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Foreign direct investment and development Friday, 22 August, 2008

Posted by Farbod in Business News, Features.
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Press TV – Foreign direct investment and development.

By Abdolreza Ghofrani

Giving credit, or as put by bankers and economists, the establishment of credit lines has been, for decades, a common practice in financial markets. Almost every country has used this catalyst to finance their ventures which has proved to be vital for their economies.

In recent years, this financial mechanism has gained widened dimensions and will certainly continue in the years to come. Fortunately, the scholars, economists and economic decision makers in different countries and particularly developing nations, have advised using this instrumental device in their countries.

Therefore, the use of FDI is not unprecedented and we see emerging economies and newly developed nations do not hesitate to seek new sources of Foreign Direct Investments.

Contrary to traditional perception that foreign investments would have political, cultural and social consequences, or negative impacts, it is noteworthy that this perception has changed now. For, this is no longer a time for unilateral commitment on the part of one side.

In other words, this is not a contract that the so-called “host country or company” (the receiver) needs the investment and must make commitments and be held debtor and the “home country or company” (that make investments in other countries) at the end of the day will be the creditor.

In this financial relationship or as we can call it, hereinafter, the “partnership”, some kind of balance does exist. Mainly because, it is not only the host country that needs this financial source, but proportionately the home company or country is also very eager to buildup this relationship.

Therefore, this mechanism is as beneficial for home as it is for the host country. Actually, FDI is a well-arranged partnership that the interests of both sides are served in the agreements or contracts they conclude. Or as put by a scholar, it must be taken as a “win-win” game, but the modality of one side’s win may differ with that of the other’s. Of course, the reliability of resources for the investments and the credibility of investors must be conspicuously figured out, and undoubtedly, taking necessary precautions are unavoidable.

Fortunately, nowadays there are plenty of investors, being, pretty eager to make investments in lucrative markets, and luckily those markets are among the developing nations. Interestingly, sometimes a “home” country is simultaneously the ”host” country and so a distinction must be made between the current FDI and that of the colonial past.

This has certainly given a global particularity to FDI. Because; in this case private sectors are more active than public sectors and naturally investments goes where there is benefits and of course security.

It is pretty useful to build a clear definition of foreign direct investments. So what is FDI?

In a simple definition FDI is: Building a company or establishment in another country, after the feasibility study is made and the relative advantages of this is calculated. In its classic definition, FDI is defined as a company from one country, making physical investments into building a factory in another country.

Its definition can be extended and include investments made to acquire lasting interests in enterprises operating outside of the economy of the investor.

It is believed that FDI provides a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products skills and financing.

For a host country or the foreign firm which receives the investments, it can provide a source of new technology, capital, processes, production, organizational technology or management skills and as such can provide a strong impetus to economic development. FDI can take several forms that it cannot be elaborated in this short article.

This process has been so common among the countries of the world that the World Bank has established a database for FDI. With globalization gaining momentum over the past decade, FDI has gained a widened dimension and gathered more speed.

A survey shows that FDI has been only 2 percent of the total global investments through the past two decades, whereas this has grown up to 14 percent in recent years. A study conducted by UNCTAD indicated that FDI in host countries has risen from USD 159 billion in 1991 to 865 billion in 1999, namely it has promoted as much as five times.

Interestingly, China and South East Asian countries have gained the lion amount of FDI through the abovementioned periods. Although the total FDI in developing countries have dropped, China’s share of FDI, as a host country has gone up from USD33 billion to 40 billion within eight years (1991-1999).

It is an important point to be made that unlike the past decades that almost all home countries of FDI were either American or European, facts and figures now indicate that a considerable portion of FDI have been provided by newly developed countries or emerging economies.

In fact, by this, the home countries have not solely confined to western countries, but the emerging and newly developed countries have been outside America and Europe. The new emerging home countries, and of course in addition to Japan, which has had, for decades, credit lines with many Asian countries are now the arch rival for undertaken FDI in developing nations. In fact, it can be claimed that there is a tight competition among “home countries”.

Once a well known scholar wrote in his invaluable book, ”…. at the end of twentieth century Japan would provide other countries with over US $ one trillion as export credit with minimum interest rates”.

And a Danish banker quoted one of his counterparts as saying that unless we, the bankers and creditors, do business with and grant credits to developing world we would soon become bankrupt.

Having said all that, this system of credit line is, as mentioned before, actually a partnership. In other words, the host countries are as much indispensable for home countries as the former need the latter.

Developing nations should use the foreign credits more as a good source to finance their projects, particularly now that suitable conditions are met in international markets.

In oil producing countries, these credits, being partially complementary to oil revenues, need to be used in such well-managed systems that produce high value added manufactured goods that would be economically beneficial in the long run.

Undoubtedly, FDI and credit lines will be very useful and instrumental for oil rich countries that their natural resources will deplete in decades to come. By this, they not only will receive the technologies they need for developments, but in the long run they will lessen their dependence on single product economy, namely relaying solely on oil.

In fact, they begin to adapt to economy without oil. The developing nations should not abstain from receiving foreign credit, particularly in the form of FDI if it serves their national interests at the best.

Receiving credits is not necessarily incompatible with social and cultural values of the “host countries”. Many countries, thanks to foreign credits and FDI are now experiencing fast and remarkable growing economies while fully preserving their indigenous national and cultural values.

The author is a senior international and economic expert

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