The role of international relations in general and international trade in particular is very important for the growth and development course of countries. Countries in the modern world have realized pretty well their interdependence and no more attached to autarky (self-sufficiency) where one can survive without external aid or international trade. When the economies open up through international or transnational trade, it functions as a communication cord for the modern technological advancements and diffusion of industrial development benefits from the developed to emerging markets. The process of liberalization, privatization, and globalization are the driving force behind the process of international trade and financial flows in general and Foreign Direct Investment in particular. The sign of Foreign Direct Investment (FDI) which is basically a discourse about investment made by international enterprises (MNEs) in foreign countries has its roots in the 1950s in terms of flows between developed countries that are capital by heart and spirit (Agiomirgianakis, G. M. & Asteriou, 2003) which remained in educational and research world at the backdoor until its colossal outburst in the 1980s as a result of a shift in FDI flows from technologically advanced countries to emerging or evolving countries.
On average FDI inflows to developing countries very nearly doubled over in two decades (from 1980 to 1990) and the trend thereafter has been definitely a continuous upward. Similarly, in the preliminary period of the economic reforms of 1990, the part of FDI flows to the developed part of the world dropped while it amplified to developing part of the world. This shift in the dispersal of the direction of international trade and FDI demands the interrogations and answers which needs clarifications, way out, and resolutions from great think tanks. As a consequence, it is very important to understand the nature of economic reforms and realize the role of international trade in investments out of the country or overseas.
There are various determinants of investments out of the country in general and Foreign Direct Investment in particular such as the size of the market, openness of trade and commerce, and factors of production or costs of production, particularly labor cost. There is a bad interface between political and economic power in developing economies of the world, particularly the Indian economy that has greatly affected negatively their growth and development prospects. And bad political economy and uncertainties thereof along with other factors such as the development of infrastructure, rate of inflation, economic growth, and rate of taxation, corporate tax rates in particular, etc. are other determining factors. There is a significant positive relationship between the factors such as GDP growth per capita, development of infrastructure, and the degree of openness of trade and investments out of the country in a broad-spectrum and Foreign Direct Investment in a precise sense. On the other hand, there are some factors such as the tax rates, labor costs and the rate of inflation in an economy that have a negative relationship with international trade or investments abroad and Foreign Direct Investment. There are some research studies that argue that so far as labor cost is concerned, it has a constructive and progressive relationship with international trade and Foreign Direct Investment but then again that relationship is statistically insignificant. Even many studies portray political threat and bad political economy as factors bearing a negative correlation with Foreign Direct Investment but somehow analogous with labor cost for being statistically inconsequential (Demirhan & Masca, 2008).
Developing economies have experienced fundamental changes throughout their modern economic history. Of crucial prominence is the initiative of liberalization, privatization, and globalization on one hand and growth and development of Foreign Direct Investment (FDI) on another hand which somehow has its roots from them. Emerging Markets Index provides a list of the largest emerging economies by past and anticipated nominal GDP together with Purchasing Power Parity (PPP) GDP. We find that the majority of the developing economies or emerging markets of the world are affected by their terms of trade and Foreign Direct Investment which is why such indicators deserve high importance when indexing such markets. Investments abroad improve the growth rates for sure as a result they improve the macroeconomic profile of the host country. As a result, it is very important to recognize and study the major determinants of the Emerging Markets Index in order to improve the condition of such markets.
Multi-national corporations must discourse upon few profoundly consistent demands which are core global problems of international trade. They are: What to invest as? How to invest? Where to invest? and in what asset categories? FDI may attract some economies from a growth perspective, while as for some it may revolve around an equity standpoint for the reason that their growth and the profitability levels are poor especially in their core sectors. Others may hunt for attractive fixed revenue by way of their price stability and sound interest rate regime (CFA Institute, 2019). In order to hunt for better trade opportunities in the rest of the world, countries must find better markets that are likely to offer good-looking venture prospects.
Binish Qadri is ICSSR Doctoral Fellow, Department of Economics, Central University of Kashmir, Guest Faculty, NIFT, Srinagar.