El concepto de riña

Unfortunately, one cannot underestimate the dangers that exist within in a closed economy.

FDI is considered amongst one of the many tools that make it possible for an economy to extend beyond its borders and often drive international trade, competitiveness, growth and sustainable development.

2.3.1 Foreign direct investment: noticeable spectrum of benefits

Many benefits can be realised by the very presence of FDI. According to Loots (2000 pp.2-17) these include transferring technology and management skills, stimulating competition, improving human capital, widening access to new markets, forcing integration between foreign markets and enhancing job creation.

2.3.1.1 Transfer of technology

The transfer of technology from one region to another does not necessarily imply that the transfer of technology follows any specific direction, or that the movement would be from a more technologically advanced region to a less technologically developed economy.

However, the flow of technology, whether horizontal or vertical, may ultimately be beneficial to a domestic economy (Loots, 2000, pp.2-17).

2.3.1.2 Transfer of management skills and improvement of labour production

The process of FDI may lead to the transfer of management skills and an improvement of the host country’s managerial and labour productivity. This would be especially true if an element of competition was introduced into the local market, forcing local players to be more competitive by streamlining managerial structures. Investing organisations induce local competition that may stimulate local producers of related or substitute products to improve on the level of efficiency of production in order to remain competitive (Loots, 2000, pp.2-17).

2.3.1.3 Improvement of human capital through skill transfer

FDI may lead to an improvement of human capital through skill transfer such as training programmes provided by the investing companies and the spill-over effects that this may have on local companies (Loots, 2000, pp.2-17).

2.3.1.4 Access to new markets

Foreign direct investment may create access to new markets for both the local economy and the foreign entity, which may lead to the further expansion of such markets into neighbouring country industries and economies (Loots, 2000, pp.2-17).

2.3.1.5 Stimulation of market forces

FDI may lead to the stimulation of market forces such as increasing economies of scale, both internal and external, which may lead to enhanced competition in the domestic market (Loots, 2000, pp.2-17).

2.3.1.6 Integration of domestic and foreign economies

The presence of multinational corporations and foreign companies in the host country may force the integration of the domestic and foreign economies, which may assist in breaking the classical North-South barriers and enhance the co-integration between developed and developing economies. This may become more relevant as the integration of the company in the host country and the foreign companies become more coordinated through the mutual sharing of resources, values and skills. Foreign direct investment may lead towards political, social, environmental and economic integration between countries (Loots, 2000, pp.2-17).

2.3.1.7 Reduction of regional restrictions

The growing presence of trade that may become apparent as FDI establishes itself in the host economy and the reduction of regional restrictions such as the establishment of multilateral and bilateral free trade agreements (which are not mutually exclusive with FDI), may create an environment which is less politically and socially exclusive between the countries concerned (Loots, 2000, pp.2-17).

2.3.1.8 Job creation

Depending on the types of investment concerned, the presence of FDI may under certain circumstances result in enhancing job creation, improving export performance and widening the tax base (Loots, 2000, pp.2-17).

2.3.2 Measurable differences in benefits of foreign direct investment

Despite the numerous positive factors that are inherent in countries with flowing streams of FDI, the strong growth effects popularly related to FDI cannot be taken for granted.

Similarly, the benefits derived from one country may not be the same as those derived from another economy, even if the economies were very similar. In other words, FDI cannot be considered a homogeneous factor, neither can the benefits derived by a host be an automatic process. Therefore, despite the perspective that multinational corporations can be seen as important agents in developing and complimenting a country’s comparative advantage, the effects are not guaranteed and they may be equally destructive to a host economy or its neighbouring states (Nunnenkamp, 2002, pp.2-12).

Cutter (2003, p.3) highlights the study by Epstien, Crotty and Kelly who suggest that identical levels of FDI in different developing countries will have different levels of effect on each of those countries, and consequently there will be measurable differences in the benefits absorbed by the individual host economies. This ultimately depends on the existing levels of aggregate demand within the market, as well as the number and nature of regulations concerning competition and economic freedom.

2.3.3 Foreign direct investment benefit process is dependent on linkage between economies

Cutter (2002, p.3) points out that, as Andres Rodriguez-Clare states, the degree of benefit derived by the process of FDI in developing countries is dependent on the generation of linkages between economies. The linkages between countries are a central concept in the theory of globalisation. Furthermore, three assumptions concerning linkages are highlighted: the efficiency of production, physical proximity and market size.

2.3.3.1 Efficiency of production

Economic linkage occurs in line with stimulating productive efficiency and creating a comparative diversity of local goods and services. Higher levels of linkage are characterised by a higher variety of specialised inputs - a positive linkage effect. Lower levels of linkage are characterised by a lower variety of specialised goods - a negative linkage effect. Some of these networking linkages between multinational corporations and the host partners are initially of a contractual nature. They tend to be common in an industry where there is a small and diminishing technological gap between the multinational corporations and the local partner industries. Therefore, as an emerging economy becomes more technologically capable, developing its own skill base and expertise, additional foreign direct investment will possibly be attracted into those regions, thus complementing the linkage effect (Cutter, 2002, pp.3-4).

The efficiency of production can be improved by a wider variety of specialised inputs. The emphasis on a larger variety of specialised inputs is important in that the more specialised a production process is, the greater its comparative advantage. The more of these specialisations there are within an economy, the greater the overall competitiveness of the economy becomes. This is relevant when looking at the “flying geese pattern” of investment. It denotes that as one industry develops, creating its own infrastructure, the more other related industries that are either directly or indirectly supportive of the former, will advance into the region. As the former industry moves into a new region, it will create

its own new infrastructure, while the preceding infrastructure too will continue to develop and evolve (Cutter, 2002, pp.3-4).

2.3.3.2 Physical proximity

A suitable physical proximity is necessary between the supplier (and producer) of inputs and the user (or consumer) of the final goods. This embodies the demographics, geographical location and the geo-political position of the industry. Issues such as transportation costs are also relevant, as well as population and market dynamics. In a truly global economy, and assuming that transportation factors are negligible, this argument may be weakened. However, critical factors such as time to market, risk factors associated with individual regions, regional policies and regulations play a role in the proximity argument (Cutter, 2002, pp.3-4).

2.3.3.3 Market size

Lastly, market size may play a role in the manner in which the market functions and may determine the extent and duration of the derived benefits. Income distribution, demographic factors, level of market absorption and product characteristics are imperative in this regard (Cutter, 2002, pp.8-10).