Foreign Direct Investment Essay Example | Topics and Well Written Essays - 1500 words

Foreign Direct Investment - Essay Example (1) Over the same period, these countries also achieved a substantial increase in their exports, especially towards Western Europe. The question we address in this paper is whether FDI inflows have been a significant determinant of export growth in 12 CEE countries. To do so, we use a pooled data for the period between 1996 and 2004 and attempt to account for the effects of FDI on host economy exports. We separate the potential effects into supply-increasing effects (capacity effects) and FDI-specific effects. The supply-increasing effects arise when FDI inflows induce increases in the host country's production capacity, which, in turn, increases export supply capacity. The FDI-specific effects arise because foreign capital inflows may incorporate different competitive advantages, such as superior knowledge and technology and thus, higher productivity, or better information about export markets as compared to local firms. We believe that differentiating between these two effects of FDI on exports is especially important in terms of policy implications. It is often argued that successful FDI-promoting policies sh ould lead to, among other things, a significant increase in the host country's exports. ... In the following section, we provide a discussion of potential channels through which FDI may affect exports. Based on the discussion in this section, we present our empirical model in the next section. The empirical results are presented and compared to those of previous studies in the penultimate section. The last section concludes the paper. Effects of FDI on Exports - Theoretical Arguments This section discusses some theoretical arguments regarding the different potential effects of FDI on the host country's exports. Theory of Multinational Enterprise The theory of multinational enterprise (MNE) examines conditions under which firms may undertake FDI and become MNEs. (2) Such decisions may have consequences for host country's exports and it is a goal of this section to review parts of this theory that predict effects of inward FDI on host country's exports. Overall, the theory indicates that positive effects of inward FDI on a host country's exports may be expected when the host country and a home country have different factor intensities. In this case, the MNE may outsource some segments of its production process to the host country and export these (intermediate) products back to the home country (as well as other countries). Similarly, when the host country has a cost advantage and costs of trade are low (as compared to the trade costs of the home country), the host country may be used by the MNE as an export platform for serving its home market, as well as other markets. The starting point for the theory of MNE is the idea that firms must have certain advantages in order to become multinational companies. Dunning