Academic journal article The Journal of Social, Political, and Economic Studies

Foreign Direct Investments, Economic Growth, and Employment: A Global Perspective

Academic journal article The Journal of Social, Political, and Economic Studies

Foreign Direct Investments, Economic Growth, and Employment: A Global Perspective

Article excerpt

Introduction

Economic growth is one of the main challenges faced by countries around the world, especially after the global economic crisis of 2008 that caused most countries to suffer from declining economic growth. Because attracting foreign investors is considered by many governments and economists to be an important way to aid in economic recovery, new regulations focusing on economic openness and facilitating business have been adopted by governments in order to attract foreign direct/indirect investments (Agrawal & Khan, 2011; Newfarmer, 2001; World Bank, 2013). According to Agrawal and Khan (2011), "[A]ll the countries in the world are continuously striving for rapid economic growth and as a result they are inviting more and more investments by allowing foreign investors to invest in their land" (p. 71).

Foreign direct/indirect investment refers to investment by individuals and businesses in a country other than the investor's home country. Investments are made in different forms; buying companies or expanding company operations to another country is considered direct investment, while indirect investment includes buying the stocks and bonds of other companies that operate overseas (OECD, 2013; UNCTAD, 2007). According to Slaughter and May (2012), foreign investment can be generally understood as "the transfer of capital to a country, commonly referred to as the host country, by a non-resident entity. FDI is one form of foreign investment characterised by a certain degree of influence and control over assets in the host country" (p. 3). The field of operations for foreign investments includes businesses in various industries, such as the energy and food industries, and may even include operations in the field of national and international security.

Because foreign investors usually have a long-term plan for investment in the host country, FDI investments tend to be less affected than other types of investment by economic crises. According to Nunnenkamp (2001), "FDI is considered less prone to crisis because direct investors typically have a longer-term perspective when engaging in a host country. In addition to the risk-sharing properties of FDI, it is widely believed that FDI provides a stronger stimulus to economic growth in host countries than other types of capital inflows" (p. 4).

The impact of foreign direct investment (FDI) on economic growth and employment is the main theme of the current paper. The research questions for this study are as follows: Is there a relationship between FDI and economic growth? Is there a relationship between FDI and the unemployment rate? If so, what are the level and direction of these relationships? In addition to studying the long-term impact of FDI on economic growth and employment, the present research includes the periods both before and after the economic crisis of 2008 in the period under study (1999-2012), providing an excellent opportunity to study the impact of the global economic crisis on the relationships between FDI, economic growth, and employment.

The following sections will address the data sources and methodology of the paper and will then present figures of FDIs, economic growth, and unemployment rates around the globe. Studies discussing the relationships among foreign investments, economic growth, and employment will be explored. The final sections will present the result of the analysis and a discussion of the empirical applications of the current study.

Data Sources and Methodology

Data on Foreign Direct Investment (FDI) inflows, GDP per capita, and unemployment rates of the countries under study were collected from the World Bank database. This study includes 189 countries with available data and covers the period from 1999-2012. Panel data regression analysis is the methodology used to study the impact of foreign direct investment (FDI) inflows on GDP per capita and unemployment rates from a global perspective.

Global Economy

Countries around the world try hard to attract foreign investments by facilitating and adopting regulations in order to enhance economic development. …

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