Academic journal article Advances in Management

Analysis of the Relationship between FDI and Economic Growth

Academic journal article Advances in Management

Analysis of the Relationship between FDI and Economic Growth

Article excerpt

Abstract

The aim of this paper is to emphasize the importance of the FDI flows on the host country economic growth. After analyzing the literature review concerning the effects of FDI in the beneficiary country, the following results were obtained: the impact capital flows exert on host country is significant and the main channels through which the effects are transmitted are: financial markets, host country absorptive capacity and human capital.

Keywords: Foreign direct investment, economic growth, determinants, channels.

Introduction

The volume and the value of FDI flows increased significantly under the impact of globalization and intensification of the existing connections between different financial markets among developed economies and the developing ones. The recent evolutions of global economy have strongly affected the dynamic of FDI and also the impact of foreign capital flows on economic development. The current economic crisis highlighted the fundamental role of foreign flows playing in the reintegration process of transition and developing economies in the structure of the global market, as FDI are appreciated to be "the definite element of the economic growth, of promoting intensive, qualitative and efficient factors. This is why, the importance of the investment, their role in the conditions of the restructuring economy are extremely real".

The specialists in the economic and financial field give a special and increased attention to the equivalence between FDI and the growth economic rate because of the importance of foreign capitals and fundamental channels in propagation of the consequences in the real economy. The position of the investment market at the intersection between financial sector and the real one justifies the necessity of understanding the manner FDI influences host country economic development through adequate instruments. The problem identified in the literature25, concerns the controversial aspect of the economic and financial implications that FDI flows generate on the degree of economic expansion measured by the growth rate of GDP.

The main problem is: Do FDI contributes to the beneficiary country economic growth? Our analysis focused on emphasizing the causes of FDI and the channels that encourage achieving the aims. The results of the empirical analysis can be structured in two contradictory approaches: on the one side, foreign capitals are considered a fundamental factor involved in solving the difficulties about the low value of the local capital and productivity in the selected countries and on the other side, FDI is seen as an essential determinant of foreign capital inflows. The paper also presents the problematic relation between FDI and economic growth and the main causes of FDI.

Correlation between FDI and Economic Growth of the Host Country

FDI effects on host country economic growth are intensively debated in the literature because of their controversial character. Before the analysis of the consequences foreign capital flows generate, we consider appropriate a short review of the definitions of this concept and determinants that influence the investment decision. The definitions given to the concept of foreign direct investment in the significant literature are characterized by a high level of homogeneity.

In the approach of Voinea52, FDI reflects "placement of equity by foreign investors (residents) in other countries in the establishment and development of companies in various fields of activity" while Durroset20 considers them "major determinants of globalization". IMF and OECD44 highlight that these capitals emphasize the wish to obtain a long term interest by an entity resident in an economy (direct investor) in an enterprise resident in another economy (direct investment enterprise), the investor being engaged in the business influencing and controlling it; this combination justifies the FDI classification in foreign direct investment and portfolio investment54, the latter being used to obtain gain25. …

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