Incoming Foreign Investment: holly water or menu of potential troubles?


  • Asta Zilinske Kaunas University of Technology


international economics, foreign direct investment, economic effects of incoming foreign capital, FDI policies.


Economic theory provides conflicting predictions concerning the effects of direct foreign investments. There are scientists and schools, mainly representatives of liberal and neo- liberal approach, who advocate free economic run and implicitly free flow of capital. This point of view was on its highest in the middle of the twentieth century and proved to be proved to be dangerous and crisis- enhancing in the first decade of the twenty-first century.On the other hand, there are scientists and schools, representatives of Keynesian school, who provide more critical and more realistic approach (Blackamn, A., Wu, X., Razin, A., Sadka, E., Hausmann, R., Xan X.Vo and others).Pro- FDI scientists and policy makers have a number of arguments when praising foreign direct investment. They argue that incoming foreign capital ensures economic efficiency firstly, via new jobs created, secondly, via enabled technology transfer; thirdly, via encouraged competition in domestic markets; fourthly, via human capital development as foreigners engage (more) in employee training.One more argument is often used in favour of foreign direct investment, namely that FDI has an advantage over other investment forms (portfolio or loans) as it proved to be more resilient in times of economic crisis.On an empirical level, there is a body of evidence that suggests possible positive correlation between FDI and economic growth in developing countries. Yet, while much evidence indicates a one-way causality between FDI and growth, there are many indications that the causality may run both ways. Benefits brought by some foreign investment in one country it does not necessary mean that the same will happen in another one. Methods that gave some positive effects in North Africa might prove as unsuitable when investing in Eastern Europe.Increased competition may be beneficial for the host economy, or it may not. International corporations may push out national businesses if they are yet not able to compete. In that case many jobs might be lost instead of creating. Foreign flow of capital might spread good practices of corporate governance, accounting rules, and legal traditions, and it may also not. Incoming FDI can limit ability of local government to implement bad policies but it might also result in encouraging host government to implement bad policies and so to spread bad practices instead.According to the dependency school, in the long- run, FDI tends to impede economic growth and development of recipient economies.The evidence appears that FDI is favourable to economic welfare only if appropriate conditions exist in the host economy. This includes such factors as adequate absorptive capacity and human capital, a capacity of domestic businesses to face and hold out foreign competition, a capacity of local government to make rational and transparent decisions, abundance of projects and market gaps that cannot to be filled up by home producers etc.Thus it seems convenient to look deeper into the world practice by measuring the effects of FDI.

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