International Trade and Foreign Direct Investment - Example

International Trade and Foreign Direct Investment Student Name Course Name Tutor Introduction International trade and foreign direct investment are major contributors of economic growth. Nations, such as China, have actively been involved in foreign direct investment and international trade since time immemorial. Many countries have engaged in international trade and foreign direct investment due to their importance in economic growth. It is believed that active participation in international trade and foreign direct investment improves a country’s balance of payment position. Furthermore, international trade exposes countries’ products to the outside world. It also enables countries to acquire cheap goods and services from foreign nations. Foreign direct investment on the other hand enhances the amount of investments in home country, thus boosting that country’s economic growth. Therefore, the importance of international trade and foreign direct investment cannot be ignored since they have, for along time, contributed to the entire development of a country’s economy. This paper therefore evaluates the role that international trade and foreign direct investment have played in recent economic development in China. The role of international trade in China’s economic development International trade is a major driver of China’s economic growth and prosperity. It has played great roles in Chinese recent economic development. One of the main roles that international trade has played is exposing China to international competition. International trade enables a country purchase goods and services from countries where costs of production are comparatively less. It also enables a country sell its goods and services to countries where costs of production are comparatively high. International trade therefore assists a country to easily participate in cross border trade, thus exposing it to international competition. 1 The global competition, brought about by international trade, makes a county concentrate in producing goods and services in which it has a comparative advantage. It is believed that, with global competition, a country specializes in producing goods and services that can effectively compete in the global market. Selling goods and services to the global market makes a country earn valuable foreign exchange. The foreign exchange obtained can later be used to pay for imports. This makes international business more profitable, thus strengthening a country’s economy (Gaurav, 2011). The recent economic development in China is due to profits obtained from cross border trade. China exports telecommunications equipment, clothing, electrical machinery, office machines and data processing equipment to the world market. The foreign exchange obtained from exports are normally employed in importing mineral fuels, oil, plastics, medical equipment, iron and steel. The exported goods and services in China are normally more expensive than imported goods and services. This therefore makes China experience balance of payment surplus, thus enhancing its economy. 2 Apart from exposing China to international competition, international trade has also played a role in Chinese economic development through optimum utilization of resources. It is believed that with international trade, a nation can fully utilize both domestic and international resources, thus making a country’s economy grow rapidly. International trade normally widens the market for goods and services of a country. This makes a country to fully utilize the domestic and international resources so as to enhance its production of goods and services for international market (HM Treasury, 2004). China, for instance, utilizes its finance and technology in enhancing production of goods and services for export. It also utilizes raw materials and cheap labor from poor countries to enhance its exports. This therefore has made its economy to grow very fast. Carr (2009) argues that international trade enables a country to efficiently allocate its resources. It is believed that with international trade, countries specialize in production of goods and services that they can produce more efficiently. Countries do always raise the entire consumption by exchanging their surplus production with the surplus production from other nations.3 International trade has also enabled China integrate effectively with the global economy. This has vastly contributed to China’s sustained economic growth. Integrating China’s economy with the global economy has made several Chinese industries with comparative advantages to attain high level of specialization. The attained specialization has made China to enhance its gross domestic product (GDP), hard currency inflow and employment. Additionally, integrating china’s economy with the global economy has improved the productivity of local industries and technology advancement. The integration has also changed tastes and preferences of the consumers. China’s integration with the global economy has ease importation of machinery goods and high level science and technology, thus enhancing the country’s industrial productivity.4 Technological advancements and changes in tastes and preferences of consumers have resulted in structural changes in China. As the main part of economic growth, changes in employment and production structure has been enhanced greatly by technological advancements. Therefore, international trade has indirectly results in structural changes in China’s economy. The gains obtained from structural changes are currently in hindsight, but always resisted the moment they occur. For instance, there is always a fallacy that the amount of work in an economy is fixed. This has caused many people to have a view that technological improvement results in not only reduction in the number of individuals required to finish certain task, but also in reduction of the number of working individuals required in the entire economy. This has caused delays in establishing technological innovations which are believed to have essential possible productivity benefits. 5 Even though introduction of new technology has displaced employees from certain tasks, industries and firms have reacted by taking on enlarged or various priorities, thus causing employment levels to remain high. Openness to trade has caused various nations to maintain high employment level through redeployment of labor and capital in production of commodities that are priced in competitive markets. Redeployment process results in transitional costs that fall heavily on the least equipped so as to cope up with changes. The outcome on the economy is usually positive. International trade has enabled China enjoy economies of scale. The wide market, created by international trade, has made China enhance its production of goods and services at lesser cost, thus making it enjoy economies of scale. Economies of scale are usually experienced if more units of products are produced on large scale and with less input costs. International trade has made China to not only produce for domestic market but also for international market. It is believed that absence of cross border trade makes a county’s economies of scale constrained by the size of domestic market. However, with cross border trade, this constraint is usually removed, enabling firms and industries to produce on a scale that is more efficient than would otherwise be possible.6 Foreign investment in China has been greatly enhanced by international trade. It is believed that openness to trade affects the size of foreign investment a country attracts. For instance, the ability of China to access imported inputs and export markets has made its investment projects successful. This has attracted several foreign investments in the country. Paul (2011) argues that nations with substantial trade barriers do always attract few foreign investments, thus causing their economy to lag behind. Foreign investments do always stimulate cross-border trade. Locational factors such as skills availability, relative cost of production in home and foreign market and inputs of production in every location, do always cause firms to split their process of production among two or more nations. 