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The growing internationalization of firms from developing countries can be described as a major characteristic in the current world economic scenario. In terms of their participation in the world outflows of FDI, developing economies have registered a significant performance in the last 15 years. In terms of the countries of origin, FDI outflows from developing countries are highly concentrated. Hong Kong and China are in the first two positions, Brazil on the 5 th position, and South Africa and Mexico are at the end of the list of ten.

The increase role of MNCs from developing countries is particularly due to the high growth of the internationalization of firms from Asia, mostly from China and India, but also from Russia, and some few Latin American countries, Brazil and Mexico. The shift in the pattern of international production is not only reflected in the growing number of MNCs from developing countries, but also in their participation in the foreign assets and sales of the top 5, MNCs worldwide.

One of the indicators to measure the degree of internationalization and importance of international transactions in the global activities of a firm is from UNCTAD developed index, called Transnationality Index TNI , which is calculated considering the average of three ratios: foreign assets to total assets, foreign sales to total sales and foreign employment to total employment of a firm Unctad, , p.


Source: Unctad, , p. Although the data show a real increase of the international transactions of EMNCs, their TNI is still lower than the index of MNCs from developed countries, as can be observed in the table below. Comparing the foreign sales, foreign assets, and foreign employment in the total of the largest MNCs in developed and developing countries, EMNCs have a lower TNI, and have been more sensitive to the effects of the global crisis, reducing their international transactions between and , in the meanwhile MNCs from developed countries have registered a positive variation, and, therefore, increased their foreign assets, foreign employment and foreign sales of their subsidiaries worldwide see tables 4 and 5.

On the other hand, considering the period before the global crisis, EMNCs have improved the TNI, increasing their international transaction and their share in the total assets and sales. Source: Unctad, World Investment Report, different years. However, there are differences among developing countries.

Since the beginning of the literature about MNCs, a strong economic focus was adopted to explain how firms place their assets abroad. Hymer considers onerous to operate in foreign market, so the firm should own competitive advantages to be exploited over market imperfections. Williamson focused his analysis on comparing the costs of trading a product with foreign markets and producing this same product abroad in order to evaluate which modality would imply on lower costs, being, this way, more attractive to the firm.

Buckley and Casson determined that the company would perform FDI according to two kinds of advantages: ownership advantages and localization advantages. The Eclectic Paradigm, also known as the OLI Theory, is the result of an attempt made by John Dunning to integrate in one single model the several different scopes contained in the International Business literature in order to explain the why, where and how of the international expansion of firms. For two decades the model remained the dominant analytical basis of most of empirical studies about determinants of FDI.

The ownership advantages are inherent to the company and crucial to the internationalization, because they are a matter of differentiation among firms, they are related to the intangible assets and the position conquered by the firm, such as innovation capacity, qualified labor and financial status that allows it to compete in foreign markets. Assuming that condition 1 is satisfied, the extent to which the enterprises perceives it to be in its interest to add to its O advantages rather than to sell them, or their right of use, to independent foreign firms.

These advantages are called market internalisation I advantages. The internalization advantages come from the benefits of the firm to use its own assets to produce abroad its products instead of allowing others to produce or distribute them, which might contribute to reducing exchange costs, information property, uncertainty diminish, and more control over supply, markets, contracts and business. In other words, internalization advantages are the outcome between the mix of ownership and location advantages. Assuming, that conditions 1 and 2 are satisfied, the extent to which the global interests of the enterprises are served by creating, accessing or utilising, its O advantages in a foreign location.

The location advantages are host-market specific aspects that turn such location positive for the firm to settle a production plant in it, especially regarding transportation, access to labor force, cultural barriers and market potential. Given the configuration of the ownership, location and internalisation OLI advantages facing a particular firm, the extent to which a firm believes that foreign production is consistent with the long term objectives of its stakeholders and institutions underpinning its managerial and organizational strategy.

Based on the four sets of advantages, Dunning also suggested, based on the motivation of MNCs, four different types o FDI projects: the market-seeking projects, the performance seeking projects, the resource-seeking projects and the asset-seeking projects. The IDP model determines that there are five different development levels among countries, where they let being only a FDI destination to perform FDI as they progress to these levels. Stage 1 is related to countries with limited location advantages to attract FDI, so the role of governmental measures is important to turn the economy attractive to foreign investors.

