Global Business and Sustainability: FDI's Role in Economic Development

This essay delves into the pivotal role of Foreign Direct Investment (FDI) in the economic development of emerging countries. It differentiates between spillovers and linkages, crucial concepts in understanding FDI's impact. The essay elucidates the diverse benefits of FDI, such as resource transfer, employment generation, and positive balance of payment effects, while also addressing potential costs, including adverse effects on competition and balance of payment, and concerns about national sovereignty. Through case studies of India and Brazil, the assignment illustrates the varied impacts of FDI in different emerging economies. The analysis incorporates spillover effects, both pecuniary and non-pecuniary, and linkage effects, highlighting the importance of strong supply chains and domestic capabilities. Furthermore, the essay explores the pragmatic nationalist approach to FDI, weighing the trade-offs between advantages and disadvantages for both host and home countries. Overall, the essay provides a comprehensive overview of FDI's complexities and its significance in the global economic landscape.

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Global Business
and Sustainability

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Contents
INTRODUCTION......................................................................................................................3
Spillover and Linkages: Differences..........................................................................................3
Spillover.................................................................................................................................3
Linkage...................................................................................................................................4
Costs and Benefits of Inward Foreign Direct Investment (FDI)................................................4
Host Country Effects: Benefits..............................................................................................5
Resource transfer effects....................................................................................................5
Employment Effects...........................................................................................................5
Balance of Payment............................................................................................................5
Host Country Effects: Costs...................................................................................................6
Adverse effect on competition...........................................................................................6
Adverse Effect on the Balance of Payment........................................................................6
National Sovereignty and Autonomy.................................................................................6
Home Country Effects: Benefits............................................................................................6
Effect: Negative or Positive...................................................................................................7
Different Impact of FDI in emerging nations............................................................................7
Effect of FDI: India................................................................................................................7
Effect of FDI: Brazil..............................................................................................................9
References................................................................................................................................10

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1. The role of Foreign Direct Investment in economic development of emerging
countries: What is the difference between spillovers and linkages? Explain the
different kinds of benefits and costs that arise from inward FDI, and how can
these lead to both positive and negative outcomes? Use two emerging economies
as examples of different impact of FDI on economic development.
INTRODUCTION
Foreign direct investment (FDI) has grown to be a significant source of private foreign
financing for emerging nations. For the most part, it is motivated by the shareholders' long-
term chances for profiting from industrial operations that they directly control, unlike other
major types of private capital flows. While foreign banks lend and invest in activities
managed by banks and portfolio investors, they are not engaged in activities that are driven
by short-term profit concerns (interest rates, for instance) and are susceptible to herd
behavior. They can be seen in, for example: FDI in the Asian countries hit hard by the 1997
financial crisis; bank lending & portfolio equity investment; and FDI from the United States.
For the five most impacted countries, FDI flows stayed strong in all instances and only
marginally decreased again for group, whereas bank credit and portfolio equity stake flows
plummeted dramatically and even dropped sharply in the year of 1997. (Pavlínek, 2019)
For underdeveloped countries, FDI has a far higher impact than it does for developed ones.
Although FDI can increase investment opportunities and capital formation, it is also a way to
transfer production technologies, skills, inventive ability and organizational and managerial
practices across borders. If the climate is right, these resources can also be transmitted to
domestic companies and the wider economy of the host country, if they are part of a
transnational system or are closely linked to such networks through non-equity arrangements.
For FDI attributes that boost productivity and competitiveness to spread across a country,
there must be strong supply-and-distribution links between overseas subsidiaries and
domestic firms as well as strong domestic capabilities to capture spillovers (i.e., indirect
effects). When it comes to encouraging multinational companies to locate their business
operations in first place and ensuring that they do so, policies matter. (Rand, 2017)
Spillover and Linkages: Differences
Spillover
Spillovers (and externalities) are indeed the effects of an economic transaction on third
parties who are not directly involved in it. Some of the transaction's expenses or advantages
aren't shared equally among the participants (firms, customers, and factor owners). spillover
effects can be positive or negative depending on whether societal advantages outweigh
private benefits. Spillovers, on the other hand, are not always cause for alarm. Pecuniary and
non-pecuniary spillovers are the two types of externalities that lead to resource misallocation.
As a result of an economic transaction's effect on the prices of goods and other factors, there
are monetary (or vertical) ripple effects that affect the prices of other goods, factors, and
assets. Pecuniary spillovers are defined by Dunning and Lundan as "the amount and/or
circumstances of supply of, or demand for, other goods and services by some other firm or by
consumers," resulting from purchaser linkages involving the international market (MNE). A

