SIGNIFICANCE AND INFLUENCE OF FOREIGN DIRECT INVESTMENTS

Abstract

Foreign direct investments refer to direct inflow of investments in a country’s economy, and as such they are not a mere transfer of capital from one country to another, but rather an investment package containing new technologies, managerial knowledge and new markets. Foreign direct investments are motivated by economic interests, primarily by profit. In the past two decades, we have witnessed a huge expansion of foreign direct investments, which coincided with globalization. It is difficult to distinguish whether globalization is a result of expansion of foreign direct investments or vice versa, however the synergy between these two occurrences is unquestionable. In some previous years, the so-called „greenfield“ investments used to prevail, however nowadays the more significant foreign direct investments are done by mergers and acquisitions (M&A).

This paper covers three research activities conducted in different time frames, at a sample bigger than 20 countries. The research showed significant positive influence of foreign direct investments to the GDP, and the influence was bigger in the more open economies.

Not all forms of foreign direct investments have equal effect on economic growth, and the growth is conditioned by the available human capital in the host country. The effects are negative in countries with low human capital.

Growth rates in developing countries are partially explained by the level of technology development. The foreign direct investments of multinational corporations are considered to be the main channel to access advanced technologies for developing countries. The multinational corporations possess the more advanced knowledge that enables them to introduce new capital goods at a lower price. The application of advanced technologies, however, requires the sufficient amount of human capital in a host country’s economy.

Regardless of the various theoretical stances, the foreign direct investments have become one of the most significant economic factors.