Markets on Stage 2 have a larger extent of location advantages, which turn them a attractive destination of FDI. The stage three describes the development of this process and shows that the enlargement of the activities of foreign firms in the host country will contribute, through spillover effects and technology transfer, to create and increments the ownership advantages by local firms, turning them more prone to perform FDI, especially on less-developed markets.

On Stage 4, firms from the home market stop being predominantly FDI receivers to be investors, and when they achieve the final level, Stage 5, their strategies will be more influenced according to their own resources and capabilities and less by governmental measures. This process contributed largely to stimulate the creation and expansion of MNC from developing countries.

Due to the growing importance of developing countries MNCs DMNCs in the current world economy, their role in the International Business Literature has grown in importance in the same pace. The second perspective is the institutional perspective, which focused on how institutions from home and host countries of FDI affect the international expansion of firms.

The third perspective is more related to studies that have addressed differences and similarities of the internationalization processes of MNCs from countries with different level of development Developed and developing economies. While the first perspective is, in large part, based on the economic theory of FDI, and specifically, the contributions of Hymer , Bukley and Casson , and Dunning , The second perspective introduced insights and concepts of the neo-institutionalism to explain the phenomena of MNCs.

The third perspective, including some contributions of the behavioral approaches Uppsala , focused more on how EMNCs create ownership advantages, and how they overcome the liability of foreignness. It is believed that developing countries MNCs share some common characteristics, such as the easy access to natural resources BCG, and the comparative advantages related to the factor endowment resources in their home countries, that allow them to be internationally competitive due to their low prices Pangarkar and Lim, ; Enderwick, Cuervo-Cazurra argues that the access to technology is the main reason for firms to perform FDI in developed countries.

Gammeltoft, et al also highlight the extent in which the home market characteristics affect the competences from developing countries MNCs, stating that institutions also play a vital role, but there are evidences that these firms are moving on and acquiring competences of their own, making them achieve a higher level of competitiveness and climbing on the IDP Model stages Goldstein and Pusterla, MNCs with high international integration will choose a global strategy, in the case of low local responsiveness, or a transnational strategy, in the case of high local responsiveness.

But in the case of low international integration, the firm will choose an international strategy, in the case of low local responsiveness, or a multi-domestic strategy, in the case of high local responsiveness. Factors like GDP, exchange rate, trade and inflation, with the aim to estimate the effects of the market size, trade openness, macroeconomic stability, and the quality of institutional governance.

Bae and Hwang, ; Thomas and Grosse, ; Frenkel et al.

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  • Results of empirical studies have shown opposite effects. On the other hand, the interest rate has revealed to present a negative relation to the outward FDI Bae and Hwang, ; Thomas and Grosse, ; Kyrkilis and Pantelidis, , The relationship between FDI and both trade and exchange rate is also uncertain. The outward FDI may replace trade on the case of market-seeking projects, but cases of efficiency-seeking or resource-seeking projects may create an intra-firm trade Swenson, ; Seo and Suh, A high exchange rate devaluated currency may be positive for firms willing to maximize their profits in the home market, a feature from market-seeking projects, while a low exchange rate evaluated currency will reduce production costs, which is common in the cases of performance-seeking projects Chen et al.

    Just recently there were some studies trying to combine non-traditional variables with the traditional ones. Amal et al. The economic freedom was also negative to the outward FDI for Kapuria-Foreman , leading the author to argue that this variable need to be disaggregated to function properly, being its most relevant index the property rights. Chitoor et al. Some other empirical evidences from structural changes boosting the outward FDI from developing countries are the governmental regulations to promote outward FDI in China Rasiah et al.

    The FDI theory has traditionally seen the macroeconomic variables as the country of origin elements responsible for the international performance of MNCs. Bevan et al. Given the institutions importance on improving markets efficiency, Peng et al. The authors describe institutions as structures responsible for the social behavior interaction, managing transactions on politics such as corruption and transparency , law such as economic freedom and regulatory regime and social such as ethical rules and business climate. McMillan also consider that institutions play a more important role on developing economies, since the developing markets poor function may be a sign of poor institutions, restricting local firms, since institutions are relevant over strategies implementation and competitive advantage development by local firms.

