The Changing Trends in Foreign Direct Investment and Their Economic Implications

Subject: Economics
Pages: 5
Words: 1220
Reading time:
4 min

Foreign direct investment commonly denoted by FDI is a measure of a country’s involvement in the affairs of another. It shows a country’s foreign possession of assets of a foreign country. Foreign direct investment can be a good measure of economic globalization where a country can own productive assets in another foreign country. The inflows from foreign direct investment are added to the gross domestic production to obtain the gross national income. Foreign direct investment may take the form of an individual, a group of individuals, a company or any other entity of the economy owning a productive asset in a foreign country.

Income obtained from foreign direct investment is referred to as foreign direct investment inflows because it is money inflow from foreign investments. An investor in a foreign country may own an asset through merger and acquisition, joint venture with a foreign partner or any other legal method. FDI has a lot of incentives including low taxes, tax holidays, and preferential tariffs among others. There have been advancements in the foreign direct investments as the global economy recovers from the economic crisis.

This essay analyzes the changes in trends in the foreign direct investments and their implications for both host and countries of origin.

The trend for 2005 showed an increase in FDI inflows of 29% compared to the previous year. There was a rise in flows to both the developing and the developed countries. Developed countries had $542 billion increase in FDI inflows while the developing nation had $334 billion increase in 2005 compared to 2004. Both Africa and the western Asia recorded the highest growth in FDI of 85% and 78% respectively. The growth of FDI in developing countries is facilitated by the presence of natural resources that attract investors. The prices of commodities are also higher in some developing nation and this attracts investors. The global economic recession of 2008 greatly affected FDI and reduced returns although the performance is picking up in 2010.

According to global outlook report, the foreign direct investments are increasing as economies recovers from the global economic crisis. Companies continue to look for new markets overseas and taking advantage of the emerging opportunities. The global outlook report for 2010 indicates that since 2009, the investors have become more risk-averse and they are investing in FDI markets that are less risky for fear of suffering losses. Investors are also avoiding investing in more risky sectors that require huge capital.

Despite the decision by the investors, FDI still continues to contribute greatly to the economic growth of countries. FDI data for 2009 shows that there were 13, 678 projects related to FDI. The value of these projects was recorded at one thousand billion USD. These projects created over 2.6 million employment opportunities globally. This was a 14% decline within a period of one year. The FDI intelligence had estimated about 14% decline in FDI projects following the 2008 global financial crisis. However, the trend is expected to change in 2010 and FDI projects are expected to grow by about 5%.

Western Europe is the greatest contributors to the FDI projects taking about 49% of all FDI projects. America is expected to record 4% increase in FDI in 2010. A research by the FDI intelligence recorded Asia-pacific as the biggest market for FDI in2009 though it had declined by 16% compared to the previous year. Most of the sectors recorded a decline in FDI in 2008 due to the financial crisis but they gained momentum in 2009. About 9% of all FDI project recorded in 2009 came from the financial services sector indicating an increase from the previous year. Sales and marketing activities for FDI also recorded the greatest increase in 2009.

As mentioned above that the investors are avoiding the sectors with intensive capital requirement, the real estates and manufacturing FDI projects declined most in 2009.

Foreign direct investments have implications both to the host country and the country of origin. The country of origin is the country that owns productive assets in a foreign country. The host company is the country in which the foreign direct investment projects are carried out. Both countries may benefit economically from the foreign direct investment. The host country will benefit mostly from the employment opportunities created by foreign investors while the country of origin will benefit from the inflows or the investment returns.

Following the 2008 global economic crisis, the investors have become cautious in foreign direct investments. They are investing in countries that are less risky and those that are less capital intensive. Most of the host companies that are capital intensive are likely to lose a lot of money they get from the foreign direct investment. This is because the investors have become more risk-averse. The level of unemployment is also likely to go down as the investors withdraw from the capital intensive countries. The reason for the decline of FDI in 2008 is because the investment risks increased and economies performed poorly making the investors to suffer loss.

The United States as a host country for FDI related to real estate sector might continue to lose because investors are avoiding such capital intensive investments. Investment in real assets in US has become more risky following the global economic crisis.

The trend in the foreign direct investment is skewed towards the favorable conditions in the host countries. Investors are looking for the conditions in the host country that will favor the investment. For instance they look for countries where there are good returns for the investment. The host developing countries will benefit from FDI because they have cheap labor and this will attract the investors.

The country of origin, mostly the developed countries, will benefit from cheap labor from the developed countries. They will therefore get huge returns for their investment. They will also get cheap resources from the host countries.

The host countries may suffer a lot because the country of origin repatriates the return to its domestic economy. The resources are overexploited and the investor might withdraw when the resources are finished.

The host country benefits from the employment opportunities created by the foreign opportunities while the country of origin benefits from the increased GDP and more profits obtained due to cheap labor and resources. With cheap labor, the cost of production will be less and therefore the returns from FDI investments will be relatively higher.

FDI improves the economic growth of the host and the country of origin. The host company gains form increases employment opportunities while the country of origin benefits from the foreign direct investments returns.

Foreign direct investment is beneficial to both the host country and the country of origin. The investors invest in countries where there is less risk involved but where high returns are gained. The amount of resources, political stability, cheap resources and presence of cheap labor attracts foreign investors in a country. Countries with high capital intensive investments are avoided by the investors because of more risks and the losses involved.