英语论文网

it is obvious that when investors earn profit, they instead of remitting abroad reinvest which requires repayment. This situation demands a favorable economic environment in a country which is an underlying factor in building up an investor’s confidence. Thus this confidence building effect is considered to be the greatest advantage of FDI inflows. Overall pace of economic growth, degree of confidence building and FDI inflows together have a positive interrelation.

Over the last couple of decades FDI has remained the largest form of capital flow in the developing countries far surpassing portfolio equity investment, private loans, and official assistance. According to the study done by Pradeep Agrawal (2000) on economic impact of foreign direct investment in south Asia by undertaking time-series, cross-section analysis of panel data from five South Asian countries; India, Pakistan, Bangladesh, Sri Lanka and Nepal, that there exist complementarily and linkage effects between foreign and national investment. Further he argues that, the impact of FDI inflows on GDP growth rate is negative prior to 1980, mildly positive for early eighties and strongly positive over the late eighties and early nineties. Bosworth, Collins and Reinhart (1999) applied a regression analysis on a sample of developing economies to analyze the effectiveness of various forms of the FCI and found that FDI has a strong positive impact on domestic savings and investments than other form of FCI like loans, portfolio investment and borrowings where some of these forms of FCI have negative impact on domestic savings and investment. Aslam (1987) examined that the public FCI did not affect the domestic investment significantly, while the private FCI covered the domestic saving-investment gap.

Shabbir and Mahmood (1992), regarding Pakistan, indicated that net foreign capital investment and disbursement of grants and external loans have a positive impact on the economic growth of Pakistan. The evidences are mixed regarding contributions of foreign aid. Ali (1993) found no significant relationship between the flow of foreign resources and economic growth in the case of Pakistan. Mosely (1980) stated that the relationship between aid and economic growth is positive for U.K. aided countries and negative for the French and Scandinavian aided countries.

Foreign direct investment (FDI) which is a strong source of exterior finance is also an outcome of capital account liberalization. It not only promotes capital formation but also helps in transferring the productive technology among countries (William, 1998).

Zhang (2001a) reports that the extent to which FDI is growth-enhancing appears to depend on country-specific characteristics. FDI may promote export of manufactured products if the FDI can enable recipient region to exert its comparative advantage. It may generate a technology spillover effect and raise productivity. It may create a demonstration effect through a closer observation in market conditions and better management knowledge. Allocating capital to more valuable uses, foreign investors would generate a demonstration effect for domestic enterprises when higher return to FDI is observed. FDI thus increase efficiency through signaling correct investment directions. Zhang and Song (2001) found that FDI to China up to 1997 promoted export. Li, Liu and Parker (2001) confirm that there is a technology spillover effe