FDI: Bridging Nations, Building Prosperity

BOOK CHAPTER

FDI : BRIDGING NATIONS, BUILDING PROSPERITY

Lecturer: Eko Handayanto, Dr.,M.M.

Arranged by :

1. Fera Alaidia Putri       (202110160311610)
2. Roro Bilkis Nurusifa (202110160311614)

MANAGEMENT STUDY PROGRAM

FACULTY OF ECONOMICS AND BUSINESS

UNIVERSITY OF MUHAMMADIYAH MALANG

2023

INTRODUCTION

According to Onody et al, (2022) Foreign Direct Investment (FDI) plays a pivotal role in the global economy, representing a fundamental aspect of international business and trade. FDI refers to the investment made by individuals, corporations, or governments in a foreign country's assets, such as companies, real estate, or infrastructure (Aluko et al, 2023). These investments are aimed at establishing long-term business interests, control, or influence in the host country. FDI can significantly impact a nation's economic growth, job creation, and technological advancements, making it a critical subject of study and analysis in the field of economics and international relations (Jardet et al, 2023).Then, according to Ullah et al. (2022) the concept of FDI has gained prominence in recent decades due to globalization, liberalization, and the increasing interconnectedness of world markets. As a result, countries have become increasingly proactive in attracting foreign investments through various incentives and policies. The competitive landscape for FDI has intensified as nations strive to create an environment conducive to foreign investors (Pacariz, 2022). Understanding the factors that drive FDI, the benefits it offers to both the host and source countries, as well as the challenges associated with it, is crucial for policymakers, businesses, and economists to navigate the complex dynamics of international investment (Mahbub et al, 2022).

In this context, this paper will delve into the multifaceted nature of FDI, shedding light on its significance in fostering economic development, technology transfer, and job creation (Abu Bakar et al, 2022). Additionally, it will explore the various factors that influence the flow of FDI, such as political stability, economic conditions, and market size (Amdam & Benito, 2022). The analysis will also consider the potential risks and drawbacks associated with FDI, including issues related to national sovereignty and economic dependency (Hofbauer & Limanskis, 2022). By examining FDI from different perspectives, we can gain a deeper understanding of its role in shaping the global economic landscape and the potential implications for both developed and developing nations (Prasetyo Khafidzin, 2021).

 

LITERATURE REVIEW AND DISCUSSION

Foreign Direct Investment (FDI) has been a dynamic force in the world economy, and current trends indicate its continued importance (inikait & Meidute-Kavaliauskiene, 2023). In recent years, there has been a notable shift in FDI towards the technology and innovation sectors. With advancements in technology and the digital economy, multinational corporations are increasingly investing in high-tech areas, such as artificial intelligence, green technology, and biotechnology (Shekhar & Jena, 2021). This trend is motivated by the intention to leverage the opportunities for sustained expansion and advancement in these industries. Moreover, FDI has been moving from developed countries to emerging markets, with Asia, particularly China and India, attracting substantial inflows of foreign investment (Temouri et al, 2022). This is indicative of the growing economic significance of emerging markets, with governments in these countries often offering incentives and reduced regulations to attract FDI (Smirnov & Lukyanov, 2021).

According to Samour et al, (2022)Various theories help explain the motivations behind FDI. The Market Imperfections Theory suggests that firms invest in foreign markets to exploit differences in factors like labor costs and resources. The Internalization Theory posits that companies engage in FDI to internalize their operations and reduce transaction costs, thereby improving coordination and control (Nighat Farooq et al, 2022). Additionally, the Eclectic Paradigm, also known as the OLI framework, combines ownership advantages, location advantages, and internalization advantages to elucidate the factors driving FDI decisions (Sawitri & Brennan, 2022). Political ideology significantly influences a government's attitude toward FDI. Liberal governments tend to be more welcoming of FDI, emphasizing open-market policies and reducing restrictions to attract foreign investors (Zhao, 2022) .In contrast, socialist governments may be more cautious, focusing on protecting national interests and preserving domestic industries (de Jong, 2021). Nationalist governments prioritize self-sufficiency and sovereignty, leading to more stringent regulations on foreign ownership. Therefore, understanding the role of political ideology is essential when analyzing a government's approach to FDI (Onody et al, 2022).

Foreign Direct Investment (FDI) entails advantages and disadvantages for both the countries of origin and the host nations. For the home country, it can stimulate economic growth and job creation but may lead to some domestic job displacement due to offshoring (Appiah-Kubi et al, 2021). Host countries can gain capital, job opportunities, and economic development, while potential drawbacks include a risk of exploitation and dependence on foreign corporations (Wu & Chen, 2021). Governments can use a range of policy instruments to influence FDI, including tax incentives, trade policies, and investment promotion agencies (Ofori & Asongu, 2021). Managers operating in the context of FDI need to be aware of the different theories and government policies associated with FDI, as these factors can significantly impact their business strategies, risk assessments, and global expansion plans (Wako, 2021).

Recognize current trends regarding foreign direct investment (FDI) in the world economy.

According to Lashchyk & Viblyi, (2021) Currently, there are discernible patterns in the global economy concerning Foreign Direct Investment (FDI).One prominent trend is the increasing FDI in the technology and innovation sectors (Bris et al, 2021). Countries are in a race to attract investments in high-tech industries such as artificial intelligence, blockchain, and green technologies ( & , 2022). This surge is primarily driven by the desire to establish global technology hubs, which serve as catalysts for long-term economic growth and knowledge-based job creation (Joo & Shawl, 2021). Then, according to Jaworek et al, (2022) Furthermore, another significant trend to be recognized is the shift of FDI from developed countries to emerging markets. There is a noticeable increase in FDI flowing into markets in Asia, Africa, and Latin America, driven by rapid economic growth, youthful populations, and substantial growth opportunities (Gizaw et al, 2023). Emerging economies are increasingly seen as promising investment destinations, creating heightened competition among nations to attract foreign investors. Understanding these trends is key to identifying the opportunities and risks associated with FDI in the current global economy (Sou & Vinnicombe, 2023)

 

Explain the different theories of FDI.

