Openness, Market Size and Foreign Direct Investments

Foreign direct investment (FDI) has come to play a major role in the internationalization of business in the past decades. Reacting to changes in technology coupled with growing liberalization of the national regulatory framework governing investment in enterprises and changes in capital markets, profound changes have occurred in the size, scope and methods of FDI. Productive FDI usually brings along lasting and stable capital flows as investments in long-term assets. These funds are introduced into a country’s economy, contributing to the aggregate demand of the economy and, therefore, eventual growth. Companies within the country experience competitive pressure brought about by FDI and tend to be more productive to effectively counter the threat of the competitor from abroad, which contributes to the growth of a country’s income. Employment generation is also another positive effect of FDI when a country becomes more productive. With increased productivity and competitiveness, employment is created and introduction to the world economy is more feasible. New informational technological systems and the decline in global communication costs have made management of foreign investments far more effective than in the past.