Academic journal article Business Economics

Does FDI Contribute to Economic Growth? Knowledge about the Effects of FDI Improves Negotiating Positions and Reduces Risk for Firms Investing in Developing Countries

Academic journal article Business Economics

Does FDI Contribute to Economic Growth? Knowledge about the Effects of FDI Improves Negotiating Positions and Reduces Risk for Firms Investing in Developing Countries

Article excerpt

Using data from an Arab country, this paper shows that foreign direct investment (FDI) contributes to higher growth both directly and indirectly through its effects on exports. Knowledge of the positive influence of FDI on growth could enable businesses to have a stronger negotiation position vis-a-vis the host country. Drawing on the findings and the methodology in this paper, business decision-makers could enhance their measurement of expected risks by estimating the effects of increased FDI to the host country. The results also highlight the potential for FDI to contribute to political stability through efficient allocation of corporate resources.

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Transnational corporations (TNCs) devote special consideration to country risk. The recent rise in terrorist acts implies that country risk has significantly increased in some parts of the world, which would lead to significant cuts in foreign direct investment (FDI) to those countries. On the other hand, many analysts believe that there is a strong link between poverty and terrorism and that if we could reduce poverty, we would be able to curb the spread of terrorism. This suggests that TNCs may play a major role in fighting poverty and terrorism and underscores the opportunities fostered for business involvement in promoting political stability through efficient allocation of corporate resources. Thus, it appears there are important complementarities between U.S. foreign policy and U.S. business activity abroad: foreign policy that contributes to reducing country risk benefits businesses abroad and increases expected profits. FDI further reduces risk by promoting economic growth and thereby increasing political stability through reduction of poverty, insofar as there is a connection. However, we need to ascertain whether in ward FDI does indeed contribute to economic growth. This paper uses data from an Arab country, Morocco, and examines the relationship between FDI, exports, and economic growth.

Why should U.S. business decision-makers care about the effects of FDI on exports and economic growth in a small developing country such as Morocco? This question may be answered by considering the negotiations that must take place before many governments of developing countries are willing to allow foreign firms to undertake investment. U.S. firms often need to convince the host government of the range of benefits FDI could have on its country's economy. (1) This has become even more crucial with the increasingly important role of civil society in developing countries. Thus, knowing the likely effects of FDI on economic growth improves the firm's negotiating position and increases its success. Furthermore, the findings may help business decision-makers improve their measurement of country risk through assessment of the influence of FDI on the host country's macroeconomic variables, such as exports and GDP.

In January 2003, the United States announced it was beginning a new round of negotiations on a free trade agreement with Morocco. If this undertaking is successful, it will make Morocco the second Arab nation (after Jordan) to have such an agreement with the United States. Given the proximity of the country to the European Union, it is speculated that free trade with the United States will result mainly in higher U.S. investment in Morocco. Thus, it is important to examine empirically the main effects and determinants of FDI flows to Morocco. The Moroccan case may serve as an example of how FDI promotes exports and economic growth in developing countries in general and the Middle East and North Africa (MENA) region in particular.

FDI is increasingly being viewed as a major indicator of globalization. In its World Investment Report (1995), the United Nations Conference on Trade and Development (UNCTAD) states that "[e]nabled by increasingly liberal policy frameworks, made possible by technological advances, and driven by competition, globalization more and more shapes today's world economy. …

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