Foreign Direct Investment ( FDI ) has been an extra beginning of capital for most of the states. In general, economic experts agreed that FDI leads to an addition in economic growing and helps in capital formation, though there are some statements from others.

Majority of the research workers found that FDI affects economic growing positively but in different extent, depending on assorted factors and states. ( See: Lensink & A ; Morrissey, 2006 ; TvaronaviA?ienA- & A ; GrybaitA- , 2007 ; Batten & A ; Xuan, 2009 ; Brock, 2009 ; Wang, 2009 ; Chee & A ; Nair, 2010 ; Ghosh & A ; Wang, 2009 ; Wijeweera et al. , 2010 ) . FDI has contributed well to the productiveness and economic growing, and it is a mover of production efficiency and a shifter of the production frontier in the host state which will take to a growing in GDP ( See: Marwah & A ; Tavakoli, 2003 on ASEAN states ; Yao et al. , 2008 on China ) . Besides, some research workers found that FDI ‘s positive spillovers can excite national public assistance and growing. It is by and large accepted that the positive impact of FDI is driven by FDI reassigning assets associating to productivity betterment or spillover consequence and efficiency of FDI, every bit good as the interaction with that state ‘s absorbent capableness ( See: Mencinger, 2003 ; Choong et al. , 2005 on Malaysia ; Wang, 2009 on Asiatic states ) . The positive impact of FDI is smaller than the domestic investing because FDI still concentrates in some industries with low value added. The consequence seems to be really different across economic sectors with most of the good impact concentrated in the secondary industries. ( See: Vu et al. , 2008 on China and Vietnam ; Oladipo & A ; Vasquez Galan, 2009 on Mexico ) . On the other manus, Tang et Al. ( 2008 ) indicated that FDI has complementary effects on domestic investing, and long-run economic growing is positively associated with FDI. His determination was being reinforced by Baharumshah and Almasaied ( 2009 ) who found that FDI has a positive and important consequence on economic growing, but its consequence is of lesser magnitude than that of domestic investing.

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In contrast, some empirical surveies obtained a negative relationship between FDI and economic growing ( See: Nwala, 2008 on ASEAN 4 states ; Bezuidenhout, 2009 on Southern Africa ) . In other words, when the sum of FDI inflows additions, economic growing will diminish. For illustration, harmonizing to Nwala ( 2008 ) , if FDI complements domestic investing, it can heighten growing ; otherwise, the former will herd the latter out, and decreases domestic nest eggs, which will in bend lead to a lag or lessening in economic growing. This can be attributed to the type of FDI that flows into the part.

Interestingly, there were besides some research workers produced assorted consequences on the impacts of FDI influxs on economic growing. ( See: Wang & A ; Wong, 2009 ; Farshid et al. , 2009 ) . For case, harmonizing to Vita and Kyaw ( 2009 ) , FDI has a positive consequence on economic growing merely in developing states with lower center and upper middle-income, but this is non the instance for developing states grouped within the low-income categorization. Furthermore, Ang ( 2009 ) , who had done a research in Thailand, stated that although FDI ‘s indirect consequence through fiscal sector development seems to hold a positive impact in exciting economic development, it has a negative influence on end product in the long tally.



Larger market size should have more FDI influxs compared to smaller states that have smaller market size. Market size is by and large measured by Gross Domestic Product ( GDP ) , GDP per capita income and size of the in-between category populations. Besides, we know that the larger the market size, the better the chance for foreign investors to cut down entry costs and to achieve economic systems of graduated table ( Li et al,2008 ) . Many empirical surveies documented a positive and important relationship between market size and FDI by analyzing on the several states ( See: Vijayakumar, 2010 on BRICS ( Brazil, Russia, India, China and South Africa ) states ; Asiedu, 2006 on Sub-Saharan Africa ( SSA ) states ; Faeth, 2009 ; Gast & A ; Herrmann, 2008 on OECD states ; Ladyeawa, 2009 on Russia ; Leitao, 2009 on Greece ; Leitao & A ; Faustino, 2010 on Portugal ; Mateev, 2009 on Central and South eastern European states ; Oladipo, 2008 ; Sinha, 2008 on India ) .

