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The role of foreign direct investment (FDI) and trade in regards to the economic development and growth of various economies across the globe continues to be deliberated and analyzed by business analysts and economic scholars. Consequently, the notion of foreign direct investment (FDI) has improved significantly in recent decades.
As developing economies, mostly in Asia, remove various restrictions and employ policies to attract the inflows of more FDIs, trade and investment in these economies have become more and more related. As such, there has been an increase in the development and general economic growth levels in the Asian continent.
However, there are diverging opinions from analysts and economic experts as to the extent to which the FDIs and trade have contributed to the growth and development of the Asia pacific region economy.
It is therefore to this effect that this paper shall effectively establish the relationship that exists between the FDIs and trade patterns in this region to the economic growth. The contribution of trade and FDIs on the economy shall be discussed and their impacts analyzed.
At the end of the paper, a decision shall be made establishing whether the FDIs and trade are the main cause of the development or there are other factors that have contributed to the positive progress experienced in this region.
A brief overview on the emergence of trade and FDIs in Asia
Most developing countries pursued foreign direct investment (FDI) with great caution until the 1980’s. The existence of multinational corporations (MNCs) within these countries was understood as a threat to national independence and security.
In many emerging economies, the indulgence of FDIs especially multinational corporations was a cause of concerns in regards to their influence on the political and economic trends that existed in the host countries.
As such, such investments were associated with unfair business practices in terms of competition, prices and market share and were considered as a modern form of economical colonialism and exploitation. As a result, many restrictions and policies were put in place to ensure that these corporations found it hard or impossible to venture their businesses in some economies.
In recent years, however, many economies have opened their doors to FDIs upon the realization of the benefits that can be accrued from such investments. This move has greatly been influenced by economic globalization, technological advancement, integration of market and production networks on a global level and the establishment of investment treaties all over the world.
In addition to this, poor debt policies and interest rates in developing countries have forced most of them to reconsider their investment policies in a bid to attract foreign capital and capital inflows.
To further facilitate this, investment restrictions have been considerably reduced in order to attract FDIs and more incentives and subsidies offered to multinational corporations which have consequently led to the rapid growth of FDIs experienced across the globe within the past 20 years.
Impacts of FDIs and trade to the economic growth in Asia
According to, Jones & Wren (2006, p.8) a foreign direct investment (FDI) refers to the Capital flows from one state to another to bring in a higher return where it is more productive and to branch out the probability of risks.
Yi & Lee (2002, p. 55) acclaims that the prospective impact of global capital movements is therefore an increase in the world’s output and welfare. However, there exists other potential economic and trade benefits to host countries that encourage foreign capital inflows:
Statistics indicate that trade and FDIs have contributed highly to the growth and development of the economy in the Asia pacific regions.
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This is because the foreign firms that invested in the ASEAN countries in the past 20 years brought with them superior technology new to the host countries which was quickly assimilated by the domestic firms giving them an advantage against other economies which lagged behind in this aspect.
The assimilation of such technology has contributed highly to the increase in output from countries like China, Malaysia and Indonesia as well as the quality of products from the regions. Consequently, the almost economically isolated countries like China and Thailand in the 70’s have ever since developed into the largest economies in the world next to the United States.
China recorded an impressive economic growth rate of over 9% in1978-2005. This was the highest economic growth recorded within that period in the world. This achievement has been brought about by China’s espousal of fundamental initiatives promoting inward FDI.
In 2004, FDIs in china constituted about 7% of the capital formation, 21% of total tax revenue, 28% of industrial outputs and more than half of the total exports (57%) were created by these foreign invested enterprises (Zhang, 2006, p.2).
In this region, the most significant contribution of the FDIs would be the expansion and development of the export markets and systems. The indulgence of FDIs in this region has not only increased the levels of exports but also upgraded the export structures to the world standards.
In 1980, China’s exports were 26th in the world ranking with a volume of $18 billion and held a 47% portion of the manufactured goods export markets. These figures have improved immensely after the policy amendments on FDIs and they stood 3rd in ranking with a volume of $762 billion and a 93% export margin on manufactured goods (SSB, 2005).
In addition to this, the FDIs have also increased the job opportunities in the host countries. Krueger & Ito (2000, p. 347) states that the FDIs offer employment opportunities to the locals thereby improving on the overall standards of living and the effective demand of the people.
This can be reflected through the spending patterns experienced in china in the fourth quarter of 2009 where there the citizens were spending highly despite the economic crisis that prevailed. In addition to this, employment increases productivity and consequently the overall GDP of the nation as portrayed by the economic growth in this region.
The presence of FDIs in the Asian countries has also influenced the trade and investment policies in those countries. Most of the corporations investing in this region are green field investments.
This means that most FDIs have started their investments from scratch. As a result, they buy most of the materials from the host country and employ from the same.
This has led to increased technological transfer and spillovers as well as improved managerial know-how in this region. Inevitably, this has over the years improved the infrastructure, efficiency and innovation in this region factors core to the development and growth of the economy.
On the same note, the foreign investments have over the years aided the Asian countries lessen the foreign exchange gap that has been predominant in these regions. Dickinson & Prathet (2000, p. 308) reiterates that growth requires investments and in order to invest, there is need for saving be it domestic or foreign.
Foreign exchange is required to transform foreign into domestic resources. The importation and exportation of inputs and outputs to and from the Asian countries have seen the domestic currencies strengthen their values as well as improving the domestic foreign exchange sectors and as a result, fuel rapid economic growth.
