Foreign direct investment and Employment Essay Example | Topics and Well Written Essays - 2000 words

Foreign direct investment and Employment - Essay Example Mirza (1998) states that movement of labor and links with domestic subcontractors enable transmission of business culture, which involves corporate values, organizational structures and management practices (qtd. in Mickiewicz et al. 2000, p. 5). Michalet (1997, p.1) tells that over the last two decades, more and more developing countries have changed their attitude towards foreign direct investments that instead of fearing, limiting or even banning the entities, they have not only welcomed it but are competing to attract them. Foreign direct investment is an important source of external finance in transitional economies particularly those in Central Europe (Lansbury et al. 1996, p.104) as it helps to cover the current account deficit, fiscal deficit [in case of privatization-related FDI], and supplements inadequate domestic resources to finance both ownership change and capital formation (Krkoska 2001, p.1). Since 1988, around 70 per cent of FDI in transitional economies has been channeled into these countries. Deutsche Bank Research (EU Monitor 2005, p.14) reports that foreign direct investment in Central and Eastern European countries (CEECs) rose almost tenfold between 1994 and 2003 - from USD 20 bn to USD 197 bn. It also reported that in terms of FDI in relation to GDP, there was an impressive increase from 6.9 per cent to 33.2 per cent.1 Lansbury et al. also contend that FDIs may have played an important role in transforming the formerly centrally planned economies of Central and Eastern Europe as FD Is provide an important source of investment for modernizing the industrial structure of these countries and improving the quality and reliability of infrastructure. Sader (2000, p.2) states that because public industrial structure have relatively low priority for cost-effectiveness and profit generation [which is the opposite for private firms], excess staffing and low-quality service provision results. FDIs, through private lenders and equity investors, provided infrastructure services around the world through full-scale privatization of public sector entities, the construction of new facilities with private capital on the basis of build-operate-transfer (BOT)-type investments, lease arrangements, and operation and management (O&M) contracts (Sader 2000, p.2). A study done by Dimelis and Lauri (2004) using Greek firms as samples confirms that an effect of foreign direct investment on host economies is increases in productive efficiency. Lansbury et al. add that new investments may also bring badly needed skills and technologies into the host economy. Evidences compiled by Lane (1994) in Hungary show that multinational firms had a higher propens ity to trade and invest than purely indigenous ones (qtd. in Lansbury et al. 1996, p.104). Foreign direct investment is important not only as generator of new employment but also as agent that can change the structure of employment in the direction that would be more favorable for a long-term growth of CEECs, that is, more likely to happen if FDI is diversified, according to Mickiewicz et al. (2000, p.7). In their study on the employment effects of FDI on four sample CEECs2, Mickiewicz et al. found out that foreign direct in