Generally, the paper "Comparison of Malaysia and Indonesia as Preferred Locations for FDI " is a great example of a business case study. A country’ s preference as a foreign direct investment (FDI) destination depends on its ability to provide a stable economic environment that can attract investors. Foreign firms are likely to invest in a country whose economic condition is steady since any form of instability is likely to adversely affect such firms. Against this backdrop, this paper aims to discuss the meaning of the term economic stability and analyse how it affects a country’ s investment environment, especially the capacity of a country to attract FDI.
The paper will then compare two ASEAN nations – Malaysia and Indonesia – in regard to their economic stability as preferred locations for FDI. Significance of economic stability to a country’ s international business capacity There are many definitions of the term economic stability. However, according to the World Bank (2012), most definitions have in common that economic stability is about the nonexistence of system-wide occurrences characterised by a failure of the economy to function (that is, the occurrence of crises).
Economic stability is also about the propensity of an economic system to withstand stress. This implies stability in both political and macroeconomic systems. Notably, a stable political system means that a country is able to provide an environment that is conducive for people and firms to conduct business. The World Bank (2012) also notes that a stable economic system has the capacity to efficiently allocate resources and manage financial risks, maintain employment levels close to the economy’ s natural level, and eliminate relative price movements of financial or real assets that will impact the financial stability of employment levels.
An economic system is also said to be stable when it able to dissipate economic imbalances that arise internally or those that emanate from significant widespread unexpected events. If the system is stable, it will be able to absorb the shocks mainly through self-corrective mechanisms, thus preventing adverse occurrences from having a disrupting impact on the real economy as well as other financial systems. As mentioned above, economic stability can also be viewed in terms macroeconomic stability and this takes into account factors such as a country fiscal policy, budget deficit, balance of payments, inflation and so forth (Buxheli, 2011, p.
34). These factors affect a country’ s investment environment in different ways. For example, a large and continuous budget deficit as a ratio of a host country’ s gross domestic product (GDP) may be an indicator of economic instability in the host country, and this may have a negative impact on the country’ s ability to attract inward FDI (Banga, 2008, p. 128), which does not augur well with international business. A high real GDP growth rate is indicative of high economic productivity and can raise the level of international business and hence attract more FDI (Arbatli, 2011, p.
10). As well, Schneider and Frey (1985, cited by Banga, 2008) argue that a low rate of inflation is an indicator of internal economic stability in a host country. In contrast, high rates of inflation indicate that the governments of affected countries are not able to balance their budgets and their central banks have failed to conduct appropriate monetary policy. Although Banga (2008) does not relate this directly to a country’ s economic stability, Neuhaus (2006, p.
147) asserts that a low level of inflation coupled with a stable fiscal balance raises the credibility of a government in regard to its long-term economic policy. Along the same line, Balasubramanyam and Mahambare (2004, p. 49) point out that macroeconomic stability, which is embodied by stable exchange rates and low levels of inflation, is an important factor in foreign investment decisions of firms. This means that countries which score highly in terms of taming inflation, making attempts to have stable exchange rates and reducing budget deficits are likely to engage in more effective international business than those which score poorly in these areas.
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