Question

Supporting the statement, trade in developing countries.

Hint:

Foreign investment boosts trade in developing countries through export diversification, technology transfer, global value chain integration, infrastructure development, and market access. It transforms economies from commodity exporters to manufactured goods exporters.

Answer 1

Step 1: Understanding the role of foreign investment in developing countries.
Foreign investment significantly impacts trade in developing countries through various channels. It helps integrate these economies into the global trading system and enhances their trade capacity.
Step 2: Arguments supporting the role of foreign investment in trade of developing countries.

• Export Diversification and Growth:
  • Foreign investment helps developing countries move beyond traditional commodity exports
  • Multinational corporations (MNCs) establish manufacturing units that produce finished goods for export
  • Example: Vietnam's export boom in electronics due to Samsung's FDI
  • Countries like Bangladesh developed readymade garment exports through foreign investment
  • Export processing zones (EPZs) established with foreign capital boost export earnings
• Technology Transfer and Productivity:
  • Foreign investment brings advanced technology and production methods
  • Local firms learn from foreign competitors and suppliers (spillover effects)
  • Improved productivity makes domestic industries more competitive internationally
  • Access to global research and development (R& D) networks
  • Example: Indian automobile industry transformed through Japanese and Korean FDI
• Integration into Global Value Chains:
  • Foreign investment connects developing countries to global production networks
  • Countries specialize in specific stages of production where they have comparative advantage
  • Increases trade in intermediate goods and components
  • Example: China's integration into global electronics value chains through FDI
  • ASEAN countries' participation in automotive and electronics global value chains
• Infrastructure Development:
  • Foreign investment often includes development of ports, roads, and logistics
  • Better infrastructure facilitates both export and import trade
  • Special economic zones (SEZs) developed with foreign capital improve trade facilitation
  • Reduces transaction costs and delivery times
• Market Access and Trade Agreements:
  • MNCs use their global networks to access developed country markets
  • Products manufactured in developing countries benefit from preferential trade agreements
  • Foreign investors bring knowledge of international quality standards and regulations
  • Helps developing countries meet sanitary and phytosanitary standards for agricultural exports
• Human Capital Development:
  • Foreign firms provide training and skill development to local workers
  • Improved labor productivity enhances export competitiveness
  • Managerial and technical skills transfer to domestic workforce
  • Creates a skilled labor pool that benefits the entire economy
• Access to International Markets:
  • Foreign investors bring established distribution networks and marketing channels
  • Products from developing countries gain access to supermarkets and retail chains in developed countries
  • Branding and packaging improvements make products export-ready
  • Example: Kenyan horticulture exports developed through Dutch and British investment

Step 3: Statistical evidence.

• Developing countries that attracted significant FDI (China, Vietnam, India, Mexico) saw their trade-to-GDP ratios increase substantially
• FDI inflows to developing countries increased from $200 billion in 2000 to over $700 billion in recent years
• Share of developing countries in global trade increased from 30% to nearly 50% over past three decades