In contrast, Kang ( 2009 ) captured market size as an undistinguished determiner of FDI flows in China. In add-on, we can see that different states may hold different market size which play a important function on the economic growing where it attracts more FDI. Hence, market size of host state and market size of place state are peculiarly of import positive location factors of FDI ( Vogiatzoglou, 2007 ) .

Based on the old surveies, we can see that the caution is that the little size of a state may necessitate many states to be included in a alliance in order to accomplish a market size that will be big plenty to pull foreign investors ( Asiedu, 2006 ) . When a state expands the size of its market in footings of population increase, it will take the part to go more attractive for FDI.


States that require FDI can pull it besides by developing resources like human capital. Corporations seek out societies with a skilled, educated, and productive work force. In other words, investors progressively aim states where the quality of human capital is high, for illustration: instruction ( Bhaumik & A ; Dimova, 2009 ; Fork et all, 2008 ; Suliman & A ; Mollick, 2009 ; Wong 2006 ; Amal et Al, 2009 ) is the most outstanding constituent in human capital development, in which it positively and significantly improves FDI. Human capital is besides a cardinal component of increasing per-worker labour productiveness ( Rodriguez & A ; Pallas, 2008 ) . Furthermore, widespread regard for human rights facilitates the ability and enhances the chance for the host state ‘s citizen to achieve higher degree of instruction and preparation ( Blanton & A ; Blanton, 2007 ) . Therefore, the interaction between human capital and FDI is of import for both short and long-run growing procedure ( See: Baharumshah & A ; Almasaied, 2009 ; Sinha, 2008 ) .

However, in eastern China, instruction has a statistically non-significant positive direct consequence on FDI ( Li et wholly, 2008 ; Nasser, 2007 ) . In America, the province gift of human capital suggested province specific plans to human capital within a province because near perfect factor mobility is non assisting in pulling more FDI to that province ( Brock, 2009 ) , and therefore human capital is non important in impacting FDI.

In short, we believe that instruction and labour accomplishments are non a major restraint to pulling investing and we have provided grounds that instruction does count for end product growing or productiveness, where the survey found that higher degree of instruction is an of import determiner of employment in the labour market. So far, our analysis has proven this statement to be true by reexamining on the old surveies.


Exchange rate is besides an of import determiner of FDI in our survey. As we know, in finance, exchange rate is known as foreign-exchange rate between two currencies, stipulating how much one ‘s currency is deserving in footings of other. It is the value of a foreign state ‘s currency in footings of the place state ‘s currency.

Recent empirical research on FDI and exchange rate uncertainness has highlighted the equivocal consequence of exchange rate volatility on FDI. A alterations in the exchange rate will non merely affect foreign trade, alternatively, it besides will influece the MNCs or FDI ( Bunch and Kleinert, 2008 ) .

There are groundss that exchange rate volatility has a positive and important consequence on FDI ( Chowdhury & A ; Wheeler, 2008 on Canada, Japan and United Stated ; Bunch & A ; Kleinert, 2008 ; Vita & A ; Abbott, 2007 on UK ) , which means a existent grasp of the local currency with regard to the foreign currency implies an addition of FDI flows into the state. In contrast, there are besides surveies shown that exchange rate volatility has a negative impact on FDI ( Wong, 2006 ; Song & A ; Zhen, 2007 ; Zheng, 2009 ; Wei & A ; Zhu, 2007, Vita & A ; Abbott, 2007 on UK ; Gottschalk & A ; Hall, 2008 on South-East Asia ) , which means a existent grasp of the local currency with regard to the foreign currency implies a decrease of FDI influxs to the state.

