The foreign direct investment (FDI) is an
essential part of an open and effective international economic system and a
major facilitator to the development of a country’s economy. FDI is the
purchase of a significant amount of ownership or physical assets of a company
in another country to gain management control. Prostsenko (2003) stated
that there are two types
of FDI horizontal and vertical. In horizontal FDI the firms duplicate their
activities in different countries to avoid the transportation cost and trade
barriers. The vertical FDI refers to when companies outsource some production
stages in different countries to minimize the cost of production. Relating to
the theory of Hill and Hult (2017) there are two main forms of FDI. Firstly,
the Greenfield investment in which the company starts new operations whereas,
the second one is acquiring and merging with the existing host country’s

According to Hill and Hult (2017)
the attitude of the host country towards FDI is a vital decision about where to
locate the production facilities of the foreign companies and where to make
FDI. If the host country is trying to attract the FDI, the main point will be
that what kind of incentives the MNE will get from its investment. On the other
hand, the two main reasons for the multinational companies is to serve the host
country and to reduce their cost of inputs. The policies to attract FDI have
become standard in most of the countries for example: reducing the taxes,
improving labor cost position, focus on research and development, education and
training of workers (Bellak, Leibrecht and Stehrer, 2008). The most policies
used by the host country to attract FDI are tax concessions, low-interest
loans, and grants on subsidies for example Kentucky offered Toyota $147 million
to build an automobile assembly plan and along with it they provide incentive
package include tax breaks, new state spending on infrastructure and low
interest loans (Hill and Hult, 2017). If we take Pakistan as an example the net
inflows of FDI in 2016 was $1.9 billion due to security of environment, improved
economic stability and China Pakistan Economic Corridor (CPEC) resulting in the
improvement of inward FDI (Export.gov, 2017). Moreover, the free trade agreements
also play an important role to encourage more FDI, the great example is NAFTA
the FDI increased to $452 billion between the member countries (Amadeo, 2017). Additionally, other factors which boosts
inward FDI are: the market size, fast developing economy, availability of diversified
and cheap labour force, increasing improvement of infrastructure, public
private partnership, IT revolution, English literacy, openness towards FDI,
regulatory framework and investment protection (Bose, 2012). On
the contrary, the government policies can restrict the ownership in certain
sectors like in Pakistan the threshold is 60% in the agricultural sector and
the foreign investors cannot invest in the defense and broadcasting industries (Export.gov,

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The emerging economies, developing countries and
countries in transition increasingly looking for FDI as an instrument of
economic development and modernisation, employment and income growth (Oecd.org,
2002). For example according
to Zhang (2006) the economy of China increased with an average rate over
9% in 1978-2005 it was the highest in the world in that period. Furthermore,
the inward FDI emerges new employment opportunities e.g. the number of employed
persons in Pakistan increased from 50450 in 2008 to 56920 in 2013 due to inward
FDI (Gul and Naseem, 2015). Additionally, the FDI also increases the income of
the employees and the averages wages of foreign-owned companies are 30% greater
than domestic companies (The Impact of Foreign Direct Investment on Wages and
Working Conditions 2008). Additionally,
the FDI make an encouraging contribution to the economy of the host country by
providing capital, technology and management (Hill, 2000). FDI produces a positive effect on
the economic growth in the host country. One convincing point for that is it
consist of a complete package including capital, technology, management and
market access. For FDI, the repayment is required when the companies make
profit and they have to reinvest rather than remit abroad (Khan and Kim,
1999). Moreover, the FDI bring
economies of scale and increase the productivity in different sectors as new
technologies are introduced. FDI helps to setup the infrastructure and provides
a comparative advantage to the host country. As reported by Khan (2017) the Groupe Renault is
entering Pakistan to assemble and distribute its vehicles in Pakistan. Likewise,
it also have a positive effect on the competition in the country. South Korea
is the best example when large western discount stores like: Walmart, Costco,
Carrefour and Tesco provided indigenous discounts more than competition which benefited
the South Korean consumers. To add more the FDI aid the host country to make a
positive balance of payment. For example China’s exports increased from $ 26
billion to $ 1.9 trillion in 2012 due to the investment of multinationals
investment in china during 1990s (Hill and Hult, 2017). Lall and Streeten (1977) emphasize
on three kinds of managerial benefits. Firstly, managerial efficiency comes
from better training and higher standards. Secondly, entrepreneurial capabilities
strengthens when seeking out investment opportunities and thirdly,
externalities arise from the training received in different fields.


However, there are some costs of
inward FDI for the host countries that, it have an adverse effect on the
competition, balance of payment and the national sovereignty and autonomy. After
FDI there always threat that a giant MNE can monopolize the market by acquiring
the small companies or by selling the products on lower prices which will wipe
out them from the market (Hill and Hult, 2017). Unilever the largest multi-national
company merged with the Polka ice-cream company in 1996 and now it is known as
wall’s not Polka as it acquired the relatively small company and rule the
Pakistani ice cream industry for many years (Jones and Miskel, 2007). Moreover,
the FDI have a negative effect on the balance of payment if the MNEs imports material
from abroad and outflow of earnings.    

National sovereignty and



FDI is one of the significant instrument which
can help an economy to grow rapidly and to cope up with the hyper competitive
and ever changing global business environment. The MNE are looking to capture
new destinations and new market therefore they look for such countries where
the government policies are attractive. The political ideology formulates the
government policy towards the FDI. The host country enjoys many benefits of FDI
as it improves the balance of payment due to the inward flow of foreign
earnings, positive employment effect as the MNE’s create jobs in the region and
give higher wages which enhances the standard of living in the host country and
when the MNE uses their resources in the host country they provide training. The
MNE brings new technology and managerial skills and provide knowledge to the
host country’s employees which improves to their skills. The FDI brings a positive
competition in the market which provide a variety of choices to the consumers
and they get quality products in low prices.          

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