Sectoral Performance through Inflows of Foreign Direct Investment

As per the reports of the UNCTAD or United Nations Conference on Trade and Development, it is pretty clear that the sectoral performance of the inflows of foreign direct investment is not always as good as it is expected to be.

For example, in 1999 the foreign direct investment in India went down to 2.2 billion dollars compared to 2.6 billion dollars in 1998.

This should not have been the case as the economic liberalizations had been effected and a better performance was being expected on the foreign direct investment front. This is all the more surprising in the context of the fact that the foreign direct investment made in India had gone up from 2.4 billion dollars in 1996 to 3.6 billion dollars in 1997.

During the same period in 1998, the total foreign direct investment made in the world has experienced a major rise. The amount had gone up to 644 billion dollars and this was an increase of 40%. In 1999 the total foreign direct investment of the world reached 865 billion dollars.

It was an increase of 27%. The foreign direct investment in the health sector has picked up in the recent years. This has been, to a large extent, owing to the General Agreement on Trade in Services, which has sought to liberalize the trading of services.

This agreement recognizes the foreign direct investment to be an important part of the trade agreements. However, there are some important areas in this case that need to be looked at and considered carefully. The various details of the agreement like the commodities and type of negotiation are extremely important in this case and the performance of the foreign direct investment would depend highly on these factors.

There has been a huge amount of foreign direct investment in the power markets around the world. This is applicable for the economically developing as well as developed countries. As far as the economically developing countries are concerned the Chinese power sector has been one of the major names.

During 2002 the Chinese power sector received 52.7 billion dollars in foreign direct investment. The United States of America is one of the leading names when it comes to receiving foreign direct investment in the economically developed countries is concerned. However, it is expected that in the near future China would leave the USA behind in terms of receiving foreign direct investment in the power sector.

The sectoral performance of the foreign direct investment in case of the service sector has been comparatively limited in the economically developing countries. This is all the more applicable for the countries in the South-East Asian region like Sri Lanka, Bangladesh, India, Nepal, and Pakistan.

All of these countries, with the exception of Nepal, have liberalized certain sections of their service sectors for the foreign direct investors. This has also reflected in the sectoral performance statistics of the foreign direct investors in the country. Overall, in 2005 the South-East Asian countries have received 30 billion dollars in foreign direct investment and the investments have mostly been in the financial, telecommunications, construction and transportation service sectors.

Foreign Direct Investment and Economic Development

Foreign direct investment has a major role to play in the economic development of the host country. Over the years, foreign direct investment has helped the economies of the host countries to obtain a launching pad from where they can make further improvements.

This trend has manifested itself in the last twenty years. Any form of foreign direct investment pumps in a lot of capital knowledge and technological resources into the economy of a country.

This helps in taking the particular host economy ahead. The fact that the foreign direct investors have been able to play an important role vis-a-vis the economic development of the recipient countries has been due to the fact that these countries have changed their economic stances and have allowed the foreign direct investors to come in and improve their economies.

It has often been observed that the economically developing as well as underdeveloped countries are dependent on the economically developed countries for financial assistance that would help them to achieve some amount of economical stability. The economically developed countries, on their part, can help these countries financially by investing in these countries. This financial assistance can be channelized into various sectors of the economy. The channelization is normally done on the basis of the requirements of particular sectors.

It has been observed that the foreign direct investment has been able to improve the infrastructural condition of a country. There is ample scope of technological development of a country as well. The standard of living of the general public of the host country could be improved as a result of the foreign direct investment made in a country. The health sector of many a recipient country has been benefited by the foreign direct investment. Thus it may be said that foreign direct investment plays an important role in the overall economic and social development of a country.

It has been observed that the private sector companies are not always interested in undertaking activities that help in improving the infrastructure of the country. This is because the gains form these infrastructural activities are made only in the long term; there are no short term benefits as such. This is where the foreign direct investment can come in handy. It can also assist in helping economically underdeveloped countries build their own research and development bases that can contribute to the technological development of the country. This is a very crucial contribution as most of these countries are not able to perform these functions on their own. These assistances come in handy, especially in the context of the manufacturing and services sector of the particular country, that are able to enhance their productivity and ultimately advance from an economic point of view.