In most of the documents cited above, the location pick of transnational houses is between place and foreign state. A house either chooses bring forthing in the place state and exporting to the foreign market or bring forthing in a foreign state and sell in the place market ( Gottschalk & A ; Hall, 2008 ) . We can see that authoritiess can play a portion in how the currency exchange rates affect planetary concern every bit good. Many authoritiess will set into topographic point certain actions that will intentionally devaluate their ain dollar. By deflating the value of their ain dollar, that state will do an addition in the demand on their merchandises. Now we can see the importance ( to universe trade ) on how the alterations in currency exchange rates will impact planetary concern.


During the last decennaries, Numberss of research had been done on the function of foreign direct investing in exciting economic growing. The causal relationship should besides be paid attending to because it can assist to bring forth a policy to bring forth a more promising economic growing to the state. Previous research workers, Hansen and Rand ( 2006 ) appealled a inquiry on the causality: does FDI causes ( long-term ) growing and development or do aggressive economic systems attract FDI flows as multinational companies search for new market and net income chances? This is what we are interested as good. They conducted the research on developing states and found that FDI has a important long-term impact on GDP irrespective of the degree of development. However, Chowdhury and Mavrotas ( 2006 ) indicated that single state surveies should be done to analyze the causal relationship since FDI and economic growing is besides state specific. Therefore, Magmus and Fosu ( 2008 ) suggested that new surveies have considered possibility of several relationships between FDI and economic growing which has been categorized at below.

2.3.1 Growth-driven FDI

This relationship is demoing that the good public presentation of economic growing will drive FDI inflows into a state. With this relationship, bettering the economic growing enables the states to bring forth more FDI influxs, and accordingly convey indispensable economic resources to ease the development of the host states ( Lee, 2009 ) . In our reappraisal, several states had been examined and we found a unidirectional causality between FDI and growing ( Elboiashi et al. , 2009 on Morocco ; Chowdhury & A ; Mavrotas, 2006 on Chile ; Srinivasan et al. , 2010 on Indonesia, Philippines and Singapore ; Lee, 2009 on Malaysia ) . For illustration, harmonizing to Elboiashi et Al. ( 2009 ) , there were some research workers provided some recommendation on bettering economic status in host state such as market size, the engineering spread, technology-absorbing capableness, the grade of openness and the degree of the human capital development in order to pull more FDI influxs. While in Lee ( 2009 ) ‘s research, it was found that FDI inflows play an of import function in the accommodation of GDP per capita in Malaysia, which is consistent with the old literature that emphasizes FDI influxs as a beginning of basic economic resources to ease the development of the host state. However, his empirical consequences indicated that FDI inflows merely explicate the short-term accommodation of GDP per capita, but non the long tally. So, FDI inflows may move as positive inducements for the state, but non as an engine for sustained economic growing because FDI may non ever function the long-term involvement of the host states.

2.3.2 FDI-led growing

The growing consequence of FDI is expected to be in two ways. First of all, by promoting the inclusion of new factors and foreign engineerings in the production map, FDI is hypothesized to spurs economic growing via capital accretion in the host ( receiver ) state. Second, through cognition diffusion, FDI is hypothesized to heighten the bing human capital via skill acquisition and worker preparation, every bit good as via the publicity of alternate direction patterns and organisational agreements ( Ericsson & A ; Irandoust, 2001 ) . In add-on, in footings of start-up, selling, and licensing understandings, FDI may be hypothesized to excite technological upgrading. The statement is supported by Markusen and Venables ( 1999 ) who worked out an analytical model on the procedure of how FDI establishes local industrial sectors, whereby these sectors may turn to an extent where domestic production surpasses and crowds out FDI workss. Obviously, FDI plays an of import function in speed uping technological upgrading and industrial development. Therefore, foreign investors may raise productiveness and technological advancement in the host ( recipient ) state and therefore hold great impact on economic growing every bit good as economic development.

