SOLUTION: ECON 4014 South Florida How Does FDI Affect Economic Growth Discussion

Attached. Please let me know if you have any questions or need revisions.Foreign Direct InvestmentHOW DOES FDI AFFECT ECONOMIC GROWTHStudents NameCourseProfessorInstitutionDate1Foreign Direct Investment2HOW DOES FDI AFFECT ECONOMIC GROWTH?Foreign direct investment (FDI) affects the economic growth of a country either positivelyor negatively. However, many research findings focus on the positive impact of FDI on theeconomy and treat the negative impact as insignificant. Therefore, many are the times that FDIwould be associated with multiple benefits that promote economic growth. Many academiciansargue that FDI promotes the transfer of technology, expertise that contributes to human capitaldevelopment, uplifts competition in the domestic market, and increases revenue in the hostcountry (Pegkas, 2015). On the other hand, FDI can negatively affect the economy in that thedomestic companies face stiff competition and may push them out of the market. FDI can alsolead to increased net imports and lead to a high outflow of the investors’ profits. This scenario isdangerous to the economy as it causes damage to the payment balance of the host country. Acountry with a damaged payment balance and a declining number of domestic investors cannotrealize economic growth.Based on the research done in Latin American countries, empirical evidence suggestedthat the effect of FDI on economic growth cannot be treated as statistically significant inaggregated form. Therefore, the research findings had to be analyzed according to three levelsof high-income, upper-middle-income, and lower-middle-income economies. High-incomecountries recorded a positive and significant effect of FDI on the economy while the effect wasuneven and non-significant in upper-middle-income countries (Alvarado, Iñiguez and Ponce,2017). However, the effect of FDI on economic growth is negative in lower-middle-incomecountries. This means that only the high-income countries in Latin American enjoyed the fullbenefits of foreign direct investment. High-income and developed countries across the globebenefit the most from FDI because they get new technical know-how, increase productivity,create better-paying jobs, improve their workforce skills, and generate business for local firmsdue to foreign direct investment. These developing nations’ economies are diversified, andinvestment in these economies is less risky compared to the developing nations. Therefore, it isexpected that foreign direct investment in a developed nation will likely succeed because themarkets are already developed and well-organized (Alvarado, Iñiguez and Ponce, 2017). Thereare higher profitability opportunities for foreign investors in high-income countries than in lowincome countries. The less developed countries such as Nigeria encourage foreign investmentwith the aim of transferring capital and technology from the developed and even developingcountries to the domestic market (John, 2016). Recent research findings indicated that foreigndirect investment has a positive impact on Nigeria’s economic growth, contrary to popular beliefForeign Direct Investment3that FDI does not have a significant impact on economic growth in Nigeria (John, 2016). This isan isolated case where foreign direct investment positively impacted a less developed hostcountry’s growth of the economy.However, FDI does not always bring benefits to the economy, but it also disrupts theeconomy. The negative effect of FDI on the economy is distinctive in the less developed orpoorer countries. A research study on the relationship between FDI and economic growth of thehost nations conducted in 70 countries between 2000-2009 indicated that the relationshipbetween domestic entrepreneurship and FDI inflows was negative (Danakol et al., 2017). Thenegative effect was attributed to stiff competition to the domestic industries, especially themanufacturing industry. When foreign investors set up their businesses in the host countries,they set in the stage for stiff competition with the domestic investors. However, the foreigninvestors are advantaged because they have advanced technol…

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