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Additional Factors Which Might Be Considered When Examining The Impact Of Foreign Direct Investment On Economic Growth. Using Brazil As A Case Study.

3224 words - 13 pages

Brazil has received notable levels of inward investment over the past few decades which has not resulted in the higher growth rate as economic theory would assume. Often the negative impact of Foreign Direct Investment (FDI) is attributed to the state of various factors of the market, such as the role of institutions and government policy or the deficient 'absorptive capabilities' of local labour.Current literature suggests it is the strategic link to several dependant variables which will influence the successful impact of FDI on the economy. This paper accepts this premise and develops the theory further, by suggesting there are additional factors or 'characteristics' of FDI which will facilitate the needed strategic links to the dependant variables. Ignoring these characteristics may lead to the strategic links not eventuating and therefore, the resulting benefits on economic growth not occurring.This paper argues it is the mode in which FDI was attracted to Brazil, which failed to allow the benefits of FDI to be fully realised. This paper further suggests, there may be sectors within an economy which will allow the dependant variables of FDI to develop more than other sectors.This paper concludes that little focus to date has been offered to these additional factors and their impact on economic growth. Given their significance in the case of Brazil, further detailed analysis across several countries is required to support the initial theory.The structure of this paper is as follows; Section 1, presents a summary of the literature in FDI and economic growth theory; Section 2, outlines Brazil's approach to FDI and outcomes; Section 3, provides analysis and discussion of the issues focussing on mode of FDI and sector of investment; Section 4, presents some concluding comments.Section 1: FDI and Growth theoryFDI enhances economic growth because it substitutes domestic savings and investment and because it brings productivity spill-over from foreign owned to local firms (Mencinger 2003).Endogenous growth theory places great importance on the spill over benefits of new technologies and human capital which FDI can provide to a developing economy generating increasing returns and long term growth. Broadly, despite some derision research is supportive that FDI can lead to economic growth, when certain factors in the productive capabilities of the host country are met;Trade Volumes: De Mello (1999) concluded the impact of FDI on economic growth was positive but dependant on trade volumes. Balasubramanyam (1995) found that the positive effect was linked to the countries orientation to trade. FDI enhanced economic growth in countries with an export promoting (EP) trade strategy compared to a strategy of import substitution (IS). In testing the hypothesis of Bhagwati, Balasubramanyam was able to confirm, that EP countries attract a greater volume of FDI and enjoyed greater efficiencies in the form of social returns from the investment. However, he did...

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