Article Type : Review Article
Authors : Luo Wei
Keywords : Foreign direct investment; Economics growth
When the developing countries have a poor financial
condition, FDI might make negative influences, while it achieves better when
the country is in the rising period. Moreover, FDI makes not many influences on
the real estate industry in China, but they are influential in the
technological plant industry through the sample of Canada. FDI has enormous
impacts on developing countries, but the forces change in a different phase of
the country.
The role of foreign
direct investment (FDI) in countries’ economic growth is a controversial topic.
This question has occurred ever since the UN development decade of the 1960s.
Globalization is a trend for now due to the advances in infrastructure such as
telecommunications, including the rise of the Internet. Therefore, now the
foreign direct investment (FDI) gets more attention, especially for Asian
countries. From the UNCTAD’s World Investment Report 2019, the FDI inflows to
developing countries in Asia increased by 3.9% in 2018. Also, the report points
out the growth mainly flows to Singapore, Indonesia, and other Southeast Asian
countries. In theory, the FDI inflows boost the local economic growth due to
the advantages of capital inflows, bringing technology [1]. However, it is
still an open question for whether FDI inflows positively affect the counties’
economic growth.
Many researchers have
studied the effect of FDI in different countries or regions. The impact of
foreign direct investment (FDI) on economic growth for a sample of 32 low developing
countries (LDCs) [2]. They use OLS, random-effects, and fixed-effects models to
analyse the effect of both FDI and domestic investment on GDP growth. In the
OLS and random-effects model, they find that FDI has a higher impact on the GDP
than does domestic investment. FDI incentives native investment [3]. What is
more, the effect of FDI on economic growth is increased through positively
interacting with human capital in the macroeconomic policies and institutional
stability. However, external factors, such as inflation or excessive
intervention from the government, the influence of FDI in promoting growth is
not significant [4]. The empirical literature on the connection between FDI and
GDP growth using data from 45 countries from 1997 to 2004, and the two authors
show that the inflow of FDI positively effects economic growth in the presence
of a highly skilled workforce. Still, the precondition is that there are
well-trained and skilled laborers [5]. They also point out that corruption
brings a negative impact on economic growth, while trade liberalization
promotes economic growth by dine of efficiency. The FDI positively affects GDP
in these developing countries because FDI brings technological innovations, a
better financial system, and more confidence of investors [6]. They highlight
that the impact of FDI may only work on the proper financial openness policies.
Conclude from their study that the impact of overseas investment and influence
on growth and inequality appears to depend on whether the global economy is
expanding or contracting [7]. Their research also suggests that foreign
investment causes more negative influences in times of austerity.
Some research on the
impact of FDI focuses on specific regions. Using the threshold error correction
method, says that in the short run, the evidence indicates that FDI promotes
economic growth, and stimulates domestic capital accumulation [8]. Still, in
the long run, the increasing capital formation has an asymmetric effect on
economic growth. Meanwhile, the researcher points out that the domestic
investment hinders FDI inflow. Attempt to use panel of data from the European
Union and the Association of South-East Asian nations from 1970 to 2003 to
identify the causal relationship between FDI and economic growth, and they
believe that the host nation’s economic growth boosts inward FDI in developing
or developed countries [9]. The analysis indicates that there is a decisive
long run co-integrating connection between FDI stock and economic growth [10].
However, only Finland shows that FDI has deduced economic growth in the EU
sample, but there is no case of bilateral relations. In addition, only
Indonesian studies have shown that there is a small amount of evidence of a
two-way relationship between economic growth and FDI in the ASEAN sample, and
no case of FDI can be used to derive economic growth. Therefore, they believe
that different results produced by different stages of economic growth. FDI is
dependent on economic growth, while economic growth does not depend on FDI, in
the case of Pakistan [11]. Meanwhile, he mentions that weak human capital
hinders economic growth and the FDI. Most FDI flows are concentrated in a small
number of countries in East Asia and Latin America, and China is becoming the
primary beneficiary [12]. However, many developing countries fail to benefit
from the rapid growth that has occurred. Additionally, some traditional
variables, namely, infrastructure, economic growth and trade openness, do
promote FDI flows to small developing countries. Explores whether the dense
concentration of FDI on China’s coastal area has promoted or destroyed the
economic growth of the inland area, and reseacher says that FDI in coastal
areas has, on average, hurt economic growth in inland provinces. But some of
his findings show that FDI does have a positive spill over in some areas due to
the industrial linkages with inland provinces. FDI could improve total factor
productivity, and it brings the money, management innovations to prevent the
poverty trap eventually, the samples in the growth of Central and Eastern
European countries, the Baltic States and the CIS Common wealth of Independent States during the transition period [13]. This
aspect of avoiding the poverty trap is worth thinking about whether to attract
FDI can change the situation of capital dependence. How foreign direct
investment contributes to improving living standards and reducing poverty. The
author says that aggregate growth may benefit from FDI in countries, but the
least certain of FDI would raise per capita income and thus reduce poverty.
But, from the other aspects, say that FDI activities positively affect
merchandise and manufacturing exports from the panel data from 1975 to 2003 in
four Middle East and North Africa countries [14]. However, it does not boost
the share of the manufacturing exports increased in merchandise exports. Thus
examine the relationship between ICT (information, communication and
technology) and FDI using simple regression plots in Africa [15]. They say
there is a definite connection between the ICT and FDI, but the real GDP per
capita has an inverse relationship with FDI inflows. They also mention the encouraging
FDI in Africa had not got the result as expected. Adopts the way of using graph
and data analysis to show the effect of FDI in the relationship between
intellectual property rights (IPR) and growth. Researcher says that stronger
IPR mitigates the economic growth and the FDI inflows, and FDI promotes
economic growth [16].
The effect of FDI on the survival of new native
plants in Canada through the economic analysis within and between industries
using statistical analysis by companies from 1973 to 1997 [17]. The implication
from the author shows that the FDI may bring advanced technologies to the local
plant industry through some economic linkages, and FDI improves productivity
and expands employment. Attempt to evaluate the impact of the FDI inflows on
the real estate price through growing the host country’s economy, and the
Guangdong Province is the example in the research to be examined. They say the
impact of the FDI flows on property prices tend to be insignificant. Also, the
FDI has no push to the price of the estate industry in Guangdong Province [18].
This literature review
primarily explores the results of two primary directions in FDI research
papers, which are the effect of FDI on developing countries or some specific
countries, and the impact of FDI on some industries. Believe the FDI positively
affects economic growth due to the advanced technology, managerial skill, and
so on. Also, have a different idea, who think it is not sure for FDI to have a
more important position than domestic investment, and FDI stimulates domestic
investment. Suggests that FDI stimulates economic growth in the short run, but
it has an asymmetric effect in the long run [19]. However, conclude the
influences of FDI depend on the financial conditions of the developing
countries and the industry of the investment. When the developing countries
have a poor financial condition, FDI might make negative influences, while it
achieves better when the country is in the rising period. Moreover, FDI makes
not many influences on the real estate industry in China, but they are
influential in the technological plant industry through the sample of Canada
[20,21]. FDI has enormous impacts on developing countries, but the forces
change in a different phase of the country.