At times foreign direct investment could be provided in form of technology. Else, the money that comes in a country through the foreign direct investment can be utilized to buy or import technology from other countries. This is an indirect way in which foreign direct investment plays an important part in the context of economic development. Foreign direct investment can also be helpful in assisting the host countries to set up mass educational programs that help them to educate the disadvantaged sections of the society. Such assistance is often provided by the non-governmental organizations in the form of subsidies. The developing countries can also tackle a number of healthcare issues with the help of the foreign direct investment.

Low Income Countries in Global FDI Race

The situation of foreign direct investment has been relatively good in the recent times with an increase of 38%. Normally, the foreign direct investment is made mostly into the extractive industries. However, now the foreign direct investors are also looking to pump money into the manufacturing industry that has garnered 47% of the total foreign direct investment made in 1992.

However, the situation has not been the same in the countries with a middle income range. The middle income countries have not received a steady inflow of foreign direct income coming their way. The situation is comparatively better in the low income countries. They have had an uninterrupted and continually increasing flow of foreign direct investment. It has been observed that the various debt crises, as well as, other forms of economic crises have had less effect on these countries.

These countries had lesser amounts of commercial bank obligations, which again had been caused by the absence of proper financial markets, as well as the fact that their economies were not open to foreign direct investment. During the later phases of the decade of 70s the Asian countries started encouraging foreign direct investments in their economies. China has received the most of the foreign direct investment that was pumped into the countries with low income. It accounted for as much as 86% of the total foreign direct investment made in the lower income countries in 1995. The economic liberalization in China started in 1979. This led to an increase in the foreign direct investment in China. In the years between 1982 and 1991 the average foreign direct investment in China was US$ 2.5 billion. This average increased by seven times to become US$ 37.5 billion during 1995. A significant amount of the foreign direct investment in China was provided in the industrial sector. It was as much as 68%. Around 20% of the foreign direct investment of China was made in the real estate sector. During the same period Nigeria had been the second best in terms of receiving foreign direct investment.

 

In the recent times India has risen to be the third major foreign direct investment destination in the recent years. Foreign direct investment started in India in 1991 with the initiation of the economic liberation. There were more initiatives that enabled India to garner foreign direct investments worth US$ 2.9 billion from 1991 to 1995. This was a significant increase from the previous twenty years when the total foreign direct investment in India was US$1 billion. Most of the foreign direct investment made in India has been in the infrastructural areas like telecommunications and power. In the manufacturing industry the emphasis has been on petroleum refining, vehicles and petrochemicals.

Vietnam is a low income country, which is supposed to have the same potential as China to generate foreign direct investment. The foreign direct investment laws were introduced in Vietnam in 1987-88. This led to an increase in the foreign direct investment made in the country. The amount stood at US$ 25 million in 1993 compared to US$ 8 million in 1993. This amount increased by 3 times after the USA removed its economic sanctions in 1994. The gas and petroleum industries were the biggest beneficiaries of the foreign direct investment.

Bangladesh started receiving increasing foreign direct investment after 1991, when the economic reforms took place in the country. After 1991 it was possible for foreign companies to set up companies in Bangladesh without taking permission beforehand. The foreign direct investment rose from US$ 11 million in 1994 to US$ 125 million in 1995. As per the available statistics the manufacturing industry, comprising of clothing and textiles took up 20% of the total approved foreign direct investment. Food processing, chemicals and electric machinery were also important in this regard. The increase in the foreign direct investment in Ghana was remarkable as well. The figures increased from US$11.7 million, on an average, from 1986 to 1992 to US$ 201 million, on an average, from 1993 to 1995. This improvement was brought about by the privatization of the Ashanti Goldfields.

Foreign Direct Investment and Infrastructure Development

One of the many areas in which foreign direct investment can benefit a country or any entity, for that matter, is that of development of infrastructure. It has been observed over the years, that a lot of countries as well as other recipients of direct investment from overseas entities have used that money in order to develop the infrastructural facilities at their disposal.