Trade with other countries has also played a vital role in the rapid growth of the Asian economies. Hong Kong is among the countries that has greatly benefited in the past decade from the exportation and manufacturing of motor vehicles and textile related products to other countries.
It is renowned for its great port (3rd largest in the world). The port is strategically located and is considered as the economic pathway to China and other counties at the Far East of the Asian continent. The presence of this port has attracted more investors into the country due to the close proximity of the export and import vessels.
On the same note, other inland countries also use this port to export and import their products making the trade in this country thrive. This has seen the country attract high returns from the port revenue authority as well as from the taxation of the investors; a fact which have facilitated its economic growth over the years.
Arguably it has been on the forefront in terms of rapid technological advancement a feat which has seen its economy grow vastly due to the high demand of this technology by economies across the globe.
However, there are other factors that have contributed to the growth and development of the Asian pacific regions. This statement can be validated by the fact that Japan has very little FDI corporations within its boarders when compared to the other countries within the Asia pacific region.
However, it is the most developed countries with high economic growth levels as well as productivity. This progress can be attributed to the strong financial policies that govern the operations in Japan. Additionally, it is among the leading producers and exporters of globally demanded electronics in the region.
This added advantage has enabled the country to grow economically due to ready market for the products on the international markets as well as high returns due to economies of scales (production in high quantities).
Other contributing factors include: The favorable political climate and investment policies that prevails within this region. A country like China has a very effective and large police force and according to Transparency International, the corruption and embezzlement levels in this country are more than minimal.
It therefore goes without saying that political stability and professional etiquette presents great opportunities to potential and present investors. For example, many investors would never invest in the Middle East simply due to the high risk of loosing their investment to terrorist attacks and general insecurity despite the wealth of resources present in that region.
Due to the political stability and high professional ethics in the Asian continent, many employees and investors have ventured into this region with hopes of bettering their livelihoods as well as maximizing on the various opportunities available there.
The influx of these investors and manpower has significantly contributed to the growth of the economies located in this region. Additionally, the land policies and location of the industries have enabled equal distribution of resources as well as balanced development within the region.
On a social and cultural perspective, the high population in this region has contributed to the economic growth. According to Dickinson & Prathet (2000, p. 275), a high population is very beneficial to the economic growth of a country.
This is because it provides constant human labor sufficient for the labor market as well as market for locally and internationally produced goods and services due to a high demand. Additionally, the higher the population, the higher the GDP figures which are used to measure the level of economic growth in a specific country.
On the same note, the Asian continent is renowned for its hospitality. This cultural virtue has favored the economies within it in abundance. This can be seen through the tourism sector which thrives in the Asian pacific region as well as the foreign investments in the area.
The fact that these countries embrace diversity encourages other people to come in as expatriates or investors and their contribution in these economies are reflected through the growth of these economies.
The Asian pacific region is also famous for its regards to the environment. As such, the favorable climate has seen it thrive immensely in the agricultural sector.
Countries such as Indonesia and Thailand are among the leading producers and exporter of rice, flowers and corn and the revenue received from the agricultural sector contributes a considerable percentage in the GDPs of these economies.
On the same note, this has attracted more foreign investors who are interested in the same line of trade. These investors offer employment, market and technology to the domestic citizens and firms thereby improving the economy.
From the discussion, we learn that trade and FDIs have contributed highly to the growth and development of the Asian pacific regions. The advantages accrued from such ventures have seen the region rise to a point of recognition amongst other economic giants.
The policies and regulations set to regulate such investments and trade transactions have evidently been forthcoming through the influx of investors and consequently foreign capital within the region. However, due considerations should be awarded to other political, social and cultural factors that have at the same time favored the existence of the FDIs and trade transactions in the various economies across the region.
Jones & Wren (2006, p.37)states that progress no matter the magnitude is born of interactions between different variables and as such, the economic progress within Asia can with no doubt be attributed to the correlation and embracing of the various political, social, cultural, economic and technological factors that exist within the continent.
FDI can play a vital role in industrial development and economic growth in the emerging economies. Although most of the developing countries in the Asian continent have been taking measures to attract FDI, through offering incentive packages and liberalizing the trade system, only a few countries are triumphant in attracting these investors.
In this study, we tried to find out the influential factors that determine the growth of the economy in the Asian pacific region. The impacts of the FDIs inflow as well as that of trade to the economy of this region were discussed and other contributing factors highlighted.
A brief analysis of the situation was carried out proving that FDIs and trade have indeed contributed to the economic growth enjoyed in this region. However, the countries in this region should work hand in hand to improve the infrastructure and market the region in order to attract more investors and trader.
By doing so, they will have marked a spot in the international scene where investors can comfortably set grounds for more development not only for their own benefit, but for that of the host countries.
Dickinson, D G & Prathet, T H, 2000. Finance, governance and economic performance in Pacific and South East Asia, Edward Elgar Publishing, 2000
Yi, K & Lee, K T, 2002, Globalization and the Asia Pacific economy, Routledge Publishers
Jones, J & Wren, C, 2006, Foreign direct investment and the regional economy, Ashgate Publishing, Ltd.
Krueger, A, O & Ito, T, 2000, The role of foreign direct investment in East Asian economic development, Volume 9,University of Chicago Press.
State Statistics Bureau (SSB), 1993-2005, China Statistical Yearbook 1992-2005, Statistics press
Zhang, K, H, 2006, FDI and host countries exports: the case of China, international economics, LVIV, pp. 50-55.