Essay Sample on Impact of Foreign Direct Investment on Economic Growth

In the global market, foreign direct investment has become a cornerstone for both governments and corporations. Through acquiring a management interest in foreign assets, companies are striving to move their investment to other countries. According to Ali and Malik (2017), the establishment of foreign direct investment has become an essential aspect of economic growth. In most developing nations, foreign direct investment stimulates economic development due to the influx of capital and earning revenue. Despite host nations for being a crucial trade regime, foreign direct investment creates a good environment where other investors can introduce more business. Typically, foreign direct investment gets a voting power of innovativeness by integrating a wholly-owned firm, buying shares, or merging (Solarin & Shahbaz, 2015). Most companies which are operating in other countries view the chance as a good approach to boost their growth. In most cases, companies that engage in foreign direct investment integrate physical investment by introducing more firms in an area of interest. According to Ali and Malik (2017), foreign direct investment has become a major factor that enhances the concept of globalization. Technology development greatly facilitates the introduction of these foreign companies (Agrawal, 2015). Normally, technology development creates a connection ground, such as communication, which makes it possible for managers to conduct their roles (Solarin & Shahbaz, 2015). Due to this aspect, foreign direct investment has become good footage for development.

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Trade is one of the major factors of economic growth. Introduction of FDI has a direct impact on trade due to the establishment of new products in the market. Before a company invest in a certain area, labor cost is critical aspect management must consider (Solarin & Shahbaz, 2015). Most of these foreign investment companies move to regions where labor is cheap. Cheap labor creates a good environment where companies can enhance their productivity. This aspect creates a channel where consumers can acquire products directly from the market instead of importing. Introduction of more materials in the host nation create a system for trading, especially local town (Agrawal, 2015). Setting industries stimulate the growth of towns. Towns offer a good trading zone due to the high population rate. According to Ali and Malik (2017), the introduction of FDI in a country influences other investors to move in such areas. This movement increases productivity and trading in those areas. Trading earns government revenue to boost other development products such as road and schools (Solarin & Shahbaz, 2015).

In most developing nations, employment has been a critical aspect that affects their development. The high rate of unemployment triggers other challenges such as insecurity which hinder the introduction of industries. The establishment of FDI creates more jobs opportunities for residences in the host country. This employment may either be direct or indirect (Ali & Malik, 2017). In the direct employment, people are employed to work in companies to enhance their productivity. On the other hand, indirect employment occurs in various channels such as wholesalers, retailers, and much more, which are used to supply products to consumers. When a large number of people are employed, the government earns a lot of revenue by taxing their income (Agbloyor, GyekeDako, Kuipo, & Abor, 2016). The revenue is used to introduce other essential economic aspects such as schools. According to Iamsiraroj and Ulubasoglu, 2015), most of these foreign companies pay their employees' high wage as compared to other local industries. Due to this concept, more people are competing to acquire chances in FDI. As a way of boosting employment in these companies, most countries have introduced more education system which will equip students with the education to boost their skills (Agrawal, 2015). In some cases, the introduction of FDI boost local firms to improve their employees' services to ensure they are low turnover rate as people seek better employment opportunities in foreign firms (Solarin & Shahbaz, 2015).

Technology development plays a vital role in the establishment of FDI. According to research, the establishment of FDI has been seen as a crucial aspect of diffusing technology and knowledge to other regions (Solarin & Shahbaz, 2015). Technology development has a great impact on economic development since it introduces new and more advanced ways of productivity (Agbloyor et al., 2016). For instance, the introduction of new machines and methods of production creates a good approach to development. Usually, technology enhances research and innovation. Research and innovation give residences of host nation a chance to introduce other news ways of production to cater for their needs (Ali & Malik, 2017). These self-operating companies assist people to venture in various activities which earn the government a lot of foreign income. Despite most research and innovation are conducted in high incoming countries, third world countries rely on their knowledge to boost productivity skills (Agrawal, 2015). Therefore, introducing these companies in third world countries creates a good environment where most innovative people can learn about technology and use the skills to venture in other activities (Solarin & Shahbaz, 2015). Usually, developed nations are characterized by good technology background, and hence, developing nations need to learn more about technology to boost the development and growth rate.

FDI plays a vital role in improving the living standard due to introducing more ways of increasing people's earning (Agrawal, 2015). Additionally, high tax earned by the government is used to boost and improve economic sectors such as education and health. A developed nation can effectively be classified according to their health status. Most FDI establishes programs such as education within the surrounding community as a way of giving back to society (Agbloyor et al., 2016). This sponsorship greatly boosts various economic sectors due to the effective application of materials and good technology approaches. Countries that are concern about globalization tend to encourage FDI to invest in their country since they believe it is a good approach to raising their living standards.

