The impacts of foreign direct investment on host country economies Essay

The impacts of foreign direct investment on host country economies - Essay Example The liberalization of markets worldwide, an effect of globalisation, has led to the elimination of the barriers for developing investment activities abroad, i.e. to a country different from the country of residence of the investor. Gradually, the foreign direct investment, or else the FDI, as this activity has been characterized, see also the next section, has become a common phenomenon in countries worldwide. It should be noted that the FDI has been related to a series of important benefits but it has been also found to have a series of disadvantages/ drawbacks for the host countries economy. This issue is explored in this paper. A series of examples and case studies are presented aiming to show the various aspects of the involvement of FDI in the economy of host countries. In general, the benefits of FDI are more compared to its disadvantages. However, the latter could lead to severe turbulences if they are not appropriately addressed. In this context, appropriate measures should b e taken in advance for the control of such effects either in the short or the long term.The term ‘foreign direct investment’ is used in order to show ‘the acquisition of assets by the residents of one country for the purpose of controlling the production and other activities of a firm in another country, the host country’ (Moosa 2002, p.1). FDI, as described above, can have many forms, including the Greenfield investment (indicating whole ownership of the acquired asset) and the Joint Venture (shared ownership of the acquired asset).... 2006). The last decades, there is a trend towards the continuous expansion of FDI as a method of financing various projects. This fact is made clear in the Graph 1 below where the balance among the FDI, the bank loans and the portfolio investment as methods of financing, is analytically presented. Graph 1 – Forms of capital inflows from 1978 up to 1995 (Source: Loungani et al. 2001) The decision of an organization to proceed to FDI is usually based on the potentials for profit. Moreover, it seems that Western organizations are likely to use different criteria when having to decide their entrance in a foreign country through FDI. Bevan et al. (2004) tried to identify the factors that lead organizations in Western countries to get involved in FDI. The above researchers found that factors like ‘labour costs, market size and proximity’ (Bevan et al. 2004, p.775) are likely to have a decisive role for Western organizations to invest on a foreign economy in the form of FDI. On the other hand, it has been revealed that the potential risks of the host country economy are not expected to discourage Western organizations from proceeding to FDI. However, it seems that the documents and the commentaries published by international bodies can influence the decision of Western organizations on FDI. In the study of Bevan et al. (2004) reference is made to the influence of the announcements of the European authorities on the level of FDI outflows from countries of EU to third countries worldwide. Similar findings have been revealed through the research of Globerman et al. (2002). The above researchers tried to identify the level at which the political and legal environment of a country can influence the level of FDI towards