In contrast, there was an statement that the sum and sort of FDI influxs in the host state are influenced by the degree of economic development. Harmonizing to Caves ( 1996 ) , the technological capacity of the host state has a important relationship with the degree of FDI. If MNCs are precisely the same with local houses, it is non profitable for the former to come in the domestic market ( Markusen, 1995 ) . Similarly speech production, advantages in footings of engineering, inputs cost, factor gifts, every bit good as higher productiveness of the host state should heighten the attraction of FDI ( Caves, 1996 ) . All these reinforced Dunning ( 1993b ) ‘s international investing theory, in which it was suggested that for a house to be strongly induced to put straight, three requirements must be existed, viz. internationalisation, ownership, and location.

The degree of macroeconomic stableness and the trade policy of the recipient state are among other factors that may hold a strong linkage with FDI. Equally long as a state has provided, adopted and fulfilled the followers: ( I ) fiscal and pecuniary subject to command rising prices, liberalisation reforms, ( two ) incentives on trade and an appropriate belongings right market, ( three ) necessary institutional model for cross-border legal and fiscal colonies, it will go more attractive and competitory. All these factors can be seen as engine of growing, and the subsequent higher growing rate may in bend attract greater FDI influxs ( Ericsson & A ; Irandoust, 2001 ) .

In short, under the premise that the host state is in sound status, causality between FDI growing and income growing is expected to be bidirectional. This indicates that the rightness of macroeconomic policies is important in making an attractive economic environment in order to bring on more FDI. Furthermore, FDI affects growing via the “ catch up ” procedure in engineering and via cognition diffusion. By spurring growing in the host state, FDI influxs will increase and this will in bend have extra impact on growing and economic development ( Ericsson & A ; Irandoust, 2001 ) .

2.3.3 The two manner ( bidirectional ) causal nexus

On the other manus, there were besides several research indicated a bidirectional causality between FDI and economic growing in rather similar states. ( See Chowdhury & A ; Mavrotas, 2006 on Malaysia and Thailand ; Srinivasan et al. , 2010 on Malaysia and Vietnam ; Sridharan et al. , 2009 on Brazil, Russia and South Africa ; Balamurali & A ; Bogahawatte, 2004 on Sri Lanka ; Anwar & A ; Nguyen, 2010 on Vietnam ) . These will demo a causal relationship between economic growing and FDI influxs of the states, which mean a better economic public presentation will pull more FDI influxs, which will in bend addition the economic growing once more. For illustration, Anwar & A ; Nguyen supported the position that in overall term, a reciprocally reenforcing bipartisan linkage between FDI and economic growing exists in Vietnam. While the direct consequence of the former on the latter was found to be positive, the indirect consequence via the economic system absorbent capacity is negative.

In the instance of Malaysia, Chowdhury and Mavrotas ( 2006 ) ‘s every bit good as Srinivasan et Al. ( 2010 ) ‘s consequences showed differences with Lee ( 2009 ) ‘s consequences who found that end product merely has long-term causal relationship on FDI influxs. This is because the methods that were being employed to analyze the relationship are different among the research workers and therefore bring forth different consequences. Besides, Anwar and Nguyen ( 2010 ) found that there is a linkage between FDI and economic growing in Vietnam, but non the instance of every part in Vietnam. This implies a more specific survey in analyzing the relationship in such a manner that part by part alternatively of state by state. Nonetheless, due to the lacking of informations, troubles in sing other variables and other restrictions, our survey merely concentrate on state footing.

2.3.4 The absence of any causal nexus

In the reappraisal that we had done on old research, the absence of any causal relationship usually is less likely to be happened in the states because many research workers recommend appropriate policies in bring forthing more FDI to profit the growing of the state or frailty versa. For case, Chowdhury and Mavrotas ( 2006 ) suggested to increase attending to the overall growing and the quality of growing as there are important determiners of FDI. However, there are some states under reviewed like Brunei and Lao showed no causality between FDI and GDP ( See: Srinivasan et al. , 2010 ) .

In short, understanding the way of causality between the two variables is of import in explicating policies that encourage private investing in developing states ( Chowdhury & A ; Mavrotas, 2006 ) . Therefore, it is of import for us to comfirm the relationship between FDI and economic growing before implementing policy since it may profit nil to us if there is no causal link between these two variables.