Foreign Direct Investment as Vital Tool of Globalization

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Table of Contents

Introduction
Secondary Research
Recommendations
Conclusion
Works Cited

Introduction

In the modern world, globalization is gradually becoming a more influential phenomenon. While its volume and progression are already well-established, its impact on economic, social, and political spheres of life is debatable. For this reason, the net effect of globalization remains a controversial and vigorously debated issue among scholars. One of the aspects arguably responsible for a large portion of the controversy is globalization’s effect on employment.

One common approach defines it as a disruptive factor for the employment market since it allegedly strips from the domestic workforce the possibility to compete with external actors on equal terms. A polar opposite of this approach is the notion that globalization is actually beneficial for the job market since it redistributes the offerings, creating a more homogenized and fair environment.

One of the consequences of globalization commonly used as an argument in favor of both claims is a foreign direct investment (FDI)—a result of the worldwide integration of markets. Usually, FDI takes the form of a business entity establishing a company in another country or acquiring an existing one locally. Most of the time, FDI occurs between countries with sufficiently different technological levels and economic growth rates. Naturally, such conditions eventually lead to a gap in the competition, which is cited by the critics of FDI as a reason behind the decline of the domestic economy and, by extension, the decrease in the job market. Conversely, the availability of cheap laborers from low-income countries supposedly creates unfair competition for domestic workers.

However, a growing body of evidence points to the fact that FDI also creates a better working environment and may, in fact, improve the employment rate along with spurring economic growth for the country. The most evident benefits emerge from improved export possibilities and the formation of new job opportunities. These factors, in turn, increase productivity and balance out the competition in the long run.

This effect has led several researchers to conclude that FDI is ultimately beneficial and to suggest policies promoting FDI and creating environments that increase international diversification of the markets. Admittedly, such a move is tempting in light of the gradually worsening unemployment rate in our community. At the same time, the lack of definitive results and the ongoing controversy discourage policymakers from adopting similar strategies without proper safeguard measures. Besides, several variables, such as currency fluctuations, inflation, and political instability, make the predicted outcomes less certain.

The following report aims at researching the existing literature on the topic in an attempt to produce a set of meaningful recommendations that can be used to effectively utilize FDI as a tool for reducing unemployment. The secondary research in the form of a literature review attempts to isolate general views on FDI and its role in economic development and, by extension, the labor market. The research allows us to define two approaches to dealing with the effects of globalization. These approaches, applied to the needs and capabilities of a local community, provide us with necessary insights into the recommended course of actions and highlight shortcomings and barriers that may arise during the course of project implementation.

Secondary Research

The review of the existing literature on the matter reveals two distinct approaches to handling the problem of unemployment associated with the expansion of global markets. The first approach views globalization mostly as beneficial for the overall redistribution of wealth but disruptive for countries with advanced economies. Spence, for instance, describes it as responsible for the diversification of the job market in the United States and focuses on interventions that reshape the internal conditions of the country to better fit the international setting (35).

According to Spence, the emergence of new players in the global market created competition in areas where several key actors had previously been dominant (30). This, in turn, resulted in a gradually growing divergence between economic growth and employment and led to a situation where the most qualified and educated segment of workers is seeing an increased demand for their services, whereas those who are less competent are facing a decline in employment opportunities. Interestingly, in addition to acknowledging the evident growing attractiveness of the developing markets, Spence describes existing US markets as unnecessarily repelling (36).

This leads him to several conclusions, most of which target existing US policies. More specifically, the initial assumption that a more educated workforce has more chances for being in demand suggests the necessity to improve the educational environment. Unfortunately, Spence immediately points to the fact that despite the visible effort made in this direction, very little progress can be observed when international standards of benchmarking are applied (36).

Second, the tax structure, which supposedly discourages business entities from operating domestically and pushes them outside the country, should be reworked to create a milder environment and, by extension, raise the number of jobs. Simultaneously, the infrastructure must be modified to redistribute income levels more uniformly. As can be clearly seen, all of the proposed changes target the specific domestic conditions, to adjust them to the setting created by globalization.

The second way of addressing unemployment associated with the expansion of global markets can be broadly described as utilizing globalization to leverage the current situation in favor of the job market. One of the ways to do this is suggested by Shaari, Hussain, and Halim. They point to the fact that despite significant criticism, globalization has an overall positive impact on the country’s economic health.

