Is there any impact of the interest rate, corruption perception index, and economic growth on foreign direct investment in developing countries?
Obviously there are a strong relation between these variables. I recommend toyou the paper of Marta Bengoa and Marta Sánchez Robles: "Foreign direct investment, economic freedom and growth: new evidence from Latin America".
I expect these answer where useful for you
Dear @ Farhan Nasim,
Thanks for the interesting question:
Is there any impact of the interest rate, corruption perception index, and economic growth on foreign direct investment in developing countries?
Finding the above question quite broad, I considered some critical aspects as a contribution to the debate.
Conceptually, FDI is a form of business where an individual, a company, a multinational agency or entity establishes an investment in a country beyond its borders and exerts long-term management and operations control over it. Therefore, FDI is a profit-driven business. In essence, answering the above question requires deep thinking on the potential impacts of the three variables on the profitability of FDI. The International development architecture led by the Breton Woods Institutions (IMF and the World Bank) often lead the crusade to prescribe economic, political, environmental and social conditions that must prevail for FDI to thrive and prosper in any developing country. The Structural Adjustment Programmes (SAPS) that were implemented globally during the 1980s and 90s are such vivid cases in point. It is widely argued that the prescriptions are aimed at fostering Foreign Direct Investment and economic growth in the host country by reducing risk of doing business therein. The prescriptions also always advocate for security and political stability characterised by sound institutional, legal and regulatory frameworks, and attractive incentives such as tax holidays inter alia to attract investment. To elucidate the point, the aforementioned SAPS forced the developing countries to reduce public spending on social services including education, health and infrastructure. The developing countries were also forced to privatise government assets, liberalise their economies and remove any conditions or phenomena considered barriers to trade inter alia.
Back to the potential impacts of interest rate, corruption index and economic growth on FDI:
Impacts of interest rate:- How interest rate affects profitability determines its impact on FDI. Ordinarily, a lo interest rate reduces the costs of borrowing and the cost of doing business, thus increasing profitability. On the contrary, high interest rates escalate costs of doing business, decrease profitability and diminish FDI inflow. Thus, low interest rate encourages inflow of FDI while high interest rates have the opposite impact.
Impacts of Corruption Perception Index:
Corruption perception index is an indicator of trustworthiness, transparency, accountability, and presence of sound legal, institutional and regulatory frameworks to foster governance. A high corruption perception index implies presence of high levels of corruption while a low corruption index portrays a low level of corruption in a country. So, a low corruption perception index instils confidence in the potential investors and encourages more FDI inflow. A high corruption perception index presents a reverse effect on FDI.
Impacts of Economic Growth:
High economic growth is associated with a flourishing economy, with high possibilities of making profits. Thus, high economic growth encourages FDI inflows. On the other hand, declining economic growth presents a negative impact on profitability with resultant reduced FDI inflow.
However, combinations of these variables may create either positive conditions that attract, or negative conditions that deter FDI depending on context.
Corollary to the above response, I consider that further reflections are required on the following questions for deeper understanding of the intricacies between the three variables and FDI in developing countries. Firstly, who and what are forces pushing for FDI? What are their interests and intentions? Who are the major players and beneficiaries in the FDI business? Who formulates, conducts and oversees the operationalization of concepts such as the corruption perception index and for what purpose? Are they applied universally? To what extent are the developing countries involved in such decisions and actions?
I is good or bad for developing countries to privatize government assets? What are it's effects?
Yes,there is a direct impact on foreign Direct investment, like Most of LDCs governments are much known for corruption tendencies,resources aren't invested to kick-start real development to alleviate abject poverty among vulnerable populations.
Money meant for economic and social services deliveries to ease the cost of doing business among citizens like for roads,Dams for rural electrification, Hospitals, schools and universities are embezzled,yet interest rates for these loans have to be paid,this adversely affects the common taxpayers most.
Robert Sabiiti (Dear sir, it is good or bad for developing countries to privatize government assets? What are it's effects?
there is a existence of strong relationship between these variables that you mentonned it. As some my freind mentionned above, i suggest you the same to read this paper writting by Marta Bengoa and Marta Sánchez Robles, this paper entitiled foregn direct investment, economic freedom and growth : new evidence from Latin America. i believe that it will be more useful for you.
Obvioulsy , there is a also some few previous research have been also conducted the same area , I recommand you to check it deeply .
I hope you can get more information through these recommendations.
Certainly many studies have established there is negative impact on Foreign Direct investment when there is a high corruption perception index in many developing economies.
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