All the various types of infrastructure that are at the disposal of a country like health or education, for example, may be benefited by foreign direct investment.

Technological infrastructure is one of the many areas in which foreign direct investment is meant to benefit a country. With the help of foreign direct investment being made in a country the government can construct, as well as, improve the existing technological tools at their disposal.

This in turn also plays a very crucial role in the economic development of a country as this technological advancement assists a country in upgrading its industries and thus helps them to face the challenges of the contemporary global economy.

 Foreign direct investment is also capable of upgrading the health infrastructure of a particular country. This could be done by way of providing high-end equipments or medicines.

Such investment is normally made by the world level organizations in countries that are economically backward and have no or little medical infrastructure to speak of. For years, the World Health Organization, as well as the World Bank and the International Monetary Fund have been providing a number of the economically backward countries, all over the world and especially in Africa, with money and medicines in order to eradicate critical diseases or improve the medical infrastructure in place.

They have also been sponsoring public health awareness programs that make people aware about critical diseases that need to be eradicated. In India, for example, pulse polio and HIV prevention measures have been at the center of such activities.

Communication infrastructure is an important area where the foreign direct investment can come in handy. The money that is invested in a country by overseas entities can be used for the construction of roads, railways and bridges.

These facilities are used for establishing connections with the remote areas of a country and for transporting important services to these parts like medicines and aids at times of floods or other natural disasters. A lot of construction groups are taking active interest in developing the communicational infrastructure of other countries.

Foreign direct investment is also used for the purpose of educating the unskilled labor force that is present in a country. In India during the later stages of 80s and 90s there was a situation whereby there was a huge labor force but it was mostly unskilled and was employed in the unorganized sector.

It was possible with the help of the financial assistance from the overseas direct investors to train these people so that they may be capable of being recruited into the industry. Foreign direct investment is also useful for executing mass educational programs that can educate those people who remain out of the bounds of conventional and institutional education as they are not able to afford it or it may not be available in their areas.

Disadvantages of Foreign Direct Investment

The disadvantages of foreign direct investment occur mostly in case of matters related to operation, distribution of the profits made on the investment and the personnel. One of the most indirect disadvantages of foreign direct investment is that the economically backward section of the host country is always inconvenienced when the stream of foreign direct investment is negatively affected.

The situations in countries like Ireland, Singapore, Chile and China corroborate such an opinion. It is normally the responsibility of the host country to limit the extent of impact that may be made by the foreign direct investment. They should be making sure that the entities that are making the foreign direct investment in their country adhere to the environmental, governance and social regulations that have been laid down in the country.

The various disadvantages of foreign direct investment are understood where the host country has some sort of national secret – something that is not meant to be disclosed to the rest of the world. It has been observed that the defense of a country has faced risks as a result of the foreign direct investment in the country.

At times it has been observed that certain foreign policies are adopted that are not appreciated by the workers of the recipient country. Foreign direct investment, at times, is also disadvantageous for the ones who are making the investment themselves.

Foreign direct investment may entail high travel and communications expenses. The differences of language and culture that exist between the country of the investor and the host country could also pose problems in case of foreign direct investment.

Yet another major disadvantage of foreign direct investment is that there is a chance that a company may lose out on its ownership to an overseas company. This has often caused many companies to approach foreign direct investment with a certain amount of caution.

At times it has been observed that there is considerable instability in a particular geographical region. This causes a lot of inconvenience to the investor.

The size of the market, as well as, the condition of the host country could be important factors in the case of the foreign direct investment. In case the host country is not well connected with their more advanced neighbors, it poses a lot of challenge for the investors.

At times it has been observed that the governments of the host country are facing problems with foreign direct investment. It has less control over the functioning of the company that is functioning as the wholly owned subsidiary of an overseas company.

This leads to serious issues. The investor does not have to be completely obedient to the economic policies of the country where they have invested the money. At times there have been adverse effects of foreign direct investment on the balance of payments of a country. Even in view of the various disadvantages of foreign direct investment it may be said that foreign direct investment has played an important role in shaping the economic fortunes of a number of countries around the world.