Statement of the Problem
FDI is not only an important tool in providing finance for the acquisition of new plants and equipment, but also in the transfer of technology from more developed economies. FDI has some positive and negative effects in the local economy. Foreign Direct Investment is beneficial for the local economy in a variety of aspects such as: competition, knowledge, technology and training. However, it can be harmful if it results in closing down of domestic enterprises due to the economic inability of adopting the new technology. Furthermore, it is possible for the positive effects of FDI not to occur at all in the economy due to institutional obstacles or shortcomings in the absorptive capacity of domestic enterprises.
Among the most important welfare implications of foreign direct investments (FDI) is its effect on the economic growth of the recipient country. The empirical evidence on the relation of FDI and economic growth is ambiguous, although it is generally believed that foreign direct investment generates positive effects on the economy of host countries. FDI can play an important role in promoting economic development and modernizing a national economy through the capital financing it provides and the benefits to the local economy such as: managerial skills and know-how, the adoption of foreign technology, introduction of new processes and products by foreign firms, productivity gains, employee training and the creation of linkages between foreign and domestic firms. Because of this belief, many developing and industrialized countries encourage foreign direct investments in their economy.
FDIs’ levels increased during the last decades because of driving sectors such as trade liberalizations, higher rates of return on investment, cheap labor force and research for new markets. Most of these factors affected FDI in both developing and undeveloped countries, between them Albania, which has been considered by foreign investor as a country with a great potential. Especially during the last years, Albania had tried to attract investors by liberalizing the economic policies, improving conditions, and also by easing the way of doing business. These improvements affected positively the flow of FDIs, which increased in sectors such as telecommunications, industry, mining, banking, oil and tourism.
FDIs come into different forms but the most common are in the form of equity in new venture and capital increase in the existing foreign investment company. In Albania, FDIs enter via mergers and acquisition of state-owned enterprises through the process of privatization. The service sector is the most preferred one, where most of FDIs concentrated, in particular financial intermediation. All of these investments were a major reason for the positive rate of economic growth, from year 2008 to 2011, achieved by the Albanian economy.
Still, despite all of the advancement, there are still barriers that hinder investment, where widely...