Investment and Technology

Investing is giving something with the promise that it will give us a much greater profit. For some countries, investing in other countries shows how advanced or developed they are. This requires opportunities of investment. “An investment opportunity is a call option on future cash flows. Firms usually have a target debt in financing such opportunities. In addition to this explicit one, there exists another leverage related to the real call option” (Kenc & Driver, 2020, p. 2). “According to the asymmetric theory of investment, imperfections in the financial markets lead firms to face varying degrees of financing constraints and therefore undertake varying levels of investments” (Zubair, Kabir & Huang, 2020, p.456).

Investment in Germany

Foreign direct investment flowing to developing country economies takes at least four distinct ways according to Moran: FDI in extractive industries, FDI in infrastructure, FDI in manufacturing and assembly, and FDI in services (Moran, 2012). There is also the portfolio investment or the ownership of a financial assets that will produce more income or its value will grow over time. . The foreign portfolio investment of Germany is rather negative, since in 2019 fell significantly.  “CEIC calculates quarterly Foreign Portfolio Investment in USD from monthly Foreign Portfolio Investment. Deutsche Bundesbank provides Foreign Portfolio investments in EUR. Federal Reserve Board average market exchange rate is used for currency conversions” (CEIDATA, 2019).

Another important factor that drives investment is technology diffusion. The rate of economic growth of a developing country depends on the extent of adoption and implementation of new technologies that are already in use in leading countries” (Borensztein De Gregorio & Lee, 1998). Technology can be distributed through various distribution channels, which involve the development of ideas and innovation. In addition,, foreign direct investment by large organizations is considered to be one of the most important means for technological expansion, since it covers many more countries and drives the need for competitiveness. “The higher the real per capita GNP and the lower the balance of payments deficit are, the more foreign direct investment is attracted” (Schneider & Frey, 1985).

There are many ways to diversify production in countries where investment is attracted by various factors already mentioned above That investment can help modernization I in host countries, which is made feasible by companies interested in it. “FDI inflows exert a positive influence on technological upgrading over a lengthy time period for a large and diverse sample of countries” (Kemeny, 2020).

It is possible to think that FDI can help improve not only the economic values, but also social and environmental factors, such as schooling, telephone lines, economic governance, civil liberty, political rights, ethnic fragmentation, and cultural fragmentation  (Kemeny, 2020). However, to do this, host countries need to improve  their internet, telephone and digital communication networks. The development of both hard and soft infrastructure systems can improve the absorption of FDI benefits by countries.

FDI plays an important role, contributing to economic growth. However, the effect of FDI on economic growth depends on the conditions of the host economy. The empirical results of this study show that the impact of FDI on the technology gap is positive, while its the effect on the level of educational attainment and economic development is negative (Al Nasser, 2010). 

Foreign firms bring advance in «knowledge» applicable to the production of new capital goods that may be available in other countries to developing economies, . Thus, they facilitate the adoption of the technology that is necessary to produce new varieties of capital. FDI is the main channel of technological progress in this framework. (Lee, JW, De Gregorio, MJ y Borensztein, 1994). In addition, we assume that there is a “catch-up” effect on technological progress that reflects  that it is cheaper to imitate products that have been around for some time than to create new products.

Conclusion

The scope of multinational activity and the proportion of world trade represented by multinational companies has increased steadily over the past two decades. This has led to a renewed interest in Europe and in the impact of multinational companies on employment, investment and trade, and the structure of economic growth. In this paper, we discussed the factors behind the continued growth of foreign direct investment and its wider consequences on domestic and host economies. (Barrell, R. y Pain, N. 1997). 

Simply put, a country needs foreign investment generated through the ways already discussed above. Foreign companies see ideal growth for their industry in host countries. Although inflow of foreign direct investment can have a positive impact on host countries, barriers to technological adoption can also affect the likelihood of individuals’ entry into technology entrepreneurship” (Pathak, Xavier-Oliveira & Laplume, 2013).

References

Borensztein E., De Gregorio, J., & Lee, J-W. (1998). How does foreign direct investment affect economic growth?. Journal of International Economics.

BRENNAN, M.J & CAO, H.H (1997). International Portfolio Investment Flows. The Journal of Finance.

CEIDATA. (2019).Germany Foreign Portfolio Investment. Retrieved from https://www.ceicdata.com/en/indicator/germany/foreign-portfolio-investment

Dhrifi, A. (2015). Foreign direct investment, technological innovation and economic growth: empirical evidence using simultaneous equations model. International Review of Economics.

Kemeny, T. (2020). Does Foreign Direct Investment Drive Technological Upgrading?. World Development

Moran, T.H. (2012). Foreign Direct Investment and Development. In The Wiley‐Blackwell Encyclopedia of Globalization, G. Ritzer (Ed.).

Pathak, S., Xavier-Oliveira, E & Laplume, A.O (2013). Influence of intellectual property, foreign investment, and technological adoption on technology entrepreneurship. Journal of Business Research

Kenc, T., & Driver, C. (2020). Leverage, uncertainty and investment decisions.Economics Letters

Schneider, F., & Frey, B. S. (1985). Economic and political determinants of foreign direct investment. World Development.

Zubair, S., Kabir, R., & Huang, X. (2020). Does the financial crisis change the effect of financing on investment? Evidence from private SMEs. Journal of Business Research.

Al Nasser, OM (2010). ¿ How does foreign direct investment affect economic growth? The role of local conditions. Latin American Business Review , 

Lee, JW, De Gregorio, MJ y Borensztein, ME (1994). How does foreign direct investment affect economic growth?

Barrell, R. y Pain, N. (1997). Foreign direct investment, technological change and economic growth in Europe. The Economic Journal.