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invests directly in new facilities to produce and/or market in a foreign country FDI has come to be seen as a major contributor

to economic growth and development by bringing capital, technology, management expertise, jobs, and wealth to host countries. However, FDI is not without controversy. The investments and operations of MNEs may affect national balance-of-payments, economic growth, and employment objectives in ways that are positive, neutral, or negative for both home and host countries. A. Balance-of-Payments Effects Although foreign direct investment involves both capital and earnings inflows and outflows, many people fear (irrationally) that the net balance-of-payments effects will necessarily be negative. 1. Place in the Economic System. If a country runs a trade deficit, it must compensate for that deficit by (a) reducing its capital reserves, (b) attracting an influx of capital via the receipt of foreign direct investment, (c) the purchase of public or private debt by foreign governments or individuals, or (d) the receipt of unilateral transfers (e.g., foreign aid). Ultimately, one countrys trade surplus is another countrys deficit. 2. Effect of Individual FDI. The effect on the host country of a single foreign direct investment may be positive, neutral, or negative. When FDI results in import substitution, i.e., when products that were formerly imported by a country are subsequently produced within that country, its foreign exchange reserves should increase. The formula for calculating the balance-of-payments effects is: B = (m m1) + (x x1) + (c c1) where B = balance-of-payments effect m = import displacement m1 = import stimulus x = export stimulus x1 = export reduction c = capital inflow for other than import and export payments c1 = capital outflow for other than import and export payments Although the equation is straightforward, determining the value of each variable is difficult because the data used must be estimated and are subject to assumptions. The net import effect (m m1) is positive for the host country if the FDI results in the substitution of local production for imported products and is negative if it results in an increase in imports to supply the new productive capacity. (The marginal propensity to import reflects the fraction of a change in imports due to a change in income, i.e., the portion of increased income spent on imports.) The net export effect (x x1) is particularly controversial because underlying assumptions are widely debated. That said, the effect is positive for the host country if the FDI results in the generation of

exports but negative if it results in a decline. (FDI may also stimulate home country exports of complementary products to the host country.) Net capital flows (c c1) are difficult to assess because of the time lag between an outward flow of investment funds and the subsequent inward flow of remitted earnings from that investment. Although initial capital flows to the host country are positive, they may be negative in the long run if capital outflows eventually exceed the value of the investment. Finally, indirect effects such as those derived from the transfer of technology and managerial skills are difficult to measure but may be critical to the development of the economic efficiency of the host country. 3. Aggregate Assumptions and Responses. Generally, FDI is initially favorable to the host country and unfavorable to the home country, but this effect may reverse over time if aggregate repatriated profits exceed the value of the initial investment. Thus, governments must learn to maximize the benefits while minimizing the long-term adverse effects of FDI flows.

Over the last decades, almost all developing Asian economies including Bangladesh have progressively adopted more open policies toward FDI and this trend is likely to continue in the foreseeable future.

DEVELOPING COUNTRIES (DCs) AND TRADE BALANCES Most Developing Countries can be expected to have negative trade balances. This is in part because a Developing Country's exports "are unlikely to be sufficient to pay for the importation of those raw materials and capital goods vital for growth, while official reserves are generally too small to finance a series of deficits" [Donnelly 1987:114]. However, if the inward FDI is primarily factor-seeking, trade surpluses may result for the developing country. This may be attributable to the positive effects of "trade-oriented investment" by the home nation. For example, post-1985 FDI in Asia is characterized, in part, by the export potential that host nations perceive to be the result of an influx of foreign multinational investment [Phongpaichit 1990:105]. More specifically, Kojima found that export-oriented investment by Japanese firms in Asian Developing Countries had a positive impact on national trade balances [Kojima 1991:436]. ____________
Foreign direct investment (FDI) is a potent weapon of economic development, especially in the current global context. It enables a capital-poor country like Bangladesh to build up physical capital, create employment opportunities, develop productive capacity, enhance skills of local labor through transfer of technology and managerial know-how, and help integrate the domestic economy with the global economy. This study reports high positive correlation between FDI inflows and Bangladeshs aggregate exports and imports. The net impact on the current account

balance and the balance of payments is positive. Bangladeshs investment incentives and regulations for FDI are found competitive with those offered by similar other countries. Effective implementation of these measures and success in attracting higher FDI inflows, however, needs significant institutional reforms, radically reduced levels of control, better provision of essential infrastructures, perceived improvement in investment climate, and sustained socio-political stability. ___________

Over the 1998-2007 periods, gas and oil, textiles, and trade and commerce dominated the first half in terms of FDI inflow whereas telecommunication sector was the highest recipient during the second half of the ten year period. On the other hand, gas and oil, and trade and commerce sectors showed better performance during the last two years but the textiles sector experienced declining inflow of FDI in the second half of the decade. Our findings suggest that the relationship between FDI inflow and trade balance is moderated by whether a country is an Advanced Industrial Nation or a Developing Country

There are two common types of factor-seeking investment. First, raw material-seeking investment is used to produce natural resource products lacking in the home country. Raw material-seeking investment increases exports from the host nation to the home country and to other countries [Root 1994:37]. Second, low-cost production-seeking investment takes advantage of low-cost factors as part of an overall global sourcing strategy and leads to an ability to export products from emerging nations. In this instance, the host country is able to increase exports and improve its trade balance Each type of FDI appears to have a different impact (at least in the short and medium run) on the balance of trade of the host country. Market-seeking investment appears to lead to trade deficits while factor-seeking FDI appears to be related to trade surpluses. This suggests that the type of FDI received by a country could have an impact on its balance of trade. Although it is likely that most countries receive both types of FDI, certain characteristics of a nation may make it more likely to receive one type of FDI than the other. We suggest that firms' motives for FDI vary in a systematic and predictable fashion and that these motives will manifest themselves in the aggregate patterns of FDI and trade balances. In

this paper, we present an indirect test of the aggregate effects of the differing dominant motives for foreign direct investment in DCs and AINs. Specifically, we hypothesize that the interaction of FDI flows and country type explains the pattern of national trade balances.

ADVANCED INDUSTRIALIZED NATIONS (AINs) AND TRADE BALANCES Defensive FDI and Trade Balances We suggest that AINs, such as the U.S. and much of the EU, which have large investment inflows and high per capita GNPs, will tend to produce consistently negative trade balances. Offensive FDI and Trade Balances

Two Examples: FDI and Negative Trade Balances Hipple [1990] examined intrafirm shipments in the U.S. by American affiliates of foreign firms. He found that intrafirm exports (from the U.S. affiliates) were far fewer than the same company's intrafirm imports (into the U.s.). Hippie summarized his findings as follows [1990: 502]: Comparing U.S.-based and foreign-based multinational firms, the data show that American MNCs did not perform as well. American MNCs, with their major presence in exports, suffered a loss of trade shares between 1977 and 1982. In contrast, foreign-based firms, with their major presence in imports, experienced no significant change in trade shares. Given the faster growth trend in imports over exports, the end result was a downward pressure on the balance in intrafirm shipments. Hipple concluded that FDI in the U.S. had an adverse affect on the American trade balance because it caused an increase in imports and only minimally increased exports. Orr [1991] also examined the effects of FDI on the trade balance of the United States. Orr's argument is that, in general, FDI has a negative effect on the trade balance of the USA unless certain specified conditions are met: "foreign-owned firms [must] switch to local suppliers of parts and components, manufacture products that displace imports, and begin to export their products" [Orr 1991:67]. Only if these conditions are met does Orr believe that FDI can have a positive effect on the balance of trade. AINs and Positive Trade Flows