Foreign direct investment effects on employment

Document Type:Thesis

Subject Area:Business

Document 1

This article evaluated the various theories affecting FDI model and analyzed the effects of employment and spillovers in light of FDI in a domestic environment. From the literature review covered, FDI has positive effects of employment rates and the indirect effects such as technology transfer and other spillovers are perceptible within an economy that has the proper favorable structures that promote investment. Various challenges have been identified and their subsequent solutions given to encourage foreign direct investment and the concept of globalization. Introduction Foreign direct investment is an economic mechanism that emerged after the Second World War. Its contribution to economic theory on the international front has been instrumental in the field of economics. Denisia (2010 pg105) opines that the kind of impact to be expected alludes to the type of investment that is made on the economy.

Sign up to view the full document!

The entrance of multinational corporations in the local economy lead to market failures that call for foreign direct investment to take place. Additionally, there are to pre-conditions that enable FDI; imperfect competition structures and benefits that foreign firms can accrue through these investments. Foreign direct investment allows for transfer of capital from the investing country to another. Economists and theorists have attempted to explain FDI through various models but failed due to its complexities. This makes foreign direct investment more of a business strategy under this theory. Eclectic Paradigm Makoni (2015, pg81) states that this theory integrates three different theories of FDI; O-L-I. It was developed by Dunning and it combines the location theory, international trade theory and imperfect market theory. Under the market imperfection theory, monopolies have a competitive advantage due to the specific benefits that are particular to this kind of a market such as high barriers of entry.

Sign up to view the full document!

These firms are driven by the fact that they possess other abilities to invest in foreign markets that other firms do not (Habib & Sarwar, 2013 pg49). Most of foreign direct investment originates from developed nations such as UK, USA and Australia. Countries like Mexico have experienced increased employment in the manufacturing industries but also the high rates of employment extend to white collar jobs. Various FDI theories can be used to explain these inflows of capital. Most foreign based firms seek new market shares or a capital inspired strategy link parent firms with their international branches (Rizvi, 2009 pg3). One of the biggest ways FDI creates employment opportunities is through direct and indirect employment fostered by multinational enterprises when they enter the domestic market or merge with local firms (Mehra, 2013 pg31).

Sign up to view the full document!

Therefore, these firms transfer these standards to their countries of operation and maintain high standards of production that ensures high employment rates and increased competitiveness in the industry of operation. In 2001 China opened its markets to FDI in various industries including retail, wholesale, banking and telecommunication (Wei, 2013 pg3). Since the state laws were permissive and attractive to FDI, the country also experienced spillover effects in the form of pecuniary and demonstration effects. These are indirect impacts of FDI. They influence the host economy through a variety of ways; vertically or horizontally. Challenges in Identifying Long-term employment effects of FDI When it comes to challenges and concerns that affect identification of impact of FDI in the long-run they include poor economic growth, poor regulatory and policy framework as well as poor security and unstable political environments.

Sign up to view the full document!

Some countries have restrictive regulations that hinder identification of positive employment effects such as high taxation, restrictive competition policies and policies that stymie license applications (Ateng, 2017 pg6). Regulatory inconsistencies and weak connections between big and small investors also contribute to these challenges. A slow economic growth stifled with recession and depression cycles will inhibit long-term effects because it affects the rate of return or the return on investment and therefore discourages long-term employment. Lastly, potential political instability or perceived risks majorly affects the decisions made by firms to invest (Ateng, 2017 pg6). Some of the challenges that will be incurred in the short-term include poor institutional frameworks, corruption and inaccurate data that will influence potential investors. In the long-run, regulatory inconsistencies, poor economic growth and political instability will greatly affect FDI effects.

Sign up to view the full document!

From $10 to earn access

Only on Studyloop

Original template