East Asia: Globalization and Foreign Direct Investment


News reports suggest that economic giants from third world Asia namely China and India are expected to grow at the rate of 9.7 and 6.5 percent respectively. China has now become the factory of the world with large multinational companies infusing lots of money in establishing manufacturing units and India is now one of the major destinations for back office jobs and is the leading service sector economy. Its not just these two nations have shown higher growth but many other developing nations which includes almost the whole of South East Asia and a few parts of Latin America. The globalization has started giving results. The process which has got its roots right from the beginning of 20th century with the beginning of economic cooperation between Europe and the United States has now become synonymous with the word development no only in western world but also in Far East Asian Countries (The World Bank Group, 2000).

But still this globalization has yet to make this world a better place to live. Though as mentioned above India and China, the two most developing nations of Asia are actually among the two poor nations also. The standard of living in China is one fifth to that of a developed country and in India is even worse with standard of living being one tenth of the same variable. The difference between the rich and the poor have widen with every passing year rich becoming more rich while the poor are diving towards more destitution. So the concern related to the globalization process is the growth which is visible is actually more of mathematical in nature than the real cumulative growth. It might be taking place at the cost those who are less privileged (Kumar, 2007).

The purpose of this paper is to analyze the effects on developing nations which are said to the most benefited one when one of the components of globalization, i.e., foreign direct investment (FDI). The paper gives brief explanation of globalization and its different phases and theoretical aspects of some of its components. While presenting theoretical arguments, the main focus of the paper is an exploration of different aspects of FDI while keeping in view of its impact on the growth of economy in terms of growth in GDP. The paper looks in detail towards the contribution of FDI in the growth of developing nations and the role played by multinational firms in the fire-sale purchases. It has examined World Bank Development Indicators Website and this statistical investigation has been made to look into the above mentioned impact of FDI on GDP. The countries which have been chosen for this statistical analysis are Argentine, Brazil, Chile, China, India, Russia and Venezuela who are actually the top eight FDI receivers among the list of developing nations (The World Bank Group, 2000).

Globalization, Foreign Direct Investment and development

The foreign direct investment (FDI) has been the latest creation of globalization that too in the ending decade of the century which right from the beginning saw different phases of it with major disruptions in form two greatest wars of the mankind. The surge in FDI in 1990s led to the beginning of a global trend of foreign investment in privatization processes initiated by a number of countries all around the world. For a country, the FDI has been considered by almost all economists as the most stable among all types of investment which includes Institutional Investment as well as investment in government securities.

With the resurgence of local financial markets, FDI growth saw significant improvement. The favorable condition compounded with stable political condition made the market more predictable with continuous growth pattern. The service sectors got the most through the privatization of state-owned firms and with the innovation in telecommunication industry, the service sector more employment than any other sector. Merger and Acquisition have been the main mode of foreign entry. An established firm with a list of clients has always been a source of attraction for a number of foreign players when they are put on the platter for sale or merger (Sinn & Weichenreider1997).

The crisis of late 1990s in East Asia showed a very different business approach of MNCs. The companies were found to be putting great amount of money through FDI channel in Korea and other South East Asian countries. But this time the company went into large scale buying of local firms. These local firms were found to be facing financial crisis causing great fall in the total value of the firm with equities available at throw away prices. The Foreign Institutional Investors and investors in government’s securities taking their money out of the country but the same financial crisis created an investment opportunity for MNCs. A number of companies changed hands with a number of MNCs from US and Europe buying controlling stakes in different South Asian firms. This sort of FDI investment pattern is more of crisis driven rather than opportunity driven. Even the governments were found to shell out its stake in PSUs to foreign investors to get over the ongoing financial crisis. The fall in the value of currency and big debts diminishes the market cap of the domestic firms and then they are for sale on a platter at a throw away price to foreign players. The sudden fall in the value of the assets attracts the investors to buy those sick firms with a belief that once the crisis gets over these firms under the new management will turn out to be a golden goose (Aguiar & Gopinath, 2004).

The sale of firms into foreign hands during the time of crisis can be termed as a case of Fire-Sale FDI. But the question is that what exactly promotes this deflation in the value of the asset of domestic firms. Here the culprit is the financial intermediaries. These institutional investors enjoying implicit government guarantees over their liabilities go on unregulated investment. Excessive lending by these institutions often causes high inflation in the value of assets. The overpricing indicates sound financial condition of not only the borrowers but also of lenders because of their excessive lending. But in case of economic burst, the assets lose its value which later translates into lenders withdrawing money out of market. This panicked withdrawal by institutional investors causes further depreciation in the value of the asset (Krugman, 1998).

Now when role of FDI is looked upon; the foreign players are handed over the control of beleaguered domestic firms. The logic behind this transfer of control is that the firms’ productivity will get a boost under new management. But again the question is how a particular firm can be assumed of higher asset value under foreign control and at the same time are expected to bring higher return both in terms of productivity and profitability. The foreign investors with their strong financial condition are better placed to buy out a domestic firm than other domestic firms in an economic crisis. So the phases of overpricing and then panic stricken under pricing in case of financial or economic crisis and better record of foreign players both in terms of financial condition and efficiency causes rise in the cases of fire-sale. Sometimes the crisis is also overshot with both industry and government over assuming the negative impact and this as a whole makes way for more Fire-sale FDI (Krugman, 1998).

