Foreign Direct Investment Can Both Damage and Facilitate Economic Growth in the World's Poorest Regions

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The paper discusses the notion that foreign direct investment (FDI) can both damage and facilitate economic growth in the world’s poorest regions. It does so with a particular focus on the current trend of global economic integration. The potential dual effects of FDI are discussed here in terms of both their long and short-term effects, i.e. those arising from its routine operation, and those arising from particular events, such as the 2008-9 financial crash. The paper first defines the key terms under discussion, i.e. global economic integration (globalisation), FDI, the world’s poorest regions, and contemporary economic integration. It then discusses the variable effects of FDI on the world’s least developed countries (LDCs). It does so by looking at the ways in which FDI supposedly encourages development (i.e., through technology spillover), and considering the problems which may arise. The paper concludes that the producing a definitive explanation of the dual implications of FDI for LDCs is made difficult – if not impossible – by the variables which arise across the national economies in question.

In positive terms, globalisation can catalyse cross-border capital flows into the poorest regions, alleviating poverty through increased government revenue (through taxation), knowledge spillovers, capital formation, and employment (Aswathappa, 2010). Analysts such as Borensztein et al. (1994) considered this phenomenon from a macro-economic perspective, focusing on technology diffusion; they assume that if the minimum levels of human capital were present, FDI would have complimentary effects on domestic businesses. However, as Moran (2011, p.4) points out, establishing whether or not FDI makes a positive contribution to developm...

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...n of forces such as technology spillover. Reaching the critical mass of productive resources, entrepreneurial capabilities and production linkages which will support technology spillover (i.e. from MNCs to local enterprises) is something which national governments can encourage as a precondition of successful FDI. However, this in itself cannot succeed if the FDI in question only allocates capital to discrete enclaves of economic activity, as typically occurs in the energy sector. Catalysing enterprise remains a notoriously difficult challenge for governments (of developed, developing and the least developed nations), and one where the misallocation of capital is fairly likely. To this may be added the problem of significant deficiencies in the kinds of data which both national governments and NGOs such as UNCTAD need in order to anlayse the situation accurately.

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