Foreign Direct Investments, Essay Example

Foreign direct investments have contributed to the erosion of state control

States are in most cases confronted with issues related to multinational corporation, MNCs growing power that supersedes the sovereignty of the state (Blalock & Paul, 2005). According to the arguments of anti-globalists multinational corporations are more of a nuisance than a benefit to the economies of the states. However, some findings from research have indicated that multinational corporations offer foreign direct investment, FDI to the states which plays the role of promotion as well as sustenance of development in most of the states. The research also indicates less development in countries that deter FDI from MNCs. Consequently, majority of the states have opted to rely on FDI from MNCs for integration of economy to international economy therefore motivating development. The heavy reliance consequently makes the MNCs to be extremely powerful in the context of global systems making them indispensable in international financial activities as well as growth (Carkovic & Ross, 2005). Notably therefore, foreign direct investments has contributed to the erosion of state control and an inquiry in the influence of MNCs on international systems is imperative.

The inherent power in MNCs lies behind their production knowledge. This is further compounded by their progressively more intricate understanding of how to embrace the advantage of dynamic political situations with regard to political systems coupled with the mechanisms of influencing the state policy for the purposes of gaining legitimacy (Blonigen & Miao, 2005). The ultimate goal behind the activities of MNCs is achievement of efficiency together with profitability, thus they make all efforts to access as many market corporations as possible in attempts of taking advantage of potential uncertainties evident in global events and consequently enhance their acquisition of wealth. Due to the high potentials for investment inherent in MNCs coupled with changes in the costs shifts production that oscillate between the high cost countries to the low cost countries, the MNCs acquire sufficient power to chose the country of their preference. In case any of the country gives an unfavourable response to the suggestion of MNC, they decline their investments in that country and that opportunity is given to another country whose opportunity cost is lowest.

Due to the high degree of dependency on FDI from the MNCs, the powers of the states are being eroded. The role that the MNCs play in the economies of developing as well as developed states is so significant to the extent that they are able to erode the powers of the states. MNCs are also able to develop in international systems and show extremely high efficiency in their allocation of the scarce resources to the extent that profits are maximized and returns to shareholders are met. There are two possible paths towards the achievement of development in a country. The first one involves reliance on foreign aid and the second one is reliance on FDI (Blonigen & Miao, 2005). For a state that is striving to achieve development and sustain its healthy economy, a problem arises due to the power that is wielded upon them by MNCs. The problem is however not as severe in the developed states due to the stability of their governance systems together with lesser degree of dependence on FDI. Promotion of sustainable development in some states requires their reliance of FDI from MNCs. It is a common practice for majority of governments to promote sustainable development which is consequential to higher tax revenues. The high levels of tax revenues is a catalyst for expansion and implementation of programs and policies in the government. Developed and near developed countries are characterized by political stability which is the aspiration for all governments. It is common sense that floundering economy is a feature of governments that face extremely high risks of collapse (Blonigen & Miao, 2005).

States that are economically developed depend on their domestic investments for their sustainable development. However, even if a country is economically developed, failure of integration in the global market would most certainly lead to stagnation and lagging behind other states at similar levels of development. The need for integration of a state in the global economy is to facilitate a free flow of goods, ideas as well as services between governments which is a favourable catalyst that promotes sustainable development in states that participate in these activities (Blonigen & Miao, 2005). Retention of open borders is therefore imperative for the developed nations which give way for FDI in the economies of these states for the sake of perpetuating competitiveness. Majority of the states that play host to MNCs to offer services of FDI consider the foreign direct investment as a paramount opportunity that facilitate integration of their economies in international markets while at the same time promoting economic development for that country. The countries are confident that, FDI plays a vital role in cultivating development in a number of ways. This includes areas such as provision of health coverage and high magnitudes of research and development (Blonigen & Miao, 2005). FDI is extremely indispensable for development in developing nations while in developed nations, the role played by FDI involves its integration in international market and maintenance of its competitiveness (Blonigen & Miao, 2005). Consequently, FDI is essential in the economies of all countries. It may prove difficult to track down the entire causal mechanisms associated with economic growth but it is clearly evident that, FDI has a special role in the promotion of the economy of every country. For the developed states whose economies are relatively large a clear understanding of the response of their economy to the FDI, domestic investment and public policies is almost impossible. This is in contrast to the case of developed states where FDI is directly connected to economic growth, consequently, a clear line exist between the developed and the developing countries with regard to the positive effects associated with FDI on their economic growth. With efficient application of measures and controls and also division of statistics in relevant samples, promotion of economic growth by FDI is clearly indicated through empirical evidence which consequently promote development of the state in the broader sense. Findings from research point out diverse positive spill-overs associated with FDI on application of appropriate policies as well as conditions. Examples of these spillovers are wag, production, technological, higher cases of research and development, domestic supplies and lower prices. FDI can also reflect some differences of development to stagnation in some states and improved living standards in others (Blonigen & Miao, 2005). FDI is also associated with competition effect in which case incentives for attraction of higher wages leads to attraction of more workers and higher investments in research and development which are potential catalysts for competition. This therefore increases the level of production that in turn lowers the costs of goods and services which is beneficial to domestic supplies as well as domestic competition. The quality of living is generally enhanced in the country. The competition attributed to FDI has been documented to motivate local supplies along with domestic competitors in enhancing their industries.

MNCs use special interest groups together with lobbyists to wield their influence on governments due to their significance in legislative processes of the government. Efficient creation of policies by governments requires division of workload among diverse agencies. MNCs however do not limit their political influence for achieving wasteful projects but they strive to legitimize their presence in the government. The primary achievement for MNC is to make sure that all their companies are legitimate in the law of the state, their culture and entire society that they intend to make investments. This is the basis of their ability to operate in the boundaries of their host country.

Conclusion

The high efficiency in the operations, management as well as coordination of business transactions in states confers the relevant power to MNCs. This power then becomes the concern of the state as they are the determinants of prosperity in that particular state. States are greatly alarmed by the absence of MNCs in contrast to their presence. However, the host country is not rendered completely ineffective and useless by the virtue of the presence of MNCs because they are the ultimate providers of the necessary basic rights which is never a preserve of any MNC. States are also responsible for creation of self identity, loyalty as well as pride which cannot be provided by any MNC. The critical role of the government in the provision a suitable environment for all cannot be underestimated. The states remain the only option for providing countervailing force for their citizens.

Bibliography

Blalock, Garrick, Paul J. Gertler. 2005. Foreign direct investment and externalities: In Does foreign direct investment promotes development? Washington, DC: Institute for International Economics.

Blonigen, Bruce A., Miao G. Wang. 2005. Inappropriate pooling of wealthy and poor countries in empirical FDI Studies. In Does foreign direct investment promote development? Washington, DC: Institute for International Economics.

Carkovic, Maria, Ross Levine. 2005. Does foreign direct investment accelerate growth?. In Does foreign direct investment promote development? Washington, DC: Institute for International Economics.

Hanson, Gordon B. 2005. Comment . In Does foreign direct investment promote development? Washington, DC: Institute for International Economics.