Development through FDI: a reality or just a Mirage?

If we look into what every major financial organization like the IMF; the World Bank; and any of the OECD states, the most common thing is that all of them have suggested that this FDI is very much similar to a doctor’s prescription which is for the improvement of ailing industrial sectors. The FDI has been termed as a vital fuel which can take the engine of growth of a nation to super fast zone. With this theme each and every global organizations have stated that the degree to which a developing country can get benefited with FDI is a very lucidly documented fact. This miracle drug not only powers the growth of the nation but simultaneously improve environmental and social condition in the receiver country. The transfer of cleaner technology and better management as well as socially responsible corporate policies helps in improving environmental and social conditions by enormous amount (Gallaghar & Zarsky, 2006).

But the things in reality are very much far from what has been documented by different sources mentioned above. Even a paper by one of the writers of OECD has mentioned that the so called social and environmental benefits that are expected to come through FDI may have differing results (2002). Its not that the result is always going to be positive; it might cause no or in worst case negative effect. But the apprehensions related to development issue are equally worrying; whatever that has been documented by great economists and many others might not give the result as suggested (Gallaghar & Zarsky, 2006).

The MNCs have often been found to put money in form of FDI in the state of financial crisis. The crisis which hit the East Asia in the late 1990s led to the occurrences of a large number of cases involving fire-sale. The domestic firms in a state of cash crisis are made available for purchase at a price which has been much lesser than the asset of the firm. The final conclusion out of these investments by MNCs give a clear indication that its not the efficiency that gives them the edge it’s the better cash position which drives the flow of FDI. Another advantage that foreign firms possess is their superior information management. These firms often create high market expectation through wide spread transfer of information which are emphasizing on issues like their superior technology and news of efficiency. Through this way the MNCs manage to raise the confidence of domestic investors and often sell their equity stakes at highly inflated cost. So the highly inflated market cap of MNCs local subsidiary is more due to tactical business rather than superior technology usage and genuine investment policy (Kokko, 1994).


The evidences and a number of cases after getting studied have clearly led to the conclusion that FDI has nothing like any miraculous property. The real wheel for the growth is often the policies and will power of the political establishment of the country involved. It’s not the FDI but the way the countries handle it while maintaining the interest of domestic industry which makes an impact on the economic health of the nation. The poorest and least developed nations have the scarcity of everything a civilized society possesses. The economy requires proper infrastructure for road transport and electricity to have a sustainable economic growth. The poor countries severely lack in these sectors and these are the most primary sector over there to invest. So the FDI should be done in this field rather than manufacturing and other sectors because the local market is very weak because very less purchasing power of the people.

So for a poor nation, FDI should begin from infrastructural sector and then stretch to other sectors. Any other type of FDI might be profitable for the firm but for the country it’s not going to make any sustainable growth. So it is clear FDI is not a solution to the woes of poor nations. The underdeveloped countries extra care for improvement in infrastructure, education and health care. The MNCs profit making business will cause more harm than any possible improvement. The philosophy that a person’s life can change only through its own efforts; no external help can cause any desirable change, suits these poor nations the most. Their condition can see improvement only through better domestic policies by involving people from all levels to cooperate for all future developments. The condition in developing countries is bit better and they can achieve higher growths through the inputs in form of FDI. But the unregulated inflow and outflow of capital with MNCs attacking local firms rather than making phenomenal changes in managerial policies and superior technology usage, has resulted into instances of fire-sale FDI and falling results.


Aguiar, M. & Gopinath, G. (2004) Fire-Sale FDI and Liquidity Crisis, The Review of Economics & Statistics, Vol. 87, No. 3, Pages 439-452

Gallagher, K. V., Zarsky, L. (2006). Rethinking Foreign Investment for Development, Boston University and Businesses for Social Responsibility, USA.

Krugman, P (1998). Firesale FDI, Working Paper, Massachusetts Institute of Technology.

Kokko, Ari (1994). Technology, Market Characteristics, and Spillovers, Journal of Development Economics, Vol. 43, pp. 279-293.

Kumar, A. (2007). Does Foreign Direct Investment Help Emerging Economies? Insights from the Federal Reserve Bank of Dallas, vol. 2, no. 1.

OECD (2002). Foreign Direct Investment for Development, Maximizing Benefits, Minimizing Costs, Paris: OECD.

Penalver, M. (2002). Globalization, FDI and Growth: A Regional and Country Perspective, United Nations Department of Economic and Social Affairs.

Shahid, Y. (2001). Globalization and the Challenge for Developing Countries, World Bank, DECRG.

Singh, A (2005). FDI, Globalization and economic development: towards reforming national and international rules of the game. ESRC Centre for Business Research, University of Cambridge.

Sinn, H. W. & Weichenreider, A. J. (1997). Foreign direct investment, political Resentment and the Privatization process in Eastern Europe, Economic policy.

The World Bank Group (2000), Assessing Globalization, Economic Policy Group and Development Economics Group.

Find out the price of your paper