In the wake of globalization, the importance of Foreign Direct Investments (henceforth FDI) has strongly increased. From 1990 to 2017 the amount of FDI inflows in the world has increased sevenfold. Most FDI expenditures flow between industrialized countries. But also developing countries show a strong increase in FDI inflows. Especially China became attractive for FDIs in the past years after reducing FDI restrictions. In the year 1978, before substantial reforms, almost no FDIs were made in China. 39 years later, in 2017, approximately 9.5% of the worldwide FDIs were conducted in China. In the same period, the Gross Domestic Product (GDP) per capita of China has increased fifty-six-fold. At the same time, the export ratio of China has increased from approximately 4.5 % to 19.8 %. These developments suggest that FDI may have a positive influence on economic growth and thus on firms' growth in developing countries. Therefore, governments of developing countries try to attract their country and companies for FDI by granting tax holidays or other benefits in the hope that the domestic economy can benefit from positive FDI spillovers.
Companies have various reasons to make an investment in a foreign country e.g. lower wages, new market access, better resources, etc. All those motives are linked to the superior objective of profit maximization. According to John H. Dunning’s "Eclectic paradigm", there are three conditions which must be fulfilled so that companies make an investment in a foreign country. First, the ownership advantage which means that a company must have an exclusive competitive advantage over competitors in the foreign market. Second, the location advantage which means that a company must benefit from the differences between home and host countries for example through lower wages or factor costs and third, the internalization advantage which means that a company must exploit its specific competitive advantages itself and not sell them to existing companies, e.g. in the form of licenses.
Table of Contents
1 Introduction
2 Foreign Direct Investment (FDI)
2.1 Definition
2.2 Types of FDIs
2.3 Horizontal vs. vertical FDIs
3 Potential impact of FDIs on domestic firms’ growth
3.1 FDI efficiency measures
3.2 Spillovers through FDIs
3.3 Growth determinants
4 Conclusion
5 References
Objectives and Research Focus
This paper examines how Foreign Direct Investment (FDI) serves as a driver for economic growth in developing countries, specifically analyzing which types of FDI channels are most beneficial for the development and performance of domestic firms.
- Comparison of horizontal versus vertical FDI strategies.
- Evaluation of FDI efficiency measures like export performance, wage rates, and productivity.
- Analysis of knowledge, technology, and competition spillovers on local industries.
- Investigation of factors influencing spillover magnitude, such as absorptive capacity.
- Testing the hypothesis that vertical FDI exerts a stronger positive effect on domestic firm growth than horizontal FDI.
Excerpt from the Book
Horizontal vs. vertical FDIs
In the latter section, the different types of FDIs are outlined. This distinction is essential to examine the effects of FDIs in a differentiated way. The following section lines out the different effects of horizontal and vertical FDI and provides potential explanations why those differences exist. The majority of FDI research stated that there is in average no positive effect of horizontal FDIs on firms’ growth in developing countries. Several authors, such as Eck and Huber (2016) for Indian firms, Javorcik (2004) for Lithuanian firms, Javorcik (2017) for Turkish firms and others, found no evidence of positive horizontal spillovers on domestic firms. Aitken and Harrison (1999), Konings (2001) and Hu and Jefferson (2002) even found a negative influence of horizontal FDI on domestic firms in developing countries. To explain the negative impact of FDI on firms’ growth it is necessary to introduce the concept of the so-called agglomeration and competition effect. The agglomeration effect describes the positive impact that FDI may have on domestic firms’ growth. The idea is that due to agglomeration of firms, especially multinational enterprises (henceforth MNE), domestic firms can benefit from knowledge spillovers and labor pooling as well as of better supply options. The downside of the agglomeration effect is the competition effect. The entrance of an MNE implicates an increase of competition in the same industry. MNEs tend to be more productive which may lead to a reallocation of market shares between MNEs and domestic firms because domestic firms potentially cannot compete with the marginal costs of MNEs.
Summary of Chapters
1 Introduction: Provides an overview of the global increase in FDI inflows and outlines the research objective regarding its influence on firm growth in developing countries.
2 Foreign Direct Investment (FDI): Defines FDI according to OECD standards and categorizes the different forms, specifically distinguishing between greenfield investments and cross-border M&A, as well as horizontal and vertical structures.
3 Potential impact of FDIs on domestic firms’ growth: Analyzes the mechanisms through which FDI affects local firms, covering efficiency measures, various spillover types, and determinants of growth like product sophistication and quality.
4 Conclusion: Summarizes the findings, confirming that vertical FDI typically offers more significant growth benefits for domestic firms than horizontal FDI due to differing corporate incentives.
5 References: A comprehensive list of academic sources and databases used to support the research findings.
Keywords
Foreign Direct Investment, FDI, Developing Countries, Horizontal FDI, Vertical FDI, Economic Growth, Spillovers, Productivity, Knowledge Transfer, Multinational Enterprises, MNE, Market Access, Absorptive Capacity, Technology Diffusion, Industrial Development
Frequently Asked Questions
What is the primary focus of this paper?
The paper explores the impact of different Foreign Direct Investment (FDI) channels on the growth of domestic firms within developing countries.
What are the central themes discussed in the text?
Key themes include the distinction between horizontal and vertical FDI, the nature of technology and knowledge spillovers, and the role of domestic absorptive capacity in harnessing FDI benefits.
What is the central research hypothesis?
The thesis tests the hypothesis that vertical FDI has a significantly more positive impact on the growth of domestic firms than horizontal FDI.
Which scientific methods are employed?
The work utilizes a literature-based analysis, synthesizing empirical findings from various economic studies to evaluate the influence of FDI on productivity, wages, and innovation.
What does the main body cover?
It covers theoretical definitions, the mechanisms of FDI spillovers, various efficiency measures, and factors like the origin of the investor and the time horizon of effects.
Which keywords best characterize this work?
The work is characterized by terms such as FDI spillovers, vertical and horizontal integration, total factor productivity, and economic development in emerging markets.
How does horizontal FDI differ from vertical FDI regarding spillovers?
Horizontal FDI often involves competing with local firms, leading companies to prevent spillovers to maintain a competitive edge, whereas vertical FDI incentivizes the investor to improve their suppliers' quality, facilitating positive spillovers.
What is the "competition effect" mentioned in the paper?
It describes the downside of FDI where multinational enterprises, being more productive, enter a market and potentially reduce the market share of less efficient domestic firms.
Why does the paper emphasize "absorptive capacity"?
It explains that the technological gap between foreign investors and local firms determines whether spillovers can actually be absorbed; without sufficient local R&D and technology, domestic firms cannot benefit from FDI presence.
- Arbeit zitieren
- Yannick Koniezny (Autor:in), 2019, From which Foreign Direct Investment Channels can Domestic Firms Benefit the most in Developing Countries?, München, GRIN Verlag, https://www.grin.com/document/508838
