FDI in developing Countries；What Colombia should learn from China attracting policies

Mauricio　Alejandro　Muoz　Espinosa

【Abstract】Existing studies of FDI in developing countries has its structural base in “Factors that attracts FDI”， however delineating social， cultural and political factors will be difficult for this case and therefore， the study will need to be focus on economical determining factors. Consequently， if we analyze FDI in The Peoples Republic of China it will be necessarily to evoke the economic and political history since late 1970s （economic opening） until China enters the World Trade Organization （WTO） in 2001.

【Key words】FDI；China；Colombia；The Peoples Republic of China；Colombia；FDI；Policies

In this paper you will find a study about how foreign investment helps increase productivity growth in local firms， as well to contribute in higher growth for the host economies， occurring because of the spillovers of FDI. In this way， I would emphasize on what Colombia should learn about Chinese attracting FDI policies.

There are different opinions and academic analysis regarding the FDI factors as for example： time， regions and location， industries and policy makers. Therefore， if we have a closer look to The Peoples Republic of China and their FDI income， is relevant to show how markets as Hong Kong and Taiwan contributes to Chinese development.

According to Dunnings Eclectic paradigm， factors as ownership， location and internalization are the main incentives for foreign firms to go abroad and decide to invest in developing countries such as Colombia where labor cost is low.In addition，the strategic location to enter in other markets in the region represents a key factor for multinational corporations（MNCs）to locate its own production in the different countries were FDI is involve.

Qian Sun， Wilson Tong， Qiao Yu explains it very well when they say： “FDI is conventionally defined as a form of international inter-firm cooperation that involves a significant equity stake in or effective management control of host country enterprises. However， in China， FDI is considered to encompass also other， non-equity co-operations such as contractual joint ventures， compensation trade， and joint exploration”①

Economic growth is related with economical， political and cultural factors， however in order to determine which is more relevant its a complex analysis.In the long term， economieswill focus in productivity and the capacity to increase flow of products and services； this will be measured as production efficiency. Hence，if productivity rises and it is used same quantity of resources the result will be more income per capita which result in better quality life for the community. According to the economic growth theory，capital increasing is an important channel and positive effect by foreign investment in the host country.FDI becomes one source of improvement in production capacity and externalities will participate as well in every process of GDP growing.

If we see Colombia in particular and the liberalizing strategy that begun in the late 1990s， puts the country in a learning position from abroad experiences. On the other hand，China is an excellent case of economic growth， infrastructure improvement，government investments， trade and internationalization. This is the main fact or issue of why Colombia needs to learn from China strategy.

In recent years FDI has gain an important place in economic analysis；governments，MNCS，banks，academics and students pay more attention to FDI behavior and its results around the world.Each country has developed and implemented different policies to measure how are the benefits and what is need to be done to attract and take advantage of the inflows of capital trough FDI tool.Costa Rica， China and Colombia are clear examples of the importance of FDI in a Macroeconomic environment，especially because those countries are developing economies and are located in different regions around the world. Empirical analysis affirms from a macroeconomic view that foreign investment is an engine of employment， high productivity，technological spillovers and indeed economic growth in terms of GDP.

Findings have shown that Chinas effort to attract FDI have had positive effects in the economy， the correlation between FDI and GDP growth is studied， however， the transition of China since its opening up and the adaptability of its economical sector and evolution from manufacturer industry to high tech industry to services industry is the main objective of Chinese policy makers， then Colombia should learn and apply similar policies according to its economy structure to develop and increase economic growth in different regions of the country through FDI.

Economic impact of FDI has diverse and complex ways that make it difficult to quantify.FDI has different effects regarding dynamics on capital accumulation，technological development，economic growth，employment and international trade.FDI effects can be classified according how they affect the economy，either directly or indirectly，or positively or negatively.

Some direct effects of FDI can be seen in the increase of productive capacity， the positive contribution of capital inflows to finance external debts， and the progressive rise of international trade due to higher demand of raw material and human capital in the host country and export of manufactured products by MNCS located in the host country.

Other scholars through empirical theories confirm indirect effects of FDI；hence capital inflows and the establishment of foreign firms contribute to technological spillovers，improvement of productivity； backwards for raw material suppliers or forward for market consumers and participants.It improves labor skills，corporate governance practices and administrative activities.

Economic growth theory explain that certain factors contribute to economic growth， if we put China in particular， there are economical， external， international and political factors that led to economic evolution， adaptation and integration with the world. FDI has an outstanding role in the investment in manufacturering sectors due to strong infrastructure， low labor cost， and location of natural resources and raw materials according to Dunnings Eclectic Paradigm.

It can act as a conclusion that according to economic growth theory the increase of capital is only one channel through FDI has a positive impact in host countries. This can be more important in developing economies that are not able to obtain capital and FDI it is a determinant factor for productive capacity expansion in host countries.

FDI has a positive effect in economic growth through technology transfer from the foreign enterprises to local firms and has a special implication in long-term growth.Analysis concludes that a technological spillover takes place by externalities or indirect effects due to establishment of foreign capital in different industries.

Positive macroeconomic effects in the host country are led by FDI in the balance of payments， capital account and exchange rate. In this sense capital inflows increase fiscal earnings in the host country， as long capital inflow is not attracted by reduction in tariffs. A positive effect in balance of payment takes place if the repatriation of profits which are not superior to capital inflow. However if the MNC is exported oriented mainly it can generate foreign currency more tan its own expenditure and its relation with international market bring positive effects due to a positive relation between growth rate and internationalization.

Empirical analysis confirms there are positive correlation between FDI and GDP growth in both studied cases； China and Colombia. Both countries are dependent of FDI in order to maintain a high average of GDP growth rate.

FDI Spillovers are key factors in economic growth of developing countries； technology， human capital， equipment and intangible benefits are attracted with FDI. However， different locations and policies can restrict that the whole country take benefits， but positive effects on the GDP and balance of payments can attract more FDI.

Colombias FDI policies were more horizontal and passive； characterized by opening up policy， deregulation，denationalization，natural resources and low labor cost. Though，it needs a more active policy through strengthening organisms to promote“quality investments”in hand with development policies.

Colombia still has disadvantages as high transaction costs， weak legal framework， instability， uncertainty and administrative obstacles for creation and development of enterprises.

FDI has brought technological spillovers to Colombia economy and international trade increment， however it is not enough to modernize the economy and reach infrastructure standards of advance economies. Therefore， Colombia in order to continue being a receptor of high capital inflows should adapt and modify its legal framework according to international trade evolution.

Colombia should provide the real information on time and efficiently through all the possible ways using tools as Internet， promotion agents and offices around the world to attract investors. [科]