The Power of Fdi in Regards to Globalization

Determinants of FDI

THE POWER OF FDI IN REGARDS TO GLOBALIZATION:

Globalization is an inevitable and irreversible process, and dealing with the imperatives of globalization capitalizing on its positive aspects and mitigating the negative ones is perhaps the most important challenge for today. Globalization has enhanced the opportunities for success, but it has also posed new risks to developing countries.

Globalization has many faces; however, globalization is first and foremost comprehended in economic and financial terms. In this sense, it may be defined as the broadening and deepening linkages of national economies into a worldwide market for goods, services and especially capital.

Perhaps the most prominent face of globalization is the rapid integration of production and financial markets over the last decade; that is, trade and investment are the prime driving forces behind globalization. Foreign direct investment (FDI) has been one of the core features of globalization and the world economy over the past two decades. It has grown at an unprecedented pace for more than a decade, with only a slight interruption

during the recession of the early 1990s. More firms in more industries from more countries are expanding abroad through direct investment than ever before, and virtually all economies now compete to attract multinational enterprises (MNEs).

This trend has been driven by the complex interaction of technological change, evolving

corporate strategies towards a more global focus and major policy reform in individual countries. The past two decades have witnessed an unparalleled opening and modernization of economies in all regions, encompassing deregulation, de-mono-polization, privatization and private participation in the provision of infrastructure, and the reduction and simplification of tariffs. An integral part of this process has been the liberalization of foreign investment regimes. Indeed, the wish to attract FDI has been one of the driving forces behind the whole reform process. Although the pace and scale of reform have varied depending on the particular circumstances in each country, the direction of change has not.

Most developing countries were starting to look to FDI as a source of capital when flows of official development assistance (ODA) declined sharply in the 1990s. FDI usually represented a long-term commitment to the host country and contributed significantly to gross fixed capital formation in developing countries. FDI had several advantages over other types of capital flows, in particular its greater stability and the fact that it would not create obligations for the host country. FDI can play a key role in improving the capacity of the host country to respond to the opportunities offered by global economic integration, a goal increasingly recognized as one of the key aims of any development

strategy.

HOST COUNTRY DETERMINANTS OF FDI:

Nowadays, virtually all countries are actively seeking to attract FDI, because of the

expected favorable effect on income generation from capital inflows, advanced technology, management skills and market know-how.

Table below emphasizes three key determinants and factors associated with the extent and pattern of FDI in developing host countries: attractiveness of the economic conditions in host countries; the policy framework towards the private sector, trade and industry, and FDI and its implementation by host governments; and the investment strategies of MNEs.

Economic * Markets Size; income levels; urbanization; stability and growth prospects;

conditions access to regional markets; distribution and demand patterns.

* Resources Natural resources; location.

* Competitiveness Labour availability, cost, skills, trainability; managerial technical

skills; access to inputs; physical infrastructure; supplier base;

technology support.

Host country * Macro policies Management of crucial macro variables; ease of remittance;

policies access to foreign exchange.

* Private sector Promotion of private ownership; clear and stable policies; easy

Host country policies entry/exit policies; efficient financial markets

* Trade and industry Trade strategy; regional integration and access to markets;

ownership controls; competition policies; support for SMEs.

* FDI policies Ease of entry; ownership, incentives; access to inputs; transparent

and stable policies.

MNE strategies * Risk perception Perceptions of country risk, based on political factors, macro

management, labour markets, policy stability.

* Location, sourcing, Company strategies on location, sourcing of products/inputs,

integration, transfer integration of affiliates, strategic alliances, training, technology

Source: Sanjaya Lall, Attracting Foreign Investment: New Trends, Sources and Policies, Economic Paper 31 (Commonwealth Secretariat, 1997).

The review of host country determinants is closely linked with the role of national policies, especially the liberalization of policies, a key factor in globalization, as FDI determinants. Location- specific determinants have a crucial influence on a host country's inflow of FDI. The relative importance of different location-specific determinants depends on at least three aspects of investment: the motive for investment (e.g., resources, market or efficiency-seeking), the type of investment (e.g., services or manufacturing), and the size of the investors (small and medium MNEs or large MNEs).

The economic determinants related to large markets, trade barriers and non-tradable services are still at work and account for a large share of worldwide FDI flows. Although FDI remains strongly driven by its traditional determinants, the relative importance of different locational determinants for competitiveness-enhancing