Technological progress and foreign direct investment in developing economies

¶ … Big to fail problem?: Economic Growth

As stated by the New Classical Model, economic growth can be attained by collecting labor, wealth and other issues of production. For the reason that most of these factors are going through weakening marginal returns, the economy can merely accomplish a symmetry that is income that is steady through unceasing escalation in investment and saving nevertheless at the same time decrease population growth. Nevertheless, a policy that will be able to aid in to increase savings and investment but also be an able to lessen the population growth particularly in emerging nations is hard to be applied. This was reinforced by Blomstrom and Kokko (2003) who appealed that developing nations have low-revenue that leads population growth rates that are much higher.

Solow (1956, 1957) was the person that was able to recognize that there was some importance of technical progress as a cause of economic growth. Technology is considered to be an exogenous issue. Per capita income does not always rise to what is considered to be a steady state or even to a high level revenue economy except these technologies are joined. Research shows that the modern growth theory likewise maintains the significance of technological development for the reason that it can change weakening returns to returns that are increasing. Technological progress can also occur in the way of education, research and training development. With that said, developing nations could be able to have the prospective to grow even faster. Blomstrom and Kokko (2003) established that the potential of changing this awareness of technology is contingent upon the financial phase of capital.

The financial level of capital in any country is figure in by at least two sources. One of these sources is the foreign capital and the other one is called the domestic capital. Domestic capital is found by means of domestic savings which was created by the private and public sectors. In the meantime, the foreign capital is what has been gotten by means of the incursion of what is referred to as the foreign direct investment (FDI). In emerging nations, low-level of revenue has a lot to do with the contribution that involves savings that are considered to be low-level of savings (Plummer). As a result the savings or domestic capital found is inadequate for its investment, generating a saving-investment hole in the nation that is the host. To surmount the saving-investment hole, emerging countries are contingent on debt and foreign direct investment.

The Issue of Debt

The matter of debt is typical for deprived and developing nations. Debts mostly become an issue when the export earnings start falling and there is a discrepancy in the budget. Most of the time, the debt that comes on the scene because there was a fall in earnings of export is recognized as debt that is external meanwhile a deficit or lack in the government budget is recognized as being domestic debt. It turns out that debt is recognized as a type of sickness to the financial growth. This is for the reason that when there is debt, the nation starts needing funds to get rid of the liability. The reserves that need to be used for growth is utilized to overpower debt issues however, lesser funds are directed to the well-being of the country. The financial level of wealth in a country is decided by exactly two sources. One of those sources happens to be the foreign capital and the other is the domestic capital. Domestic capital is gotten by means of domestic savings which was created by the private and public sectors. In the meantime, the foreign wealth is gotten by means of the influx of foreign direct investment (FDI). In emerging nations, low-level of revenue underwrites to savings that are of low-level (Blomstrom and Kokko, 2003). As a result the domestic capital or savings is gotten is inadequate for its venture, generating a saving-investment breach in the host nation. To get out of the saving-investment hole, emerging nations are contingent on balance and also the foreign direct investment.

For poor and developing nations, the issue of debt is typical. Debts normally come out when there is a decrease in the export retributions and a shortfall in the financial plan. Debt that rises because of a fall in export retributions is recognized as external debt in the meantime a shortfall in the government financial plan is recognized as domestic balance. Debt is a technique of illness to the financial growth. This is for the reason that when there is debt, the country needs funds to settle the debt. The capital that needs to be utilized for growth is used to get rid of debt issues. Therefore, fewer funds are directed to the well-being of the country.

The Issue of Taxes

As stated by Ricardo (2007), if a country makes the decision to cope with external debt by commanding tax to its nation, this will generate a financial issue recognized as tax that is inflationary. Ricardian model theory demanded that inflationary tax raises the load of tax to the next age group and ultimately outcome in additional rise in poverty. In 2011, emerging countries spend somewhere around U.S.$500 billion in order to repay their debts. In the meantime, nations that are low-income nations recompense somewhere around U.S.$200 million to creditors everyday (Plummer). Yeh (2009) also maintained the statement that investments were typically sponsored by debt in emerging nations. The researchers also made the point that financing investment with taxes could also reduce existing private investment and this could downfall the general objective on the utilization of domestic capital for development.

Issue of Borrowing

This financial issue will turn from bad to worse when external debt occurs, where earnings in export are inadequate to funding domestic growth. The mere alternative would be to option to having a loan of in the global marketplace. Borrowing in the domestic marketplace lead to additional load on tax payers nonetheless having a loan from global market will only be operative in the short-run but that would have much to do if the interest rate is little and the output can be improved. It will be a load when the interest rate increases and ultimately lead to a reduction in production down the road. Plummer (2001) made the point that, foreign direct venture is a decent alternative to be utilized as a basis of funding to incapacitate debt in emerging nations.

Internal Relations

International relation is another vital environmental aspect that can be a solution for economic growth. This is good because it will be able to measure the political friendliness that goes on among nations. If there is no friendliness among the nations than it will be very hard to receive any kind of backing or support with financial issues. It can also hinder the investment strategies. This falls is in line with Ricardo (2007) view on social capital idea. This social capital idea that mostly denotes to the interacting within and among social networks in addition to within individuals is recognized as relationship interacting. In macroeconomic viewpoint, international dealings are measured to be a vital variable in appealing to foreign investment to the host nation. The researcher believes that this is the best solution because as mentioned earlier, without the help of other nations, it is hard to have help with the financial growth of any country. This is not a battle that can be fought a lone, the more friends along for the ride the better.

Congress Involvement

As many have examined the horizon and looked at the issues that lawmakers today are being faced with, the likely assumption is that the 113th Congress will be another stimulating era for many political leaders due to the economic growth issue. Some in congress propose that regulatory reform necessary for economic growth. There is actually a divide that is occurring when it comes to the question of whether politicians in Congress need to go ahead and follow policy that enables growth. And one of the unquestionable directions to facilitating growth -- and cheering on the stability that stockholders and job makers need to shape that growth -- is to reform the obscure and incompetent regulatory system. Incompetent, redundant and unnecessary regulations have had a marked undermining effect on job recovery and growth. The system is totally old-fashioned, and it is loaded with too many rules that are not effective or have been forgotten. It should not be of a surprise to any person, then, that companies big and small are selecting not to invest, enlarge and hire for the reason of the doubt neighboring the present regulatory system.

Conclusion

It is clear that when it comes to economic growth, political theater, and it does not even matter how persuasive, may not be the solution in fix what ails some economies especially in the U.S. Growth, determined by small businesses all over the country, will essentially be the engine that transmits the economy further than the episodic economic disasters that have defined our current experience. It is possible that Washington could help spike financial growth today by positioning in place a regulatory system that does not permit, but also cheers, a different economic increase.