Academics and policy makers take Foreign Direct Investment (FDI) to be an important source of productivity from the host nation. Apart from supplying the needed capital, FDI acts as a good source of valuable technology while at the same time fostering linkages with local firms thus jump starting an economy. However, there are still some issues which need to be put into consideration if economic growth and FDI are to show a positive relationship.
Policy holders believe that some Foreign Direct Investment projects have a better output than others. This is quite the opposite of what academics think about FDI since they consider it to be a homogenous capital flow. National policies on the other hand tend to follow the views of policy holders by attracting some types of FDI while at the same time regulating others. This action shows that there are some FDI projects which have a huge impact to the economy considering how governments are treating them.
Policy holders may be right in their arguments considering how the growth of FDI varies across industries. Being specific, the potential advantages which may be derived from Foreign Direct Investment across the primary, manufacturing and services sector show a significant difference. However, this is not the only difference that exists since there may be some dissimilarities among industries within a sector.
Many people find it hard to determine the different qualities of Foreign Direct Investment when re-examining the relationship between economic growth and FDI. This is mainly because they fail to understand the impact of a given unit of FDI on the growth of an economy. In addition to this, it is also difficult to measure the project characteristics of FDI and thus causing more problems.Fortunately, you can use the industry level analysis to differentiate Foreign Direct Investment based on the industry-level characteristics.
The relationship that exists between FDI and economic growth at the industry level tends to be stronger in industries which are more reliant on external capital. This also applies in industries with higher skill requirements as they both show the same characteristics. These findings not only show consistency with the current macro literature and benefits of FDI but also act as important evidence of cross-industry differences in the effects of Foreign Direct investment.
To understand the growth and quality of Foreign Direct Investment, you have to make use of suitable techniques. However, you will first have to consider the best technique which guarantees maximum results. The good news is that the success of any matching technique solely depends on your ability to correctly predict the probability of a given industry being targeted. For this reason, you have to make use of a good predictive model, if you are to support all the findings.In conclusion, it is true to say that FDI is not equal as academics put it. However, this is still subject to further research and hence any notion may be true so long as there is supporting evidence.