7 The role of foreign direct investment in China’s economic development Foreign direct investment is an essential part of global economic system that is open and effective. It is viewed as a major catalyst to economic development. Foreign direct investment plays major role in developing an economy of the host nation. For many years, foreign direct investment has assisted host countries’ economies to get a launching pad from which further improvements can be made. It is believed that any form of foreign direct investment injects a lot of capital know how and technological resources in host county’s economy (Chrystal, 2007). In China for instance, foreign direct investment has injected a lot of capital know how and technological resources, thus influencing the country’s economic growth by enhancing total factor productivity. It has also enhanced the efficient use of resources in China. Arshad (2007) argues that foreign direct investment provides major source of capital that brings with it current technology. It is not always easy to generate capital through domestic savings. Likewise, it is not easy to import the required technology from other nations. This is because transfer of technology to firms that lack previous experience in technology use is hard, risky and costly. However, with foreign direct investment, capital can be generated very easily and new technology can be acquired. Foreign direct investment plays indirect role in developing a country’s economy. In China for instance, foreign direct investment assists indirectly in acquiring new technology. It is believed that the money that China’s obtain through foreign direct investment is normally employed in purchasing or importing technology from other nations. This is an indirect role that foreign direct investment plays in China’s economic development. 8 For many years, foreign direct investment has developed several externalities in form of available benefits to entire economy. The benefits entail transfers of knowledge and technologies in production and distribution, upgrading of industries, improving labor force work experience, establishment of current management and accounting methods, introduction of trading networks and improvement of telecommunications services. Foreign direct investment in services has an impact on host nation’s competitiveness. The competitiveness of the host nation is usually enhanced through raising capital’s productivity and allowing host nation to attract latest capital on good terms. Foreign direct investment also develops services that are employed as strategic inputs within the traditional export sector. This expands trade volume and improves production via process and product innovation.9 Foreign direct investment plays a vital role in entire economic and social welfare of a nation. In China, for instance, foreign direct investment has improved the country’s infrastructural condition. Foreign direct investment has caused roads, bridges and railways to be modernized. Improvement of infrastructural condition in China has enhanced trade and industry, thus stimulating the country’s economic growth. Apart from improvement in infrastructural condition, foreign direct investment has improved people’s standard of living. Sectors such as health and education have been improved by foreign direct investment. It is believed that the health sector in China has greatly benefited from foreign direct investment.10 Foreign direct investment enhances competitiveness in an economy. Entry of foreign firms in an economy minimizes concentrations of firms in the market, thereby enhancing competition. The increased competition results to reduced prices and provision of wide varieties of goods. This enhances the affordability and amount of goods and services produced in the home country, thus assisting in economic development. Tougher competition can cause firms to minimize organizational inefficiency so as to remain competitive in the market. Countries do always allow foreign investors to invest in sectors in which they have low trade barriers. This normally assists the countries to attain greater net gains from foreign investment. 11 Conclusion From the discussion, it is clear that foreign direct investment and international trade plays a great role in economic development. In China, for instance, one of the main roles that international trade has played is exposing its economy to international competition. International trade has enable China purchase goods and services from countries where costs of production are comparatively less. It has also enable China sell its goods and services to countries where costs of production are comparatively high. Apart from exposing China to international competition, international trade has also played a role in Chinese economic development through optimum utilization of resources. International trade has enabled China integrate effectively with the global economy. It has enabled China enjoy economies of scale. Foreign investment in China has been greatly enhanced by international trade. Foreign direct investment on the other hand is an essential part of global economic system that is open and effective. It is a major catalyst to economic development. Foreign direct investment injects a lot of capital know how and technological resources in host county’s economy. Several externalities in form of available benefits to entire economy have been developed by foreign direct investment. Foreign direct investment plays a vital role in entire economic and social welfare of a nation. It also enhances competitiveness in an economy. Bibliography Arshad, K. M. (2007). Foreign direct investment and economic growth: the role of domestic financial sector. Issue 18. Pakistan Institute of Development Economics. Berg, D. V. & Lewer, J. (2007). International Trade And Economic Growth. M.E. Sharpe. Bjorvatn, K. & Nordas, H. K. (2002). The role of FDI in Economic Development. Nordic Journal of Political Economy. 28. Pg 109-126 < http://www.nopecjournal.org/NOPEC_2002_a08.pdf> Caballero, et al. (2000). International Trade: Some Basic Theories and Concepts. http://www.fao.org/docrep/003/X7352E/X7352E02.htm Carr, I. (2009). International Trade Law 4/e. 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