Foreign Direct Investment (FDI) can be understood through various theories that explain the motivations behind multinational corporations investing in foreign markets (Ben Amara et al, 2023) .One of the prominent theories is the "Market Imperfections Theory." This theory posits that FDI occurs due to imperfections in the market. Firms invest abroad to exploit differences in factors like labor costs, technology, and raw materials (Bobeni Hintoov & Bdy, 2023). By doing so, they seek to lower production costs and increase efficiency. This theory suggests that FDI arises when companies believe they can gain a competitive advantage by investing in foreign markets, where these advantages may not be fully realized in their home countries (Dominikus Leonardo et al, 2023).

Understand how political ideology shapes a government's attitudes toward FDI.

Political ideology is a crucial determinant of a government's stance on Foreign Direct Investment (FDI) (Alvin Hoi-Chun Hung, 2022). Different ideologies, such as liberalism, socialism, and nationalism, influence the policies and attitudes that a government adopts towards FDI. Liberal governments, for example, tend to embrace FDI as a means to enhance economic growth and prosperity (Keuschnigg, 2021) .They often view FDI as a source of capital, job creation, and technological advancement, and they promote open-market policies, reduced restrictions, and favorable investment climates to attract foreign investors. Liberal ideologies prioritize free-market principles and economic liberalization, making them more welcoming to FDI (Yasmeen et al, 2022) .

Describe the benefits and costs of FDI to home and host countries.

Foreign Direct Investment (FDI) brings about a range of benefits and drawbacks for both the countries of origin and the host nations. From the perspective of the home country, FDI has the potential to stimulate economic growth & job creation (Li et al, 2022) . When domestic businesses invest in foreign markets, it can result in increased production, higher sales, and opportunities for expansion (Hou et al, 2021). This growth in foreign markets often leads to greater demand for goods and services produced in the home country, ultimately boosting exports and economic prosperity (BurleaSchiopoiu et al, 2023). Furthermore, FDI can facilitate the transfer of technology and the exchange of knowledge, thereby improving the home country's competitive edge in the global market. Nevertheless, there is a potential downside, as it could lead to the displacement of domestic jobs if companies opt to offshore some of their operations to take advantage of lower production costs in other countries (Tag & Degirmen, 2022).

Explain the range of policy instruments that governments use to influence FDI.

Government policies aimed at shaping Foreign Direct Investment (FDI) involve a diverse set of policy tools crafted to either stimulate or control the influx of foreign direct investment into a nation (Song & Han, 2022). These instruments can include fiscal incentives, trade regulations, investment promotion, legal protection, and much more. Here's an explanation of the diverse policy, The impact and utilization of these policy instruments can vary depending on the country's goals and economic conditions (Song et al, 2021). Government FDI policies can be a broad field of study, and experts like those mentioned above provide valuable guidance and analysis of the influence and effectiveness of these instruments in their recent literature (Atitianti & Dai, 2022). 

 

Identify the implications for managers of the theory and government policies associated with Foreign Direct Investment (FDI).

Recognizing the theory and government policies linked to Foreign Direct Investment (FDI) is an essential aspect of effectively overseeing business operations that encompass foreign direct investment, and it holds significant significance for managers (Hobbs et al, 2021). These implications encompass understanding how FDI can affect business strategies, risks, opportunities, and the necessary actions to effectively manage foreign investments (Caetano et al, 2022). Managers need to understand how FDI theories, such as Dunning's eclectic paradigm, and government policies can affect business strategies, risk management, and company operations. Referring to recent expert sources helps them grasp the latest developments in these issues and apply the right strategies in a dynamic global context (Le et al, 2021).

CONCLUSION

Foreign Direct Investment (FDI) plays a pivotal role in the global economy, representing a fundamental aspect of international business and trade. FDI refers to the investment made by individuals, corporations, or governments in a foreign country's assets, such as companies, real estate, or infrastructure. These investments are aimed at establishing long-term business interests, control, or influence in the host country. FDI can significantly impact a nation's economic growth, job creation, and technological advancements, making it a critical subject of study and analysis in the field of economics and international relations.

The benefits of FDI are substantial. FDI can lead to economic growth by injecting capital, technology, and expertise into the host country. It often contributes to job creation, as foreign companies establish operations and hire local labor. Moreover, FDI can foster technological advancements by facilitating the transfer of knowledge and best practices. This, in turn, enhances a nation's competitiveness and can lead to broader economic development.

However, FDI also comes with costs and risks. In the home country, it can lead to the offshoring of jobs and potential revenue loss due to profits repatriation. In the host country, there may be concerns about the repatriation of profits to the home country, potentially reducing the economic benefits. Moreover, over-dependence on foreign investors can pose risks if those investors decide to withdraw their investments.

The management of FDI involves a nuanced understanding of international economics, legal frameworks, and business strategies. Governments play a crucial role in shaping the FDI landscape through policies and regulations that can either attract or deter foreign investors. Understanding the implications of FDI-related theories and government policies is vital for managers and decision-makers, enabling them to navigate the complex and dynamic world of international investments. By staying informed and adapting to changing circumstances, countries and businesses can harness the potential of FDI to foster economic growth and global development.

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