1. Introduction
Foreign direct investment (FDI) is a hot topic in international economics. Over the years, FDI has become the major source of external finance for developing countries. Together with trade, FDI forms the primary growth and financing in the global economic. FDI is defined as the investment of a company in a foreign country in the form of either acquiring a significant ownership in a firm or an expansion of an already existing business in the country. FDI has experienced substantial growth over the last 20 years. Firms are constantly looking for new areas of expansion and, as a result, the number of large firms involved in FDI has jumped dramatically. Firms predominantly from the United States, Asia, and the European Union account for the majority of FDI. In 2017, global FDI flows rose by 2% to $1.75 trillion, the highest level since the global financial crisis in 2008. In fact, during the 21st century, the worldwide stock of FDI has increased by over 10%. This is a significant trend given its impact across the globe. This increase seems to be driven by the rapid industrialization of the developing world. However, FDI is also becoming more popular in the developed world as firms look to expand their operations to new countries and markets. This increase in FDI has been helped by the establishment of around 3,000 international investment agreements which have progressively liberalized and promoted FDI. In light of the rapid changes in macro conditions in emerging economies and trends towards reforms, the study of factors which propel economic growth has never been more important. Additionally, the research on FDI is essential because it can be used to form more effective policies by governments wishing to attract higher quality levels of FDI. However, as Chang (2012) outlines, it is crucial to understand that the desired effects of FDI are not a guarantee. This serves as the basis for my research, outlined in this introduction, which will establish both the relationship between FDI and growth as well as the validity of the various growth theories. There are many adjacent discourses in the field of FDI and economic growth. This investigation will look at economic rather than cultural implications, given the established rational choice model which dominates the thesis of economic literature. Lastly, this introduction will discuss the increasing political significance of FDI in the age of globalization and increased trade integration; the topic of FDI generates strong public opinion and this further shows its relevance as a field of research.
1.1. Background
FDI is not a new term in the economic dictionaries. It is defined as a cross-border investment in which a resident in one economy (the direct investor) obtains a lasting interest in an enterprise in another economy (the direct investment enterprise), as defined by the International Monetary Fund (IMF). The last two decades have witnessed an extraordinary increasing trend in the FDI.
Emerging economies play an important role in today’s world. With initial signs of upsurge in the developed nations showing after the economic turmoil, majority of the world looks towards emerging nations for new opportunities and progress. As compared to the developed countries like United States and United Kingdom, the economic growth has been huge in India and China. They are catching up with the growth of the developed world and this offers a lot of new opportunities. However, in order to compete and maintain the growth, these nations need a consistent flow of FDI.
The rapid pace of globalization and increased interdependence among the global economies have made private and public foreign direct investment a prominent factor in driving economic growth. FDI is considered as a key component for economic prosperity in developed and developing countries. It not only stimulates economic growth but also helps in enhancing the overall technological innovation and human capital.
1.2. Research Objective
After briefly introducing the main topic and the purpose of the research, which is to examine the effect of FDI on economic growth in emerging economies, the essay continues to outline the research objective and the methodology to be adopted in the study. As it is shown in the table of contents, the underpinning research objective and the structure of the whole essay are clearly laid out in this part. It mentioned that a literature review will be conducted to define and explain the types of FDI before a secondary data analysis is carried out to understand the effect – ‘does FDI really promote the economic growth in host countries?’ These routes of investigation really arouse scholarly interests as the research question has been widely asked by many researchers till now. Another thing special about the research is that its primary emphasis is to focus on FDI in the Asia Pacific region, particularly in China, and how the transnational corporations have found ways or transferred “technological capability, management know-how and innovated activities” through their entry in Chinese market. At the same time, the research also guides the readers through the neoclassical theory of FDI, endogenous growth theory, and technological spill-over theory which are going to be introduced in the theoretical framework. Next, a detail of the things to be done in empirical analysis is included. The research include in testing the hypothesis that ‘FDI has a positive impact on economic growth in the host country’. To be able to make this judgement, some main specific objectives in the empirical analysis mentioned need to be fulfilled along the way. It has been noted that the finding of the research could give insightful information for Chinese government, for whether the existing developmental policies should maintain a relatively open policy to allow further FDI spillover and collaborations between local firms and transnational corporations, or to tighten the FDI inflow and give greater space for domestic technologies to nurture and thereby boosting capacity of independent endogenous growth. Such recommendations for policy implications will be discussed in the policy implications section. The section ends with the researcher underlining the significance of his work and the structure of the essay.
1.3. Methodology
In order to achieve the research objective, which is to examine the effect of FDI on economic growth, the study adopts a mixed research design, including both a review of secondary data and a statistical analysis of primary data. Secondary data is sourced mostly from academic papers, empirical studies, and research reports. The literature review has been conducted to define what FDI is and to highlight its prevailing importance in the economies of the less developed countries. Secondly, previous studies on FDI and economic growth in general and the study that are closely related to the issue under consideration are discussed. As the influence of FDI on the economic growth in a developing country is largely a macroeconomic matter, the study will adopt a quantitative method. The key dependent variable in the study is the real GDP per capita, which indicates the level of economic performance in a country. It is indicated in equation (1), where Y_i stands for the real GDP and P_i represents the total population in the country. Apparently, by dividing both sides of the equation by the total population P_i, the left-hand side of the equation becomes the real GDP per capita, that is, the economic output per person. When a country’s per capita income rises, the additional purchasing power each period and the increasing demand for extra output leads to economic growth. This is the reason that the study aims to examine the effect of FDI on the economic performance in a less developed country. The key independent variable is FDI, which is defined as investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. As the purpose of this study is to examine how the FDI is affecting the economic growth in the context of a less developed country, therefore, the scope of the study will be narrowed down to focus on the less developed countries only. On the one hand, the study will help to provide a snapshot of the progress of the existing study in this area, that is the empirical research in support of the theoretical argument. On the other hand, it also helps to give an overall picture of the linkage between FDI and the economic growth and “absorb” various comments and insights from different research writers. The study sample for the primary data collection will be based on the top ten countries which receive the highest total FDI flows from year 1995 to 2004. I will be concentrating on the annual data of both FDI and the real GDP per capita for these ten countries during this period of time by using econometric techniques. The selection of the samples and the sources of the precollected data will be further discussed in later part of the section on primary data collection. 112 words.