The role of international relations in general andinternational trade in particular is very important for the growth anddevelopment course of countries. Countries in the modern world have realizedpretty well their interdependence and no more attached to autarky(self-sufficiency) where one can survive without external aid or internationaltrade. When the economies open up through international or transnational trade,it functions as a communication cord for the modern technological advancementsand diffusion of industrial development benefits from the developed to emergingmarkets. The process of liberalization, privatization, and globalization arethe driving force behind the process of international trade and financial flowsin general and Foreign Direct Investment in particular. The sign of ForeignDirect Investment (FDI) which is basically a discourse about investment made byinternational enterprises (MNEs) in foreign countries has its roots in the1950s in terms of flows between developed countries that are capital by heartand spirit (Agiomirgianakis, G. M. & Asteriou, 2003) which remained ineducational and research world at the backdoor until its colossal outburst inthe 1980s as a result of a shift in FDI flows from technologically advanced countriesto emerging or evolving countries.
On average FDI inflows to developing countries very nearlydoubled over in two decades (from 1980 to 1990) and the trend thereafter hasbeen definitely a continuous upward. Similarly, in the preliminary period of theeconomic reforms of 1990, the part of FDI flows to the developed part of theworld dropped while it amplified to developing part of the world. This shift inthe dispersal of the direction of international trade and FDI demands theinterrogations and answers which needs clarifications, way out, and resolutionsfrom great think tanks. As a consequence, it is very important to understandthe nature of economic reforms and realize the role of international trade ininvestments out of the country or overseas.
There are various determinants of investments out of thecountry in general and Foreign Direct Investment in particular such as the sizeof the market, openness of trade and commerce, and factors of production orcosts of production, particularly labor cost. There is a bad interface betweenpolitical and economic power in developing economies of the world, particularlythe Indian economy that has greatly affected negatively their growth anddevelopment prospects. And bad political economy and uncertainties thereofalong with other factors such as the development of infrastructure, rate ofinflation, economic growth, and rate of taxation, corporate tax rates inparticular, etc. are other determining factors. There is a significant positiverelationship between the factors such as GDP growth per capita, development ofinfrastructure, and the degree of openness of trade and investments out of thecountry 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 costsand the rate of inflation in an economy that have a negative relationship withinternational trade or investments abroad and Foreign Direct Investment. Thereare some research studies that argue that so far as labor cost is concerned, ithas a constructive and progressive relationship with international trade andForeign Direct Investment but then again that relationship is statisticallyinsignificant. Even many studies portray political threat and bad politicaleconomy as factors bearing a negative correlation with Foreign DirectInvestment but somehow analogous with labor cost for being statisticallyinconsequential (Demirhan & Masca, 2008).
Developing economies have experienced fundamental changesthroughout their modern economic history. Of crucial prominence is theinitiative of liberalization, privatization, and globalization on one hand andgrowth and development of Foreign Direct Investment (FDI) on another hand whichsomehow has its roots from them. Emerging Markets Index provides a list of thelargest emerging economies by past and anticipated nominal GDP together withPurchasing Power Parity (PPP) GDP. Wefind that the majority of the developing economies or emerging markets of theworld are affected by their terms of trade and Foreign Direct Investment whichis why such indicators deserve high importance when indexing such markets.Investments abroad improve the growth rates for sure as a result they improvethe macroeconomic profile of the host country. As a result, it is veryimportant to recognize and study the major determinants of the Emerging MarketsIndex in order to improve the condition of such markets.
Conclusion
Multi-national corporations must discourse upon fewprofoundly consistent demands which are core global problems of internationaltrade. They are: What to invest as? How to invest? Where to invest? and in whatasset categories? FDI may attract some economies from a growth perspective,while as for some it may revolve around an equity standpoint for the reasonthat their growth and the profitability levels are poor especially in theircore sectors. Others may hunt for attractive fixed revenue by way of theirprice stability and sound interest rate regime (CFA Institute, 2019). In orderto hunt for better trade opportunities in the rest of the world, countries mustfind better markets that are likely to offer good-looking venture prospects.
Binish Qadri is ICSSRDoctoral Fellow, Department of Economics, Central University of Kashmir, GuestFaculty, NIFT, Srinagar.