Due to the effective application of the managerial system, most local companies learn the effectiveness of human resources (Solarin & Shahbaz, 2015). In most cases, FDI improves its employees' skills and knowledge by taking them for training. Applying this technique has become an essential approach to the growth and development of the firm. However, in most local industries, human resources are unskilled and semi-skilled. Due to lack of enough skills, they tend to be less productive (Agbloyor et al., 2016). Using education as a way of boosting productivity can be an essential approach local firms can learn from FDI. Through this approach, local firms will learn the importance of improving human resources as a way of boosting their productivity.

Despite many benefits of FDI, there are several challenges that are impacted by the introduction. At first, the establishment of FDI has been accused of exploitation. In this case, foreign companies have been accused of paying workers below the required level. Despite earning a lot of revenue, some companies subject workers in poor working condition, which affects their health status (Solarin & Shahbaz, 2015). Working for long hours have boosted the income rate, while negatively impacting workers ability to perform effectively. Additionally, FDI has been accused of exploiting local materials such as mineral while giving little to society. Due to the lack of effective policies to regulate these companies, some nations are not able to control this exploitation (Agrawal, 2015).

The establishment of FDI creates a condition which impacts how other local companies operates. In this case, FDI creates a competitive environment which hinders the effective development of local industries (Ali & Malik, 2017). This concept subjects local firms to risk and instability. In some cases, experienced workers in local companies quite their job to go and seek a better standard in these foreign nations. Additionally, the establishment of local industries become hard due to the high competitive condition, which is created by FDI. According to Iamsiraroj and Ulubasoglu (2015), the establishment of FDI impacts currency exchange rates due to huge monetary value that occurs from foreign countries (Agbloyor et al., 2016).

In conclusion, there are a lot of impacts associated with the introduction of FDI. Foreign firms enhance trading system due to the creation of more products. Introduction of technology in host nations enhance the establishment of research and innovation. Their aspect boosts local industries and other economic sectors. Earning revenue helps the host country to develop other sectors such as health. However, the establishment of FDI increases the chance of exploitation. Most workers are forced to work in poor working conditions which are a risk to their health. Additionally, FDI creates a competitive environment which affects the growth of local industries.

References

Agbloyor, E. K., GyekeDako, A., Kuipo, R., & Abor, J. Y. (2016). Foreign direct investment and economic growth in SSA: The role of institutions. Thunderbird International Business Review, 58(5), 479-497. Retrieved from https://onlinelibrary.wiley.com/doi/pdf/10.1002/tie.21791?casa_token=v3Z2ddZSxDIAAAAA:7DtvETsglMFOPkz6couqTZeZ0k21-QplChlfcc-jQa6fo8Zx7lgCdPKIESYIe92FE_dz8r_xRKZ9UOud1w.

Agrawal, G. (2015). Foreign direct investment and economic growth in BRICS economies: A panel data analysis. Journal of Economics, Business and Management, 3(4), 421-424. Retrieved from www.joebm.com/papers/221-W00050.pdf.

Ali, M., & Malik, I. R. (2017). Impact of foreign direct investment on economic growth of pakistan. Retrieved from https://www.researchgate.net/profile/Najabat_Ali2/publication/319292026_Impact_of_Foreign_Direct_Investment_on_the_Economic_Growth_of_Pakistan/links/59a13daba6fdcc1a314cfa2b/Impact-of-Foreign-Direct-Investment-on-the-Economic-Growth-of-Pakistan.pdf.

Iamsiraroj, S., & Ulubasoglu, M. A. (2015). Foreign direct investment and economic growth: A real relationship or wishful thinking?. Economic Modelling, 51, 200-213. Retrieved from ulubasoglu.net/wp-content/uploads/2016/12/Foreign-Direct-Investment-and-Economic-Growth.pdf.

Solarin, S. A., & Shahbaz, M. (2015). Natural gas consumption and economic growth: the role of foreign direct investment, capital formation and trade openness in Malaysia. Renewable and Sustainable Energy Reviews, 42, 835-845. Retrieved from https://mpra.ub.uni-muenchen.de/67225/1/MPRA_paper_67225.pdf.

Sunde, T. (2017). Foreign direct investment, exports and economic growth: ADRL and causality analysis for South Africa. Research in International Business and Finance, 41, 434-444. Retrieved from https://mpra.ub.uni-muenchen.de/72382/1/MPRA_paper_72382.pdf.