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Impact of Foreign Direct Investment Proposal


Introduction

There is a widespread belief among policymakers and analysts that Foreign Direct Investment (FDI) provides host countries with opportunities for growth. A host country increases its capital formation when it encourages foreign investors to undertake business ventures in the region.

In this case, a host country increases its savings significantly. Some researchers stipulate that the positive impacts of FDI are observed in the short run. In the long run, the host country’s capital encounters diminishing marginal returns. This makes a host experience slow growth in its GDP.

In this case, a host country returns back to its original state. This means that FDI does not leave a permanent impact on the host economy. Studies reveal that FDI provides improvements in technology, productivity, and efficiency. This generates increased returns in terms of production spillovers and externalities.

Today, the volume of FDI has increased significantly.1 With the liberalization of international trade and exchange rate regimes, FDI has increased beyond the volume of international trade.

Most African countries missed the chance to grow when other developing countries were registering massive growth rates. In the 1990s, many African countries were persuading foreign investors to offer them their know-how. Many African countries offer incentives to foreign investors.

However, most foreign investors refuse the offers thereby making many African countries to grow at a slow pace. FDI inflows in African countries are small compared to other developing countries. This is regardless of the favourable political climate that is present in most African countries.

This is because there is a mismatch between the development goals of foreign investors and host countries.2 Therefore, the goal of this paper is to determine whether Foreign Direct Investment (FDI) influences the economic growth of countries.

The paper will gather evidence from Sudan in order to determine whether FDI has helped to stimulate GDP growth in the country.

Significance

Foreign Direct Investment in most African countries has not made any significant impact like in other developing countries that are located in East Asia. Most African countries have favourable political climate but foreign investors do not show significant interest in them.

This is an indication that there are certain forces that limit them from investing in these countries. Moreover, it is true that there are various forces which encourage foreign investors to invest in East Asian countries thereby making them to show less interest in African countries.

Therefore, this study will help to identify the measures that African countries should adopt in order to encourage foreign investors to invest their capital. The study will also help analysts to identify the factors that limit FDI inflows in African countries and propose solutions to the problems.

The study will focus on Sudan since it has a huge potential for oil production but it is regarded as one of the poorest countries in Africa.

Methodology

In order to understand the impact of FDI in Sudan, the paper will gather evidence from internet sources, books and journals. They will be used to provide information on the state of Sudan’s economy. The will also help provide data on the impact of FDI in Sudan’s GPD growth.

The paper will provide a literature review which will help determine whether the impact of FDI inflows in developing countries can be realized in Sudan. The paper will also provide an overview of Sudan and determine whether FDI inflows have improved the overall growth of the country.

Overview of FDI in Sudan

Studies reveal that Sudan’s economy is delicate and immature. The country is characterised by poor infrastructure, inexperienced government, inter-ethnic conflicts, and post-succession rows. In this perspective, therefore, it is true that Sudan’s economy has severe constraints which limit its growth and FDI inflows.

There are several factors that have facilitated GDP growth in Sudan. These include the development of the construction sector, improved harvest, and investments in oil production. These factors have made Sudan’s economy to grow at 10% in recent years.

However, the global economic crisis led to the collapse of oil prices in 2009 thereby making the economic performance of Sudan to deteriorate. In 2009, Sudan’s GDP growth dropped to 4.5%. However, after the revival of the world economy in 2010, FDI inflows and an increase in oil prices, Sudan’s economy grew to 5.5 %.3

Sudan has managed to triple its FDI inflows in recent years. Despite the fact that the performance of Sudan was brought down by the global economic crisis, the country expects to expand FDI inflows in the coming years. However, in order for this to take place, the security of the country must be stabilized.

There are certain factors that have encouraged FDI inflows in Sudan. 4 These include tax exemptions, limitation of monopolies, allowing easy repatriation of profits by foreign firms, and development of a stable financial market.

Moreover, the country allocates free land to foreign investors thus allowing them to implement strategic projects in Sudan. The factors that hinder FDI inflows in the country include corruption, political instability, and insufficient infrastructure. The main investors in the country come from Saudi Arabia, China, and Japan. They invest in oil, banking services and petroleum products.5

FDI impact on GDP growth in Sudan

The figure shows the annual GDP growth rate of Sudan’s economy from 1985 to 2010. The average growth of the country is 5.3%. On the other hand, the average FDI inflows to the country are approximately 0.11%. Since 1998, Sudan has realized massive FDI inflows.

As a result, the overall GDP of the country grew tremendously. From 1985 to 1997, FDI inflows into Sudan were insignificant. However, after 1998, Sudan has realized a tremendous increase in FDI inflows. Therefore, it is true that FDI inflows have stabilised the performance of Sudan’s economy.

FDI impact on GDP growth in Sudan

Source: Author

Literature Review

Studies reveal that there is a great disparity between FDI inflows and economic growth in developing countries. Most countries expect FDI inflows to boost economic growth, increase employment opportunities, facilitate the transfer of technology and the correct balance of payment problems.

