The Effects of Foreign Direct Investment in the GDP of Developing Economics

The foreign direct investment or FDI, its attraction play to be one of the best strategies that developing country uses in enhancing capital formation with target to generating a higher rate of GDP. Most emerging developing countries have attracted considerable amounts of FDI accompanied by a remarkable growth in GDP. There has been witnessed theatrical increase in FDI to developing countries, with foreign direct investment increasing from a total of $24 billion in the year 1990 to a total of $178 billion in 2000. This sounds welcome news, specifically for poor nations that have no access to the international capital markets. However, Africa considered the poorest region did not gain from the foreign direct investment boom despite instituted efforts to attracting FDI. The inability to attracting FDI proved to be troubling since it has significant to the area. The core reason being that FDI lays the much-needed capital meant for investment.

Moreover, FDI supplement technology, managerial skills and employment, and therefore accelerating growth and development. The role played by FDI as a capital source has increasingly become crucial to SSA or sub-Saharan Africa (Kitanov, 2010). This stems from perceived fact that domestic savings and income levels in the area are very low. Consequently, external capital is required to complement domestic savings in anticipation to spur growth and investment. Most states in SSA cannot access international capital markets that make them rely on two types of foreign finance: official loans, example being multilateral organizations loans and FDI. This has made it imperative for countries in SSA increase their share of FDI for them to compensate for the declination in official aid. Unfortunately, for majority countries in the area, efforts to draw foreign direct investment have been futile.

The effects can be summarized as following: First, states or countries in SSA have on average been receiving less FDI compared to states in other areas by virtue of geographical location. Secondly, higher return on infrastructure development and capital promote foreign direct investment to non-SSA states, but has no considerable impact on flows of FDI to SSA states, ceteris paribus, Thirdly, openness to trade or business has a significant positive impact on foreign direct investment flows to both non-SSA and SSA countries. In addition, FDI to SSA tend to be less responsive to emerging changes in openness compared to FDI of other areas.