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deleterious pecuniary externality is created, for instance, when FDI in the oil and gas industry
increases demand for engineers. This increases labor costs for all companies that employ
engineers. Because of this, the market's workings are reflected in financial spillovers by way
of relative price changes. (Lina, 2017)
Real resource effects on third parties which occur whenever the actions of one firm influence
the technology or economic output of another firm in ways the first firm cannot capture are
known as non-pecuniary spillovers. Despite the fact that the term "non-pecuniary spillovers"
encompasses a broader concept than "technological spillovers," I'll stick with the latter term
for the remaining portion of this editorial. Non-market technology spillovers are informal,
involuntary, and non-voluntary transfers of technology. Pollution and excessive use of
common property resources are well-known examples of negative spillovers. It is possible for
local businesses to benefit from the MNE's product or process technology by copying it in the
form of informal knowledge transfers and demonstration effects. Competition from an MNE
can force local firms to be using existing technologies more effectively or update in order to
stay competitive. This provides an additional origin of technological spillovers from an MNE
entering an industry. According to Dunning and Lundan, economists are interested in
measuring FDI-induced technological spillovers because "they represent the proverbial 'free
lunch' – something useful that is received without having to pay full compensation."
Linkage
Although the primary purpose of vertical linkage is to generate financial spillovers, they are
also frequently responsible for technology spillovers. For example, MNEs can allow
learning-by-doing by local businesses, which can lead to increased productivity. For both
upstream and downstream companies, MNE training of host nation personnel increases the
labor pool's skill level and productivity while also providing a source of new start-up
businesses. All of these behaviors result in non-market, non-intentional, informal transfers of
goods or services. For this reason, it might be difficult to separate the financial and
technological spillovers of vertical links. The key to FDI's technical spillovers is that local
firms and organizations benefit from FDI's residual effects without compensation from the
foreign entrants. Remaining effects will likely boost industry and even national productivity,
resulting in higher national well-being for the country that hosts them.
Scholars may misunderstand or equate linkage with spillovers because to the difficulty in
distinguishing between financial and technological spillovers that can result from vertical
linkages. For this reason, academics have tended to split spillovers into subcategories that are
more easily quantifiable empirically, such as financial and technological. Intraindustry,
interindustry, and agglomeration/network spillovers are well-known classifications of
spillovers. FDI spillovers that affect companies in the same industry (competitors) are known
as intraindustry spillovers. Demonstration effects (e.g., emulating FDI processes and
products), competition effects (e.g., local firms' responses to the "fresh winds of
competition"), and labor market impacts (e.g., FDI provides a more highly skilled labor pool)
are all examples of these spillovers. (David, 2017)

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Costs and Benefits of Inward Foreign Direct Investment
(FDI)
Many administrations are pragmatic nationalists whenever it comes to foreign direct
investment (FDI). As a result, the trade-offs between FDI's advantages and costs inform their
strategy. In this section, we look at the advantages and disadvantages of FDI from both a host
country's and a home country's perspective.
Host Country Effects: Benefits
Inward FDI benefits the host country in three ways: by transferring resources, by creating
jobs, and by improving the country's balance of payments.
Resource transfer effects
By providing capital, technology, & resource management that would not otherwise be
available, foreign direct investment could have a favourable impact on the economy of the
host country. FDI can increase a country's economic growth if it is lacking in these criteria.
Larger and more financially powerful MNEs have access to resources that are not available in
their host countries. These funds may come from the company's internal resources, or, since
of their reputation, huge MNEs may find it simpler to borrow the money from of the financial
markets than the host country firm. (Dstin, 2016)
Employment Effects
Employers in the host nations say that foreign direct investment (FDI) creates jobs that would
not otherwise exist. Employees of a foreign multinational corporation (MNE) in the host
country suffer direct consequences.
Balance of Payment
For most host nations, the impact of FDI on the country's balance of payments is a crucial
policy consideration. Keeping track of a country's payments and receipts from other countries
is done through its balance of payment accounts. A country's current account balance-of-
payments imbalance usually causes worry among governments. The current account keeps
track of the flow of commodities and services into and out of the country. When a country
imports more products and services than it exports, it has a current account deficit or trade
deficit. Governments prefer current account surpluses to current account deficits. A current
account deficit could only be sustained in the long run if foreign investors buy the country's
assets. It's worth noting that the ongoing US current account deficit of both the late 1980s and
early 1990s was financed by the regular sale of US assets (stocks and bonds) to foreigners.
National governments seek a current account surplus because they do not want their country's
assets to be taken by foreigners. There are two ways that FDI can assist a country in
achieving this goal.
1. Foreign direct investment (FDI) replaces importation of products and services and
boosts the country's current account and balance of payments. FDI by Japanese
automakers in the United States and the United Kingdom, for example, is often used
as an alternative for Japanese imports. It is this shift in supply that is helping to
strengthen the current account in the United States' balance of payments. Since asset
sales to foreigners have become less necessary to maintain a current account deficit,
the United States has profited.

