A Study on Foreign Direct Investment on Special Reference towards FDI Developed Countries

Foreign  direct  investment  (FDI)  has  been  one  of  the  defining  characteristics  of the world economy during the last two decades. Some developing economies have emerged  as  major  recipients  of  FDI  flows  in  recent  years,  while  many  others have  attempted  to  attract  such  flows,  often  by  offering  fiscal  and  financial  value to foreign investors. This work reviews and discusses recent empirical studies on key development issues related to FDI. The literature review focuses on five main areas of interest to host economies: the FDI-growth nexus; FDI-trade linkages; FDI and technology transfer; FDI, privatization and corporate governance; and host- government policies for attracting FDI. Three of the conclusions reached in this study deserve special attention. First, a vast majority of existing empirical studies indicate that FDI does make an appositive contribution to both income growth and factor productivity in host economies. FDI tends to “crowd in” domestic investment, as the creation of complementary activities outweighs the displacement of domestic competitors.

Similarly, in the North-South context, the relationship between FDI and trade is more one of complementarily than of substitution, owing to backward and forward linkages.  Second,  host  countries  will  not  be  able  to  capture  the  full  benefits associated with FDI until they reach a certain threshold level regarding educational attainment, provision of infrastructure services, local technological capabilities and the development of local financial markets. Third, their role of FDI in development goes beyond the traditional areas of growth, trade and technology transfer to cover emerging areas of policy concern, such as mergers and acquisitions, privatization, corporate governance and “policy competition.” The study concludes by stressing that host-government policies should attach greater importance to the stability and redictability of the local business environment in which MNE affiliates operate.