Direct Foreign Investments and the Lack of Positive Effects on the Economy

By Djordjevic, Suzana; Ivanovic, Zoran et al. | UTMS Journal of Economics, December 2015 | Go to article overview

Direct Foreign Investments and the Lack of Positive Effects on the Economy


Djordjevic, Suzana, Ivanovic, Zoran, Bogdan, Sinisa, UTMS Journal of Economics


(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

In recent years many authors have emphasized the positive impact of direct foreign investments, such as output growth, employment growth, exports and so on. However, only some have mentioned and presented the negative effects of the same. Therefore, the objective of this study is to investigate, analyse and define the negative impacts of foreign direct investments on the economy of Croatia. Considering that the unemployment rate is very high, production and competitiveness are low and not improving, the assumption was that foreign direct investments do not have a significant positive impact on the economy of Croatia.

The aim of this paper is to prove that direct foreign investments also had some negative consequences that affected the unemployment growth and stagnation of economic development in the observed period. This will be proved by using scientifically-based analysis and scientific research of previous authors. The methods used in this study are linear regression model, method of compilation, descriptive analysis and the time series method.

According to Pavlovic (2008) foreign direct investment (FDI) is a financial investment in which the investor buys at least 10% of the shares of the company in a country other than his resident country with the purpose to secure a lasting interest in the company and exercise a significant influence on its management.

As defined by the International Monetary Fund, foreign direct investment is a long-term investment that occurs when a foreign investor (non-resident) holds 10% or more of the ownership interest of economic entities (resident) in a country. Grgic, Bilas and Franz (2013) separated two elements when defining foreign direct investment. The first refers to the long-term interest of foreign investors, in particular to the long-term relationship of foreign investors and the domestic entity, while the second element relates to owning at least 10% of ordinary shares of the domestic economic subject which gives the investor the right to vote. Botric and Skuflic (2006) define international flow of capital as investment made by a resident of one country in another country. They also differ between investments in the form of a loan granted to a resident of another country, the purchase of securities of a company or state, and acquiring the majority share in the non-resident company. Furthermore, Sisek (2005) states that depending on the percentage of shares shareholders have, recipient companies are called differently a) branch, if it is a totally owned, b) subsidiary, with more than 50% of the ownership, and c) associate, with a share of 10-50% of direct or indirect ownership abroad. Foreign investments can be divided into several groups depending on their purpose, aim and motive of investment. According to Grgic, Bilas and Franz (2013) from the perspective of the country of origin, FDI can be vertical or horizontal.

Horizontal investments are made for the purpose of horizontal expansion of international production of identical or similar products as in the home country. The most common horizontal investments are carried out for the purpose of exploitation of certain monopolistic and oligopolistic advantages. Vertical investments are made with the purpose to procure cheaper raw materials or to get closer to customers in foreign markets. They include geographical decentralization of the production chain of multinational companies. Bearing in mind the direction of investments, we can differ between inward and outward investments.

Inward investments occur when foreign capital is invested in domestic resources, they are encouraged by giving subsidies, tax breaks, loans, abolition of certain restrictions and barriers for the entry of foreign investors. Outward investments refer to investment of domestic capital abroad. A motivation for this kind of investment is security risk offered by the government of some countries. …

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