To substantiate their claims, the authors conduct a rigorous analysis of the relation between the rate of foreign direct investment in Malaysia and the dynamics of unemployment. Their calculations indicate a 0.009% decrease in unemployment resulting from a 1% increase in FDI in the country (Shaari, Hussain, and Halim 4905). Based on these findings, the authors suggest changes in state policies that would boost the FDI in Malaysia, which, by extension, would result in better opportunities for the local workforce.

At the same time, they caution policymakers against a haphazard and unregulated rate of FDI introduction, as it may widen the wage gap and create additional pressure for local business entities (Shaari, Hussain, and Halim 4905). Notably, the authors do not specify the interventions, providing instead an encompassing description of the benefits.

Assuming that the findings are interpreted correctly, and downplaying the possible deviations created by unaccounted factors, we may characterize these suggestions as an attempt to view FDI as an intricate yet useful tool for regulating the unemployment rate. In simpler terms, this is an attempt to assess the effect of the outbound factor (FDI) on the inbound issue (unemployment) and regulate its magnitude by utilizing available levers (policies). What unites it with the previously discussed approach is the intention to administer a certain level of control and minimize unpredictability.

A more encompassing approach is taken by Schmerer. Instead of viewing the issue from the perspective of a specific country, he evaluates the effect of FDI on unemployment by using the net-FDI concept, or the difference between the inward and outward FDI (Schmerer 41). Perhaps more importantly, he accounts for the effect both in the domestic and in the international markets, creating a more uniform and objective overview. His findings suggest a robust relation between net FDI and lower rates of aggregate unemployment (Schmerer 51).

This leads the author to the conclusion that it is possible to regulate unemployment by controlling the FDI. Furthermore, he suggests a simple multi-industry model with search frictions in the labor market that offers an additional level of control and adjustment in introducing institutional policies (Schmerer 46). For instance, milder FDI policies (suggested by Shaari, Hussain, and Halim) will likely create inequality (pointed out by Spence). Thus, a more multi-faceted approach to policymaking is desirable to evade possible adverse effects. Besides outlining the benefits of using the model to regulate the process directly, Schmerer outlines several secondary benefits of the intervention.

Specifically, he implies that such change would offer additional opportunities for studying the effect of heterogeneous labor markets and outsourcing without taking risks associated with them. Besides, the suggested model can supposedly serve as a tool for balancing the existing discrepancies in wages and, by extension, increase the attractiveness of the majority of job offerings. It is important to stress that while the model suggested by Schmerer allegedly applies to both sides of the issue, it is ultimately consistent with the second approach, i.e., using the effects of globalization to influence the undesired effect.

Recommendations

The overview of the approaches allows us to create several possible projects meant to reduce employment on a local scale. The most intuitive is an overarching effort aimed at improving the domestic labor market conditions. Such a project must be comprised of several smaller events targeting specific areas responsible for the current shortcomings in the area. The most evident one is the education sphere since its current state is positively associated with the decline in the mean competence of the workforce.

Admittedly, the possibility of influencing the educational system is limited by federal- and state-imposed regulations, visibly limiting the opportunity to introduce changes locally. Thus, the community must establish reliable communication channels with employers and educators to improve understanding of the expectations of the former and synchronize the obtained information with the actions of the latter. Simultaneously, the economic environment must be synchronized with the needs and possibilities of the local community. Specifically, partnerships can be fostered with local businesses to create more of a fair and fitting environment for the domestic workforce.

Simply put, the project is expected to create the conditions under which the negative impact of FDI is minimized and its positive influence retained. However, it is important to recognize the limitations of such a project. First, the capability of the local community to adjust the economic environment is limited by larger factors such as taxation (Spence 36). Thus, it would be unreasonable to expect significant improvements in the short run, while the long-term effects of such intervention are difficult to predict with certainty. Finally, unlike the economic domain, the educational sphere does not demonstrate a clear outline of the desired direction of change, and the previous experience of moderately successful reforms suggests low chances of successful intervention.

