Foreign direct investment and economic growth

Mehrzad Ferdows said Foreign Direct Investment and Economic Growth that having proper economic growth and its increase has been one of the most critical monetary policymakers in different countries. On the other hand, because foreign funding is a complement to domestic investment, and in fact, bridges the gap between investment savings and a solution to the gap in foreign exchange resources. In developing countries, external financial resources include bilateral assistance from developed countries, financial flows from various sources such as the World Bank, the Regional Bank, foreign portfolio investment, and foreign direct investment.

Mehrzad Ferdows added that these countries have used foreign borrowing to compensate for the lack of capital in the recent past, but due to the crisis caused by its repayment, many of them had problems. Therefore, they tried to use foreign direct investment instead of foreign borrowing to compensate for the lack of capital and a tool to achieve economic growth.

Mehrzad Ferdows stated that the engine of economic growth and development of any country is considered investment, but different countries, especially developing countries, have usually faced a shortage of capital. In the not-so-distant past, these countries used foreign borrowing to make up for the lack of capital, but many ran into trouble due to repayment crises. Therefore, they tried to use foreign direct investment instead of foreign borrowing to compensate for the lack of capital and a tool to achieve economic growth.

Mehrzad Ferdows stated that in the international community, only countries that have high technical and production capacity would have a say, and for this, considerable capital is needed. Therefore, the use of external financial resources as a complement to domestic resources seems necessary. Financing through foreign direct investment is a suitable tool for acquiring modern technology and using machinery and equipment with new technology, but it should be noted that attracting foreign direct investment depends on identifying the factors affecting it and make appropriate changes in them.

Since foreign direct investment is one of the subsets of globalization and today, globalization is the most significant policy concern; therefore, attracting foreign investment has received much attention. Although there are different types of foreign investment, foreign direct investment is compelling—most of this type of investment.

Mehrzad Ferdows said that any investment made by private companies or individuals in countries other than their homeland is called foreign investment. Foreign direct investment is capital that is made to gain a permanent benefit in an institution located in a country other than the investing country, and the result is an effective vote in the company’s management.

Based on this and other definitions, the exact final concept for foreign direct investment is derived and states a positive relationship between foreign direct investment and economic growth. Foreign direct investment affects the host countries’ economic, social and political development in different ways and in other dimensions. Foreign investment, because it creates employment through the financing of production and service projects, can also be claimed that foreign direct investment, by affecting each of the subsets of a country’s growth, causes economic development in general. Also, from another perspective, increasing foreign direct investment causes access to modern technologies in the world. In this regard, its impact on another pillar of growth and, in general, its direct and positive impact on economic growth can be examined and acknowledged. Finally, foreign direct investment increases productivity.

Mehrzad Ferdows added that another aspect of foreign direct investment that should be mentioned is human capital. Foreign direct investment alone does not transfer enough human capital but increases the emergence of human capital to some extent.

Because economic growth is of acceptable importance to any country, economists have conducted many theoretical and empirical studies on the factors affecting economic growth. Those studies show that developing countries can use higher technology to grow, provided they provide the necessary social conditions and infrastructure.

On the other hand, foreign direct investment from the point of view of economists, in addition to filling the gap between savings and investment, filling the gap between foreign currencies and the gap between the government’s targeted tax revenues and the amount realized, fills the gap of management, technology, and skills.

Mehrzad Ferdows concluded that, in general, it can be said that foreign direct investment with comparative advantages, compared to domestic investment, can be a means to achieve good economic growth in less developed countries. Moreover, given that foreign direct investment is effective on many macroeconomic variables such as employment, exchange rates, interest rates, exports, imports, and ultimately leads to the advancement and improvement of technology and increased productivity and growth and development of countries, especially developing countries.

Mehrzad Ferdows

Leading entrepreneur, advisor, investor, and industrial engineering graduate from the University of Southern California