Globalisation (fdi) Essay

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intermediate goods from domestic suppliers to cut down on transportation costs or to accommodate local content requirements. Lall (1978) finds that MNCs boost the productivity of domestic firms by giving technical assistance and training, by assisting them in buying raw materials, and by pressuring suppliers to meet standards of reliability and speed of delivery.

Balasubrammanyam and Sapsford (1996) and De Mello (1999) concluded that FDI is a combination of capital stock, knowledge, and technology, which may smoothly increase the existing stock of economy through management practice, skill development, training and organizational arrangement. Both studies found that FDI has a positive impact on the economic growth of developing countries.

However, there are also critics argue that FDI may have various negative impacts on the developing country.Dependency theory scholars argue that MNCs may suppress economic development by reducing small domestic firms, crowding-out effect, profit repatriation and negative spillover in the host countries (Dixon and Boswell, 1996).

In terms of human capital spillover, Aitken, Harrison and Lipsey (1997), Glass and Saggi (2002), and Fossuri, Motta and Rønde (2001) argue that MNCs will pay higher wages in order to keep their trained workers from moving to domestic firms. These higher wages may encourage skilled workers to move from the domestic firms to foreign firms. Such movement will have a negative impact on domestic firms with potential employees being attracted by foreign investors which will result in negative productivity to the domestic firms.

Multinational organizations are generally big organizations; they have huge capital, skilled labor and possess latest technologies. They are international organizations that can compete in global market. Therefore, it’s not easy for small domestic organizations to compete against them.Usually, government of host countries provides protection to their domestic industries but when they welcome FDI, it might also create a situation for them to shut down their business(Perez,1997). And ultimately people involved in those industries will lose their jobs. With the increase in unemployment and shutting down of the domestic industries, this will slow down the economic growth in the host country. For an example, with the establishment of KFC restaurant in Nepal, while people have the chance to experience the international standard of fast food but it has also become a threat to small domestic restaurants. People are more attracted to KFC because of its brand, popularity and sophisticated outlet. Therefore small fast food restaurants in Nepal are losing their business in the local market.

Moreover, MNCs are organizations with huge investment. If they borrow in the domestic economy, they borrow a large amount of total supply of saving available for investment. With such large amount of borrowing, there will be an increase in demand for savings but the supply remains same which leads to increase in the interest rate (Rogers,2004). Crowding out effect starts when interest rate reaches to such a level that individuals and small organizations can’t afford to borrow money(Dixon and Boswell, 1996). Eventually, they have no other option than getting out of the business. Individual and small organizations consumption decreases because of crowding out effect, slowing down the host developing country’s economic growth(Dixon and Boswell, 1996).

Although it is true that MNCs are a good source of FDIs and capital in host countries but the incomes that they generate by operating in these countries cannot be considered as a part of national income because these corporations send profits and incomes back to their home countries. Indeed, the national currencies of host countries go out when they transfer a huge sum of money to home countries as part of their profit, dividends, and royalty. As a result, this creates the imbalance in payment in host country because currency outflow becomes more than the inflow of currency, which also depreciates the value of host countries’ currencies (Dixon and Boswell, 1996).

Overall, FDI does bring significant and positive externalities to the developing economies such as labor managements, training opportunities and thus, increases the standard of the production function. All of these result in higher economic growth, which is a crucial tool for alleviating poverty in developing countries. But, FDI also has negative effect to them. Therefore, before permitting them to operate in a country, the government should analyse their intention and what benefits and drawbacks they can have in country’s economy.

1.2 The FDI entry strategies on the economic development of developing countries

The entry strategies of FDI can be Greenfield investment or a cross-border merger and acquisition (M&A). Greenfield FDI is the parent enterprise enter a foreign location to create new production facilities. The M&A is the parent enterprise to merge with or acquire an existing company in a foreign location. By contrast, Greenfield investment compared to M&A usually brings new constructions, creates jobs, and facilitates knowledge transfer into developing countries which helps to enhance the economic development (Garnaut and Song, 2006).

Firstly, Greenfield operations build new factories and offices from scratch (Garnaut and Song, 2006). Greenfield creates job opportunities to the local people, with the job employment increase people will now have the income and this increases the capital inflow in the host developing countries which will then help to improve the productivity of the country (Wang & Wong,2009). Greenfield also brings in new technology which helps enhance the human capital through technology transfer. The company will provide training to the employees thus this will improve the skills and knowledge of the local people (Wang & Wong,2009).Technology is very important to a country development because when new technology is transferred to the people, they can now perform their task in an efficient way(Aghion et al., 1999).Besides that, by technology know-how, it also helps the domestic firms to grow by starting up new businesses as now they have more knowledge on skill and are able to come up with new ideas in technology products, thus, this will help to enhance the economic development in the long run(Aghion et al., 1999).

Furthermore, due to the entry of foreign partners, a greater competition in the host country market is observed (Caves, 1974; Wang and Blomström, 1992). Competition makes domestic firms forcefully use resources more efficiently and adopt advanced technologies,