Advantages and Disadvantages of Fdi in China and India

One of the important factors of the growth in China and Brazil as BRIC countries is Foreign Direct Investment (FDI). There are several factors that contribute to attract FDI including market size, institutional and regulatory quality, trade openness, infrastructure quality, economic and political stability, and labor quality and cost (The World Bank, 2011). China is still the most attracting for FDI among any other BRIC members (UNCTAD, 2012). Huge amount of market, low inflation and stability of their government are might be the factors that attracted the FDI in China. According to the ministry of China, “Investment from the United States decreased by 26.1 percent in 2011 to $3 billion, while that from the European Union decreased by 3.65 percent to $6.3 billion” so, China’s FDI was hit by the global financial crisis in the EU and US. However, The most attracted FDI in Brazil is in market size sector with the fact that Brazil will be the host of

Figure 1.7 The structure of the dissertation Figure2.2 Modes of entering foreign markets Table 2.32 Factors affecting the FDI decision Figure 2.33 Types of FDI 12 15 19 22

FDI allows the home country to invest into the host country to produce, advertise, and distribute products, in order to upsurge their market share and provides a long-term investment and enhancement. (Moosa, 2002)

The effects can be negative or positive. According to the theory of Hill (2003), FDI can affect host countries on resources-transfer effects, employment, competition and product and process innovation. There are a small number of research available that explain the behaviour of local companies when FDI take place. Nevertheless, there are many research that explain the benefits for the local economy. Foreign direct investment can increased indirect productivity for host country companies through the realization of external economies. Generally these benefits indicates the importance of the way in which the influence is transmitted that referred as “spillovers” (BlomstrOrn,

Many scholars argue inward FDI have positive economic impacts on the host country (Buckley et al., 2007; Globerman, 1979; Lipsey and Sjöholm, 2004; Nguyen and Nguyen, 2007; Zhu and Tan, 2000). According to them, there is a causal relationship between FDI and economic growth, where FDI stimulates economic growth. Nguyen and Nguyen (2007) state FDI promotes economic growth and is also a tool to attract FDI. The literature by Anwar and Sun (2011) shows FDI and domestic capital have a significant positive impact on economic growth. Thus, FDI has a positive impact on the economic growth of the host country.

FDI grew quickly in the 1990’s. The U.S is the top destination of FDI and China and Brazil are in top five. The reasons for the increased activity were the opening of markets due to trade liberalisation and deregulation, pressure of competition brought about globalisation and technological changes, the importance of size as a factor in creating economies of scale and the desire to strengthen market position.

According to the International Monetary Fund (IMF), Foreign Direct Investment (FDI) is defined as “cross border investment where a resident in one economy has control or a significant degree of influence on the management of an enterprise in another country.” FDI in the past decade has grown intensively, exceeding the growth of world production and the growth of international trade (Dierk, 2008). Many nations are open and engage in FDI because it will benefit domestic firms. Brazil, a top emerging market, has experienced record number of FDI projects, establishing it as the second most popular global destination in terms of FDI value. The country has experienced steady growth over the past decade and is projected to keep increasing its number of FDIs.

Foreign direct investment (FDI) is taken as one of the key factor of rapid economic growth and development. FDI, it is believed to stimulate domestic investment, human capital, and transfers technology. It is associated qualities which causes the faster economic development in the host countries. South Korea, for instance had one of the of the poorest economies during 1960s, but yet

In today’s increasingly globally integrated business world, foreign direct investment (FDI) “provides a means for creating direct, established and long-lasting links between economies,” according to the 2008 Organization for Economic Co-Operation and Development Benchmark Definition of Foreign Direct Investment (OECD, 2008, p. 14). Foreign direct investment (FDI) is defined as “an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor,” by the United Nations Conference on Trade and Development (UNCTAD).9

Foreign Direct Investment is the direct investment in new facilities or companies to expand a business in a new country. In evaluating and analyzing East Asia, it is important to focus on cultural issues as they are major indicators of the business environment and implementation in a given local. East Asia, including China, only began opening up for foreign investment in the 1970s. Japan is considered a developing market, where the rest of Eastern Asia is an emerging market, the majority of FDI around the world is targeted to developing nations due to increased stability, consumer culture, and large markets. The risk of emerging markets is greater than in developed, thus yielding a greater return on investment when the endeavor succeeds.

Other disadvantage of FDI is that it affects the small enterprises or industries because mostly they are not able to compete with world class large company and ultimately out of the main

The factors involved in process of economic growth of nations have transformed overtime, from savings to trade, foreign investment and human capital base of the country. With opening up of the economies and the formation of multiple agreements among the countries, trade and FDI have become the major medium of accord among the economies. There has been surge in FDI inflows ever since the countries adopted liberalisation policies across the globe. The countries have been looking for policies to attract more FDI by boosting investment climate in their countries, to finance their process of growth and development.

High inflow of foreign investment is needed for a country to gain a high sustainable economic growth. For an economy to grow by 7 to 8 percent a year, there is a need to invest about 30 to 40 percent of GDP. FDI is good and strong developmental equipment that contributes to the economic growth of host country. This growth are contributed by the high increase of capital stocks in the host country, increase in productivity and availability or creating of new jobs. These new creation provided by FDI also leads to productivity and knowledge spillover on the domestic firm. Productivity and knowledge spillover increases when the productivity of the local firm is gained through the leading edge of technologies employed by the foreign companies. However, there is some negative impact on this because the foreign firm or investor has the ability to draw the demand away from the local firm because of the price of reduction to their new different and innovative products or goods and due to this, the local firm’s productiveness will decrease because of the market run down by the foreign firm or investor. The ability of a local firm to take the spillover benefits is dependent on how the local firm takes in the foreign firm skills and technological know how.

FDI is where the MNE invests directly in production or other facilities over which it has effective control in a host economy (j &t). According to Pollan (), the definition of the terms “investment” is highly significant to Foreign Direct Investment, which can be typical comprehend as the conveyance of capital to a country. Investment can be defined as money committed or property acquired in order to gain profitable returns, as interest, future income or appreciation in value (business dictionary, 2014). The commonest definition used to understand the idea of FDI is the definition provided by International Monetary Fund’s (IMF). The IMF definition of FDI introduces systems and structures which clearly demarcates foreign direct investment from portfolio investment. According to the IMF, direct investment creates a lasting interest in an enterprise, consisting of a long-term relationship between the investor and the enterprise and that the investor has an outstanding amount of control on the management of the enterprise, while portfolio investment does not create an extended relationship and the portfolio investor is rarely directly partaking in the day-to-day management of the enterprise (Pollan,). FDI however has no comprehensive, authoritative and ubiquitous legal definition and the test for the existence of enough degree of control differs in scope depending on applicable law in a

The main determinants are openness to trade and political stability in the study. The results show that FDI stimulates the economic growth but growth does not attract the foreign direct investment. In fact the openness trade and political stability are the significant determinants.