Thus, another possibility to decrease unemployment is a project aimed at the factors responsible for the aforementioned long-term effect. In general terms, the goal of such a project would be to target the vertical hierarchy of responsible factors from the highest possible level. For instance, it may be useful to research the actual impact of FDI on a community and present the findings, along with suggestions for policy amendments, to state authorities. If accepted, the suggested changes will have a downward effect on particular areas, including the labor market. The net effect of milder FDI policies will eventually lead to economic improvements and facilitate changes on the local scale.

In addition, such a project likely requires little time to execute but depends on too many uncertainties. First, it requires significant administrative support from the local authorities to approach higher levels of influence. Second, the suggested research demands financing and material resources currently unavailable in the community. Third, even if approved, the changes will likely require a long time to take full effect and longer still to result in any meaningful change in a particular locale. In other words, it offers a robust and steady progression toward a decrease in unemployment but is not as effective as an immediate solution.

The third possibility is a project aimed at directly leveraging the effects of FDI by applying the trade model suggested by Schmerer scaled down to apply to the community. Such a project requires three steps. First, the local economic environment should be studied to identify tendencies and trends in the labor market and capture essential rates important for model configuration. Simultaneously, local businesses must be surveyed for readiness to implement the desired policy changes.

Second, the obtained data must be studied to determine what fields present the biggest capacity for improving FDI favorability. Third, local businesses must be approached with the resulting model, which would allow them to assess the effects of FDI and adjust their practices accordingly. Essentially, such an approach will create the possibility to take indirect control of the positive effects of the FDI, which supposedly unites it with the first project.

However, it differs in one important detail—it does not turn away from the process of globalization, which becomes more difficult each year. Instead, it introduces a means of coexisting with it and finding a balance between diversification and homogenization, both of which offer opportunities for economic improvement under the proper conditions. Admittedly, the research and design of the appropriate model require funding and skill.

However, the effect of such intervention will be observable in the short run, which will strengthen the dedication of the involved community members. In the long run, such a project will also contribute to the overall development of the community. For instance, the rise of demand for a skilled workforce, backed by fair compensation, will create the need for better education, which may eventually create a self-sustaining cycle (Spence 38).

In addition, the project offers the necessary level of safety since it uses a means of control and adaptation instead of blindly relying on the suggested positive effect of FDI. Finally, the project is the most achievable of the three since it caters to the needs of the two main actors involved—the community and the local businesses. Their dissatisfaction with the current state of the labor market will create a sufficient level of interest and readiness for change.

Conclusion

The full effect of foreign direct investment is yet to be understood. Nevertheless, the currently available data allows us to determine some of its effects on state economies. That which is the most relevant for our project is its supposed positive effect on decreasing unemployment rates. However, it is important to recognize that even this aspect of FDI has not been studied to a degree that allows acceptance without proper precautionary measures.

At the same time, the implications of these initial findings can produce feasible results when applied with necessary caution. By reviewing current trends in the existing literature, we came up with a set of recommendations based on the tendency to incorporate the effects of globalization on current economic and social practices. The resulting project is built around the involvement of local businesses and communal effort, which offers a possibility to observe the effect directly and foster trust in the participants.

More importantly, it allows for timely adjustments in the case of deviations and unforeseen variables. Most importantly, it does not rely on massive resource allocation, and therefore, can serve as a small-scale experimental intervention contributing to the knowledge of the subject. Finally, upon successful implementation, the project is expected to eventually enter a self-sustaining phase where it will trigger positive changes in other aspects of the community. Specifically, education, which is often cited as both responsible for and aggravated by the incompetence of the workforce, is expected to either improve or become more susceptible to positive changes after the unemployment rate goes down. Overall, the suggested project is superior to the other two in terms of safety, cost, and acceptance by the stakeholders.

Works Cited

Schmerer, Hans-Jorg. “Foreign Direct Investment and Search Unemployment: Theory and Evidence.” International Review of Economics & Finance 30 (2014): 41-56. Print.

Shaari, Mohd Shahidan, Nor Ermawati Hussain, and MohdSuberi bin Ab. Halim. “The Impact of Foreign Direct Investment on the Unemployment Rate and Economic Growth in Malaysia.” Journal of Applied Sciences Research 8.9 (2012): 4900-4906. Print.

Spence, Michael. “The Impact of Globalization on Income and Employment.” Foreign Affairs 90.4 (2010): 28-41. Print.

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