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2. It is possible that the MNE can gain from the exportation of goods and services from
another country through a foreign subsidiary.
Host Country Effects: Costs
Competition inside the host country, balance of payments problems, and a projected loss of
national independence & autonomy are all major concerns for host countries when it comes
to inward foreign direct investment (FDI).
Adverse effect on competition
Many countries are wary of foreign multinationals operating there when they may be part of a
wider international organisation and wield more economic power than local businesses.
Foreign MNEs could use money obtained elsewhere to subsidise their costs inside the market
place, which might push out local competitors and allow the company to gain a monopoly.
Once a foreign MNE has a monopoly on a market, it has the power to raise prices above what
would be found in a competitive market, which would be detrimental to the host country's
economy. In nations where there are few significant companies that can fight with overseas
MNE units, this fear tends to be larger.
Adverse Effect on the Balance of Payment
Foreign direct investment (FDI) can have two negative implications on a country's ability to
pay its bills.
1. There must be an equal amount of income repatriated from a foreign subsidiary's
earnings to offset the original capital intake from FDI. The current account of both the
balance of payments is debited when these outflows occur.
2. Importing large amounts of raw materials from outside the host country results in a
current account deficit for the host country. As an example, Japanese-owned auto
assembly plants in the United States, for example, were accused of importing a large
number of Japanese components that lowered the positive impact of this FDI on the
US balance of payment situation. According to Japanese automakers, 75 percent of
their components will come from US-based suppliers.
National Sovereignty and Autonomy
Many host countries fear that foreign direct investment (FDI) may lead to a decrease in their
economic sovereignty. It will be up to a foreign parent with no actual attachment to the
hosting country to make decisions that could have a significant impact on the host country's
economy. Several European countries raised similar worry about FDI from US MNEs
jeopardising their national sovereignty over thirty years ago. Concerns about Japanese and
European FDI are now arising in the United States.
Home Country Effects: Benefits
Additionally, there are both expenses and benefits for the home country (or origin). Is the US
economy better off or worse off as a result of foreign investments? Some even go so far as to
say that FDI should be regulated since are not in the country's best interest. According to
some critics, limiting access would be counterproductive to the national interest. FDI's

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benefits and costs to the source country must be examined in order to better understand why
people hold these perspectives.
There are three ways in which foreign direct investment (FDI) benefits the host country.
1. The inflow of foreign revenues helps in current account of a country's balance of
payments. If the foreign subsidiary generates demand for home nation exports of
capital equipment, intermediate goods, supplementary items, and the like, FDI can
also boost the current account of a home country's balance of payments.
2. Outward FDI generates employment benefits for the home country. In the same way
that a company's balance sheet benefits from export demand for its own country's
exports of machinery and equipment, intermediate products, complementary items,
etc., so do favourable employment consequences.
3. There are numerous advantages to a home country MNE's exposure to overseas
markets, such as gaining key skills that may be transmitted back to the country.
International exposure allows a multinational corporation (MNC) to learn about better
management practises and better product/process technology. These assets can then
be reinvested in the economy of the native country. When General Motors & Ford
invested into Japanese automobile businesses (GM owned part of Isuzu and Ford
owned half of Mazda), they were hoping that the Japanese companies' managerial
skills and production procedures would help them improve. There may be a net
benefit to the US economy if GM & Ford are able to return this know-how to their US
operations. (Amal, 2018)
Effect: Negative or Positive
1. Foreign direct investment (FDI) increases the demand for labour, which in turn raises
wages. In order for local governments to be able to fund its citizen-directed
programmes, economic growth is necessary. To ensure that citizens' wealth doesn't
decline rapidly, demands for a domestic currency can increase its purchasing power,
as witnessed in China, so that people's labour doesn't go unappreciated as time
progresses.
2. The side effects might be life-altering. Destabilizing the social fabric occurs as a
result of this unregulated wealth creation. In part, this is due to naivete and narcissism
on the part of the leaders, who lack insight and understanding of the Western world.
3. Secondly, FDI has a major impact on the home country's economy and workforce. In
the event that "A" decides to invest in "B" utilising its capital and technology, the host
country will gain more financially than the home country will gain. There will be a
great deal of attention paid to the corporation in nation "B" in the future, too, if
country "A" hopes to grow in any way. As a result, domestic output suffers, and the
company may be forced to cease all activities in order to devote all of its resources to
the host country. This has a devastating effect on the economy and employment in the
home country.
4. A rise in investment and employment is expected as a result of foreign direct
investment (FDI). Foreign investment can be seen as a direct boon to a country, but
it's also possible that the resources will be exploited and fewer jobs would be created
because of the nature of capital-intensive businesses. It's also important to note that
social unrest is exacerbated by population dislocation.

