Foreign Direct Investment and Free

¶ … Foreign Direct Investment and Free Trade on Developing Countries

International commerce is certainly not a new trend, and humans have been trading with each other since time immemorial. The same forces that are driving the globalization of the marketplace have also contributed to an acceleration in the rate of free trade among the countries of the world in recent years. One of the more interesting aspects of this growth in international trade has been a concomitant increase in the amounts of foreign direct investment being made. Although industrialized nations such as the United States and Japan continue to be a target of choice for certain investors, a growing number of investors are looking to developing nations as the best recipients for their foreign direct investment purposes. As a result, many of these formerly developing nations, including South Korea, Singapore and especially China, have enjoyed significant economic growth in recent years and have joined the international community as equal trading partners. To gain some insights concerning the advantages of foreign direct investment and free trade on developing countries, this paper provides an argument in support of increased free trade and foreign direct investment based on a review of the relevant literature, followed by a summary of the advantages of foreign direct investment.

Review and Discussion

From a strictly economic perspective, it has become abundantly clear that increased level of international trade and foreign direct investment contribute to the development of emerging nations. For instance, according to Kumar, Dunning, Lipsey, Agrawal and Urata (1999), "The world economy has witnessed a remarkable expansion of foreign direct investment (FDI) since the early 1980s. In the post-World War II period through the 1970s, international trade grew more rapidly than FDI, and thus international trade was by far the most important international economic activity" (146). During the mid-1980s, though, this situation reversed itself in a dramatic fashion and global FDI began to significantly increase (Kumar et al. 1999). During the period from the early 1980s through the mid-1990s, the FDI growth rate was substantially higher when compared to the level of international trade (Kumar et al. 1999). In the process, a growing number of developing countries throughout East Asia, including the newly industrialized economies of Hong Kong, Korea, Singapore and Taiwan, the so-called "ASEAN4" (i.e., Indonesia, Malaysia, Philippines, Thailand), and China, have all been the target of large amounts of FDI (Kumar et al. 1999). Likewise, de Mello (2010) reports that, "The ultimate impact of FDI on output growth in the recipient economy depends on the scope for efficiency spillovers to domestic firms, by which FDI leads to increasing returns in domestic production, and increases in the value-added content of FDI-related production" (para. 2).

The difference between developing nations that attract large amounts of FDI and those that do not relates in part to the type of role played by the national government of the developing nation. For instance, Kirkpatrick, Parker and Zhang (2006) emphasize that, "FDI in infrastructure responds positively to an effective domestic regulatory framework. By implication, where regulatory institutions are weak and vulnerable to 'capture' by the government (or the private sector), foreign investors may be more reluctant to make a major commitment to large scale infrastructure projects in developing countries" (para. 1). A pattern of governmental involvement is apparent in varying degrees among the developing nations that have experienced the most significant economic growth as a result of foreign direct investment.

In an increasingly integrated global marketplace, it is apparent that increased trade will equate to increased economic growth but the level of growth will be directly related to how well developing nations are able to attract the finite amount of FDI that available.

Advantages of Foreign Direct Investment and International Trade

A distinct advantage of foreign direct investment is that it provides an investment framework for the economic development of a given country where the investment is being targeted, a factor that is particularly relevant for economically developing countries (Benefits of Foreign Direct Investment 2010).