Positive and Negative Impact of FDI (Foreign Direct Investment) on a Country’s Economic Development

Abstract

Over the past three decades, the world has witnessed massive growth in Financial markets both in terms of their scale and scope. The global value of financial assets including equities, government and private debt, and bank deposits increased from mere US$ 12 trillion during 1980 to US$ 64 trillion in 1995, and further, it has grown to US$ 140 trillion by 2005. The global financial assets have grown more than ten-fold within a quarter-century. The growth of financial assets has far outstripped the global GDP growth which has increased from US$ 10.1 trillion to US$ 44.5 over this period. The increase in cross-border financial activity has been increased even more unprecedentedly for the last few decades. Worldwide cross-border capital flows –which include foreign purchases of equity and debt securities, cross-border lending, and foreign direct investment (FDI)-have grown at an average annual rate of 10.7% since 1990 and reached a level exceeding US$ 6 trillion in 2005 (Farrell cited in anon 2011). As Escaleras (2011) argued that in order to appreciate the dynamism of FDI it is important to recognize that total net foreign direct investment inflows rose from about $10 billion in 1975 to an astonishing $532 billion in 2004. Natural disasters around the globe also increased dramatically during the past half-century. Exhibit-3 depicts the growth in major, destructive natural disasters such as earthquakes, floods, volcanoes, landslides, and windstorms for the period 1935-2004 (Escaleras 2011). In this paper, we will explore the mechanism of Foreign Direct Investment, how it is contributing towards the development of a country’s economy, and moreover improving the standard of living of the particular countries. We will also examine why FDI is important for the developing world for eliminating poverty. Also, we will critically analyze the negative side of FDI and its negative influences on a country’s economy and cultural aspects. Finally, we will examine and correlate the increase in natural disasters and the FDI flow of the respective countries.