Researchers stipulate that FDI brings new technology, managerial talents, physical capital, increased competitiveness, and international best practices into a country. FDI also leads to the creation of more jobs in an economy.6

The benefits that are associated with technology transfer include facilitation of organizational innovations and spillover effects to the host economy. However, a study on 20 UK-owned manufacturing companies reveals that spillover effects can either be positive or negative.

As a result, it is not clear whether technology transfer is beneficial or not. However, in a study conducted by the World Bank on 1500 firms located in major Chinese cities, it is true that technology transfer has positive spillover effects.

Some researchers argue that developing countries do not benefit from FDI inflows. However, Moran, Edward and Magnus stipulate that when the control of local firms is left in the hands of foreign firms, the adverse selection problem arises.7

This means that the ownership of local firms is transferred to inefficient foreign firms thus lowering the productivity of a country. This is evident when local firms are sold to foreign firms. Moreover, FDI inflows crowd out local firms because they create unfair competition.

The outflow of foreign firms’ earnings also creates a balance of payments problems. Moreover, UNCTAD stipulates that most foreign firms invest in developing countries in order to exploit the available resources and to take advantage of the wealthy people in the region.8

Analysts argue that when a host country’s economy is strong, it is able to reap the benefits that that are brought forth by foreign investors. Moreover, Chowdhury reveals that the relationship between economic growth and FDI inflows is influenced by the level of human capital in a country.9

This means that a host country that has a better endowment of human capital is able to reap the benefits that are brought forth by FDI inflows. Asheghian suggests that trade openness plays a vital role in terms of increasing FDI inflows into a country.10

In this case, foreign investors increase the export capacity of a host country. In addition, most transnational companies provide countries with easy access to export markets. As a result, they facilitate in the distribution of goods among countries that participate in international trade.

Conclusion and Policy Recommendations

From the analysis, therefore, it is evident that foreign direct investment has a direct impact on the GDP growth of a country. However, this is possible when the development goals of foreign investors match with those of a host country.

Moreover, a country should have a large human capital endowment in order for it to realize the positive impacts of FDI inflows. Despite the fact the FDI inflows have tripled in Sudan in recent years, there are various factors that limit their full exploitation.

These factors include political tensions, poor infrastructure and lack of proper coordination between government agencies. Therefore, in order for Sudan to realize continuous FDI inflows, it should implement the requirements of the Global Peace Agreement in order to ensure that the country remains peaceful.

This would encourage foreign investors to establish in the country. Government agencies in the country should also coordinate their activities in order to eliminate political tensions. Moreover, the government should improve the infrastructure of the country in order to make it appealing to foreign investors.

Bibliography

Adam & Associates. “.” HG Experts, 2009. Web.

Asheghian, Peris. “Determinant of Economic Growth in the United States: The Role of Foreign Direct Investment.” International Trade Journal 8, no. 1 (2004): 63-83.

Brems, Haron. “A Growth Model of International Direct Investment.” American Economic Review 60, no. 3 (2007): 320-331.

Chowdhury, Andrew. “FDI and Growth: What Causes What?” World Economy 59, no. 1 (2006): 121-129.

Moran, Theodore, Edward Graham, and Magnus Blomstrom. Does FDI Promote Development?: New Methods, Outcomes and Policy Approaches. New York: Peterson Institute, 2005.

UNCTAD. World Investment Report. Geneva: UNCTAD, 2008.

Footnotes

1 Brems Haron. “A Growth Model of International Direct Investment.” American Economic Review 60, no. 3 (2007): 320-331.

2 Chowdhury Andrew. “FDI and Growth: What Causes What?” World Economy 59, no. 1 (2006): 121-129.

3 Adam & Associates, “Prospects of Foreign Direct Investment in The Sudan.” HG Experts, 2009.

4 Moran, Theodore, Edward Graham, and Magnus Blomstrom. Does FDI Promote Development?: New Methods, Outcomes and Policy Approaches (New York: Peterson Institute, 2005), 203

5 Adam & Associates. “Prospects of Foreign Direct Investment in The Sudan.” HG Experts, 2009.

6 Asheghian Peris. “Determinant of Economic Growth in the United States: The Role of Foreign Direct Investment.” International Trade Journal 8, no. 1 (2004): 63-83.

7 Moran Theodore, Edward Graham, and Magnus Blomstrom. Does FDI Promote Development?: New Methods, Outcomes and Policy Approaches. (New York: Peterson Institute, 2005). 204

8 UNCTAD. World Investment Report. (Geneva: UNCTAD, 2008), 15

9 Chowdhury Andrew. “FDI and Growth: What Causes What?” World Economy 59, no. 1 (2006): 121-129.

10 Asheghian Peris. “Determinant of Economic Growth in the United States: The Role of Foreign Direct Investment.” International Trade Journal 8, no. 1 (2004): 63-83.

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IvyPanda. "Impact of Foreign Direct Investment." May 27, 2020. https://ivypanda.com/essays/impact-of-foreign-direct-investment/.

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IvyPanda. 2020. "Impact of Foreign Direct Investment." May 27, 2020. https://ivypanda.com/essays/impact-of-foreign-direct-investment/.

References

IvyPanda. (2020) 'Impact of Foreign Direct Investment'. 27 May.

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