Foreign direct investments have surged with globalization in the past few decades. What are the benefits...

Foreign direct investments have surged with globalization in the past few decades. What are the benefits of FDI for the host country? Does foreign direct investment promote economic growth? How would FDI play a role in the economic growth of developing countries? Please give an example from world economies. Cite your references.

Expert Solution

Globalization refers to the process of opening up of economies and trade and flow of goods, services and capital among different countries, people and firms globally, all across the world.

FDI or foreign direct investment can be defined as long term investment in the business of other countries with the motive of ownership. With increase in globalization, FDI flow has also increased with passage of time.

FDI has a number of advantages for the host country.

Inflow of investment increases production in the economy.
It also contributes to increase in employment.
The foreign companies bring along their technologies with them.,flow of knowledge and skill also takes place.
The foreign companies also provide training to their employees, thus, improving the human capital in the host country.
The increase in competition also helps in improving managerial and entrepreneurial skills in the host country. All of this helps in the economic growth of the country.
The growth also has a dominant effect boosting the local businesses and increasing competition in the domestic market.

Especially for the developing economies which face a lack of capital, poor quality of human capital, low capital formation, old and backward technologies, FDI plays a crucial role in the process of economic growth. That is a reason why the developing economies provide a number of incentives to attract FDI.

For instance, we can look at the economies of India and China. Both are developing countries competing to attract more FDI.

In order to do so, they have adopted a number of incentives such as establishing SEZs or special economic zones, liberalizing the labor laws, easing the permits and license process. This has helped in increasing capital inflows and boosting the economic growth.

Rahul Sunny answered 2 years ago

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