Innovative Foreign Direct Investment Policy: Latvia’s Case

Abstract

As globalization accelerates, the influence of innovative foreign capital on economic development and employment level becomes more significant. However, the impact of FDI on the standard of welfare and economic development is controversial. The demand to promote or target innovative FDI has increased as it has been seen as an innovative tool to stimulate regions’ economic growth or intervene in economic structure changes by orienting it in the most favourable way for the host country. Interest in attracting foreign direct investment has increased since the 1980s as it is one of the external financing sources for both developing and developed countries. However, scientists still argue whether the impact of foreign capital on economic growth is positive or negative. Some researchers state that inward FDI is limited to a short-term positive impact. In contrast, others maintain that the performance of multinational corporations cannot harm the host country at all, and FDI only positively influences economic growth. Modern economic science questions whether it is worthwhile for the state to interfere with the market and stimulate the identified target business sectors with the help of innovative FDI policy. In this way, even significant market flaws are revealed, and some companies are doomed to fail. The benefits of FDI are obvious: the creation of new jobs, «know-how», and the tendency to increase exports. In this sense, the host country should attract specific MNCs motivated towards expanding business through research and development. The article proposes a targeted, complex, innovative FDI policy while applying the ANP method. The methods applied in this research include Analytic Networking Method based on the SWOT approach. The ANP has been chosen as a qualitative method based on the experts’ opinion, allowing determining the best or several alternatives. The findings & value added of the study demonstrated that to gain a competitive advantage, Latvia should attract more innovative FDI into the service business area, followed by manufacturing. The research contributes to the internalization theory while emphasizing the importance of promoting innovative FDI.