FDI And Global Integration

FDI contributes to the integration of the host country into the global economy, particularly through the financial flows received from abroad (OECD, 2002). This relationship is also demonstrated by Mencinger (2003), who provides evidence of a clear link between the increase of FDI and the rapid integration into global trade. This integration generates economic growth which is increased as the country becomes more open (Barry, 2000). The local firms’ integration in the global market is also made by copying and attaining of knowledge held by the multinationals. Multinationals have higher knowledge about internationalization because they have already gone through this process. Among the main competitive advantages held by multinationals are the

This may lead local firms to follow the multinationals to other markets or even replace other suppliers in multinationals subsidiaries in other countries (OECD, 2002). The OECD (2002) study refers to the trade associations that multinationals are generally prominent members, as important sources to pass knowledge about the world market, because they are a center for exchange of relevant experiences. It also says that in response to requests from multinationals, local authorities can create infrastructures (particularly transportation infrastructures) that will benefit international trade and local firms that also will use them successfully in their internationalization. This fact is evidenced by Gunaydin and Tatoglu (2005) which indicate that these consequences of FDI facilitate the distribution of raw materials that exist in the host country. Additionally, Ford (2008) assert that multinationals tend to include their suppliers in international networks to which they belong, so that local firms are involved in global trade by establishing relations with other international entities (Ford,

Mecinger (2003) suggests that FDI has a far greater impact for imports than for exports, which influences negatively the balance of payments. This strong impact on imports is due to the fact that multinationals have great need of goods and raw materials, and most of the time; these are not available, either in quantity or in quality, in the host country (OECD 2002). Another explanation is that the investment made may have as its main objective the supply of the local market and thus does not encourage exports (Ram and Zhang 2002). Vissak and Roolaht (2005) note that FDI is the easiest source of spreading economic problems occurring in the world, particularly those that have occurred in the multinationals countries of origin. Host countries become more open economies and more subject to changes in the global economy. But the negative aspects do not stop there. In fact, the purpose of improving the balance of payments through the initial financial flows received is not always achieved in the long run. These effects can be mitigated or contradicted (in stages of low FDI inflows) through the usual repatriation of multinationals subsidiaries profits to their countries of origin (OECD, 2002; Hansen and Rand, 2006; Ozturk, 2007), or through the payment of licenses and royalties due to the use of technology held by headquarters (Sen, 1998). Ram and Zhang (2002)