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Different Impact of FDI in emerging nations
Effect of FDI: India
It is referred to as "parent enterprise" (and "investor") and "foreign affiliate" when one
company owns (or has significant influence over) another company based in another country.
Attracting foreign direct investment (FDI) helps a country stay connected to global trade
networks and fund its own development. Unconditional large-scale FDI, on the other hand,
can make a country vulnerable to pressure from outside sources. Foreign investment has a
major impact on India's economic growth. To encourage foreign investment, several
countries offer numerous benefits (FDI). Any country's need for FDI depends on the
country's savings and investment rate. Bridge: Foreign Direct investment fills the gap
between saving and investment. It is through foreign capital that local savings constraints are
alleviated and new manufacturing opportunities are created in the promotion of economic
development. (Miachel, 2015)
Although India is a great environment to invest in FDI, there are still a number of difficulties
and areas of improvement that need to be addressed. It's impossible for India to become the
world's leading FDI destination until these issues are addressed.

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Effect of FDI: Brazil
Between 2009 and 2011, Brazil saw a surge in FDI, although that growth has subsequently
slowed. Global FDI flows have fallen by 62% from USD 65 billion in 2019 to USD 25
billion in 2020, as reported by UNCTAD's World Investment Report 2021.
Covid-19 epidemic slowed down Brazil's FDI in 2020, even as privatisation and
infrastructure concessions programmes were put on hold. Transportation, financial services,
oil and gas extraction, and the automobile industry were among the industries hardest hit by a
reduction in FDI inflows of more than 85 percent. Despite this, despite the COVID-19 crisis,
some big investments were made in the country. When New Fortress announced in January
2021 that this would buy Hydro and Solar LNG from each other for a total USD 5 billion, it
entered the Brazilian domestic gas market and became Brazil's largest gas-to-power
company. Other large oil firms, such as BP PLC & EIG Global Partners, are also considering
multibillion-dollar investments in Brazil as the country opens its natural gas market to private
investors. But at the other side, Ford Motor Company announced in January that it would
cease production of automobiles in Brazil, where it had operated since 1919, by closing all
three of its plants and closing all three of its plants, as the disease outbreak amplified
continual industry excess resources and decreased sales, tends to result in significant losses.
Global FDI is expected to reach USD 608 billion by the end of 2020, a level that has been
unchanged over the past 2 years. Latin America's largest economy and the world's 11th
largest beneficiary of foreign direct investment (FDI) inflows (it ranked 6th the previous
year). The Netherland, the United States, German, Spain, the Bahamas, & Luxembourg are
the primary countries investing in Brazil. Oil and gas production, the automotive sector,
financial sectors, trade, power, and the chemical processing all receive significant amounts of
investment. (Smith, 2021)

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References
Amal, M., 2018. Foreign Direct Investment from Emerging Economies: Determinants and
Strategies. [Online]
Available at: https://www.intechopen.com/chapters/16918
[Accessed 08 June 2020].
David, 2017. Foreign Direct Investment, Backward Linkages, and Productivity Spillovers :
What Governments Can Do to Strengthen Linkages and Their Impact. [Online]
Available at: https://openknowledge.worldbank.org/handle/10986/33761
[Accessed 19 February 2019].
Dstin, A., 2016. Costs and Benefits of Foreign Direct Investment (FDI). [Online]
Available at: https://www.mbaknol.com/international-business/costs-and-benefits-of-foreign-
direct-investment-fdi/
[Accessed 19 August 2020].
Lina, 2017. Exporting, Linkages and Productivity Spillovers from Foreign Direct Investment.
[Online]
Available at: https://www.jstor.org/stable/25478277?seq=1
[Accessed 18 June 2019].

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Miachel, 2015. FOREIGN DIRECT INVESTMENT IN EMERGING MARKET COUNTRIES.
[Online]
Available at: https://www.imf.org/external/np/cmcg/2003/eng/091803.pdf
[Accessed 08 January 2021].
Pavlínek, P., 2019. Linkages and spillovers in global production networks: firm-level
analysis of the Czech automotive industry. [Online]
Available at: https://academic.oup.com/joeg/article/16/2/331/2412424
[Accessed 14 June 2021].
Rand, J., 2017. Understanding FDI spillover mechanisms. [Online]
Available at: https://www.brookings.edu/blog/africa-in-focus/2015/11/19/understanding-fdi-
spillover-mechanisms/
[Accessed 18 July 2020].
Smith, 2021. BRAZIL: FOREIGN INVESTMENT. [Online]
Available at: https://santandertrade.com/en/portal/establish-overseas/brazil/foreign-
investment#:~:text=For%20Further%20Information-,FDI%20in%20Figures,USD
%2025%20billion%20in%202020.
[Accessed 06 December 2021].