A Developing Economy Should Wish to Host Foreign Direct Investment (fdi) by Foreign Multinational Enterprise

International Business Management

BUSI 1493

Student ID: 000862249

Foreign Direct Investment

Critically anaylse the reasons why a developing economy should wish to host foreign direct investment (FDI) by foreign multinational enterprise (MNS). Suggest how the host country can maximize the benefits and the dangers these might have for the investing MNE.

Table of contents

Introduction

For the past 40 years, more and more developing countries realized and pay more attention on its countries economics development, modernization, income growth and employment. One of the effective way to get start is from the introduction of Foreign Direct Investment (FDI) from developed countries. FDI is “Foreign Investment in the form of loans or equity is an important source of capital for growth in developing countries.” (Weigel et al., 1997). According to Huang’s study, China permit FDI in 1979, Indonesia in 1967, and Taiwan in 1960 (Huang, 1998 pg.10-12). Vietnam also successfully launched its economic reforms in 1986 (The World Bank, no date). In this report, we will take a look on why developing countries wish to host FDI, how can they maximize the benefits, and lastly what are the dangers that foreign multinational enterprise might encounter.

The Benefits of FDI to host countries

The report from OECD explained that FDI help economic growth and bring positive impact to host countries, like, increase trade, promote transfer of technology, human capital enhancement, and therefore create more job opportunity and people can earn more income.

Increase Trade

Let see the case in China, since 1979 China permit FDI, Government setting policies to permit joint ventures, set up four special economic zones in Shenzhen, Zhuhai, Shantou and Xiamen to attract foreign investment (Huang, 1998). In the initial stage the Foreign Investment Enterprises physically import materials, machines and capitals to China for production. Below three charts show:

1. Total amount and trends of FDI used in China from year 1986 to 2011 (figure1).
2. China imports and its trends from year 1980 to 2012 (figure 2)
3. China exports and its trends from year 1980 to 2012 (figure 3).

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From these charts, it proved that with the increase in FDI in China over the past 40 years, the amount of imports and exports activities also increased. The increase in trade can lead to create job opportunity in trade handling, logistics management and transportation.

Technology Transfer

The multinational enterprise from developed countries usually possess higher level of technology, if host countries can attract these enterprises to invest in their countries, investors will also bring in technology, training and other knowledge to assist and raise the quality of their products, and as well as their suppliers. An example is a global gold mining company from Canada called Eldorado Gold Corp. Learnt their history from their company website (Eldorade 2015), with over 13 years of mining experience, they first entered China in 2005 and become the largest foreign gold producer in China in 2009. Bring along with their technical expertise to expand resources reserves, they have three gold mines in Jinfeng, Tanjianshan and White Mountain, which produced over 360,000 ounces of gold in 2014. However, OECD explained that the technology gap between domestic enterprises in host countries and foreign investors must be relatively limited, in order to make FDI to have a positive impact to host country. If the important differences prevail, or the technology level in host country is too low, then local enterprise is unlikely to gain from technologies transferred (OECD 2002 pg. 13).