Benefits of Foreign Direct Investment

Benefits of Foreign Direct Investment Do Host Countries Benefit From Foreign Direct Investment? Evidence From Developing Economies Executive Summary The multinational companies (MNCs) and associated foreign direct investment (FDI) play an important role in international economy. It is well-known that FDI activity can bring many significant effects to host countries. In this essay I estimate such effects from three different aspects: The first part I focus on the relation between FDI and host country wages. Previous studies show that it is a universal phenomenon that the wages in foreign companies are higher than domestic companies. The FDI activity has a positive effect to the overall wage levels of the host countries, although wages spillovers to domestic companies are not always exist. The second part I focus on the relation between FDI and host country productivity. Foreign companies have higher productivity than domestic companies; it can be supported by most of the available studies no matter what measures have bee n used. Although some findings reflected that local firms in developing countries can benefit from FDI by productivity spillovers, in more cases, the productivity spillovers are not significant, even negative. The third part I focus on the relation between FDI and host country’s economic Growth. The result shows that developing countries can benefit from FDI and achieve economic growth. Overall, the host countries, especially the developing countries, can benefit from foreign direct investment. 1. Introduction The worldwide spread of multinational companies (MNCs) and associated foreign direct investment (FDI) play an important role in reconstructing economy pattern of the world. It is well-known that FDI activity can bring many significant effects to host countries’ development. In this essay I will estimate such effects from three different aspects- the effect in wages, the effect in productivity and the effect in economic growth- by reviewing numerous relative studi es and try to find out whether host countries, especially the developing countries, can get benefits from foreign direct investment. 2. FDI And Host Country Wages In this section, I will explain to what extend does FDI influence host countries’ wages level. Whether local firms could benefit from the entrance or existence of foreign companies will be analyzed based on the previous studies. Firstly, let us take a look at the difference between foreign companies and domestic companies in regard to wages level. Almost all the available studies proved that foreign companies did pay higher wages in developing countries. Haddad and Harrison (1993) made a research on different companies’ performance in Morocco. They found that in unweighted means, foreign firms paid about 70% higher wages than domestic firms. According to weighted means, the foreign companies still paid higher real wages than domestic companies (PP.58-59). Higher wages paying by MNCs was also supported by some studies of other developing countries, such as Indonesia (Hill, 1990, Manning 1998, Lipsey and Sjà ¶holm, 2001). Lipsey and Sjà ¶holm (2001) reported that when taken the educational level into account, blue-collar workers can get 25% higher wages and white-collar workers can get 50% higher wages in foreign companies. In the conclusion part of this paper, the author stated â€Å"those higher wages for workers of a given educational level do not reflect only the greater size and larger inputs per worker in foreign plants, or their industry or location† (p.13). If considered all these factors, the foreign companies paid 12% and 20% more wages than domestic companies for blue-collar workers and white-collar workers respectively. Another evidence is taken by Ramstetter (1999), he did an research in five East Asian economies (Hong Kong, Indonesia, Malaysia, Singapore and Taiwan) and made a report that wages in foreign plants were higher than domestic firms over 14-23 years, but the differences were not so significant in Singapore and Taiwan.