å"Europe agreements† on FDI in developing countries, International Journal of Social Economics, Vol. 23, no. 10/11, pp. 150 163 Aitken, B J and Harrison, A 1999, â€Å"Do Do mestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela.† American Economic Review, Vol. 89, pp. 605- 618. Balasubramanayam, V N Salisu, M and Spasford, D 1996, â€Å"Foreign Direct investment and Growth in EP and IS Countries.† Economic Journal , Vol.106, pp. 92-105. Borensztein, E, De Gregorio, J and Lee J-W 1998, â€Å"How Does Foreign Direct Investment Affect Economic Growth?† Journal of International Economics, Vol. 45, pp. 115-35. Caves, R 1974, â€Å"Multinational Firms, Competition and Productivity in the Host Country.† Economics, Vol. 41, pp. 176-193. Haddad, M and Harrison, A 1993, â€Å"Are There Positive Spillovers from Direct Foreign Investment?† Journal of Development Economics, Vol. 42, pp. 51-74. UNCTAD, 2001, Trade and Investment Report. New York: The United Nations Xu, B 200, â€Å"Multinational Enterprises, Technology Diffusion, and Host Country Productivity Growth.† Journal of Development Economics, Vo l. 62, pp. 477- 493

Phrasal Verbs With Look for English Learners

Phrasal Verbs With Look for English Learners There are a number of phrasal verbs and phrasal verb expressions with the verb look.  If you are unfamiliar with phrasal verbs, this guide to what are phrasal verbs explains everything. Teachers can use this introducing phrasal verbs lesson plan to help students become more familiar with phrasal verbs and start building phrasal verb vocabulary. Finally, there are a wide variety of phrasal verb resources on the site to help you learn new phrasal verbs. Learning Phrasal Verbs with Look Read this story about a man who looked up his friend Peter. You will notice that the story is full of phrasal verbs and expressions with look. Try to read the story a few times to understand how the various phrasal verbs with look are used. Following the story, you will also find all the phrasal verbs with look put into categories with definitions and example sentences taken from the story. Looking Up Peter in Seattle Last week I was in Seattle and I remembered that my friend Peter had recently moved there. I looked up his name in the telephone book, called, but got the answering machine. Luckily, I finally found him at work. He was looking at a picture on his desk, and I swear he looked like the famous actor Harrison Ford! I know Peter looked up to Harrison Ford, but I was a little surprised to see that he had become a look-alike! I said Look lively! and he raised his eyes and looked me up and down. Hello! if it isnt my old friend Ken!, Peter said. With that, he got up, looked me up and down and shook my hand. I must admit, Peter didnt look his age in the slightest. In fact, he looked as if he was ten years older! I looked him straight in the eye and said, Well, I was in town and thought Id look in on you to see how youre doing in Seattle. How have you been? Peter responded that he was fine, but that he was also on the look out for a new cat. Looking over at the picture, I noticed that it was of a cat. Yes, he sighed, I didnt really look after my first cat very well. It ran away. Im sorry to hear that, I said. We talked for a while and decided to go out for a coffee. We were at a Starbucks when a beautiful woman walked into the Cafe. Peter quickly looked the other way. Whos she?, I asked. Nobody, just someone who looks down their nose at me. Just then somebody shouted Look out! Peter jumped up and pushed the woman hard. At first, she looked daggers at him. Then, realizing what had happened, she noticed that because Peter had been looking lively, she hadnt slipped on a ice coffee drink that was all over the floor. Im glad I looked Peter up, it certainly was an interesting day... Phrasal Verbs with Look Finding Someone or Something Look up: look for information in a reference bookI looked up his name in the telephone book, called, but got the answering machine.to find someoneIm glad I looked Peter up, it certainly was an interesting day. Look in on someone: visit someone at their home or place of work, check up on someoneI was in town and thought Id look in on you to see how youre doing in Seattle. Be on the look out for: Trying to find something or someone, interested in purchasing something Look up to someone: respect or admire someoneI know Peter looked up to Harrison Ford. Look someone up and down: Examine someone carefully, look at someone very carefully, often with disdainWith that, he got up, looked me up and down and shook my hand. Look someone straight in the eye Look at someone with seriousnessI looked him straight in the eye... Expressions of Looking at People or Things Look over at: To look in the direction of somethingLooking over at the picture, I noticed that it was of a cat. Look the other way: Look away from something that you see, not notice something on purposePeter quickly looked the other way. Look down your nose on/at someone: Feel superior to someone...someone who looks down their nose at me. Look daggers at someone: Look with hatred or intense dislike at someoneAt first, she looked daggers at him. Look after: Take care of something or someoneI didnt really look after my first cat very well. It ran away. Appearances Look like: Be similar in physical appearance... he looked like the famous actor Harrison Ford! Look your age: Appear to be your actual age (someone can look older, or younger than their age)I must admit, Peter didnt look his age in the slightest. Warnings Look out!: Be carefulLook out! Look lively!: Pay attention...she noticed that because Peter had been looking lively, she hadnt slipped on a ice coffee drink...