    But, in the other hand, there are authors like Witt and Lewin that pointed out the possibility of a negative institutional scenario also having positive impact over the FDI, since companies may feel encouraged to operate across borders to run away from some home market restrictions. The BCG believes that the experience of developing business on negative institutional scenarios has implied on significant competitive advantages for MNCs from developing economies, such as creative, innovative and flexible processes that helped them to take fast and efficient decisions. Luo et al called such behavior as institutional escapism, and affirm that both of the situations approached by the literature co-exist and boost the international engagement of MNCs from developing countries, but their effects are different among firms and industries.

    Whereas firms do seek foreign markets to obtain access to technology and knowledge which are not available at their home market, public policies are also important to neutralize intrinsic competitive disadvantages from DMNCs Luo et al. The literature on International Business IB showed that foreign firms face different barriers that exist because of different levels of geographic distance, psychological, cultural and institutional relationship between the country of origin and host countries of their investments Zaheer, ; Nachum, , the barriers are often called "Liability of foreignness LOF.

    According to Madhok , LOF occurs for several reasons:. Foreign companies have disadvantages related to the low level of knowledge about host markets of their investments;. Secondly, companies must adapt their ownership advantages to different cultural and institutional environments, which should generate different costs and barriers that domestic firms do not have; and. On the other hand, the following features regarding the internationalization patterns between developed and emerging economies have been pointed out in the literature:.

    EMNCs are based in countries with low average income per capita, and presenting weak institutional infrastructure;. EMNCs present limited ownership advantages, such as technology, brand when developing international operations. They are late comers Ramamurti and Singh, , following apparently different paths in terms of countries of destination of their investments. They use to invest in other emerging countries, but also in developed countries Sirkin et al, , acquiring other companies as part of their internationalization strategy UNCTAD, ; Gubbi, et al, Cuervo-Cazurra classified the MNCs from emerging countries as those that seek to develop ownership advantages abroad and those that aim on exploring abroad the advantages acquired in their domestic market.

    To overcome the liability of foreignness, measured as the cost of doing business abroad Zaheer, and their disadvantage as latecomers, EMNCs may opt for an audacious international strategy to quickly establish their reputation among foreign customers, such as the acquisition of strategic assets and already established brands Luo and Tung, ; Bonaglia, Goldsten and Matthews, That means that the investments of EMNCs will act as a springboard to address firm-specific disadvantages via international acquisitions of new assets. Several studies about MNCs from developed countries have discussed different issues, most of them related to the determinants and patterns of their strategies, and also the relationship between the degree of internationalization and their performance.

    Currently, researchers understand that MNCs seek for complementary assets abroad to enlarge their ownership advantages Serapio and Dalton, ; Hayashi and Serapio, , which means that EMNCs are not the only ones to develop ownership advantages abroad. In terms of competitiveness assets, it is believed that firms from developed countries have an inherent advantage over firms from emerging countries, which is the effect of the country of origin stereotype over its international branding.

    Although there are different standards between MNCs, studies have shown that both emerging MNCs and MNCs from advanced countries seek to develop complementary strategies to expand their ownership advantages Hayashi and Serapio, They used to follow an incremental strategy of internationalization, based on the psychic distance as determinant factor for market selection in the early stages, in particular, which means, that the process of gradually increasing commitment would still be expected to be the norm Dunning and Lundan, There are also evidences about the role of social networks as a key factor of learning, developing new markets, and managing disadvantages related to the LOF.

    Results from different empirical studies suggest that an incremental behavior is also a feature from the internationalization of EMNCs Pillania, , and the psychic distance also affects the market selection process, even though it does not determine alone, for example, the foreign direct investment destination Li, Regarding the extent to which a firm will depend mostly on ownership, internalization and locational advantages to internationalize its activities, Li and Lee and Slater suggest an adaptation for the specific case of EMNCs; this is because these firms often end up developing ownership advantages on foreign markets, mostly in developed countries, due to better access of technology and knowledge.

    An analysis of the International Business literature shows that due to the complexity of the phenomena of Multinational Companies from developing economies, scholars have been using more eclectic approaches to investigate the process of internationalization of firms from countries of different levels of development.

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    However, although some authors have suggested new theories of EMNCs, it seems that the eclectic paradigm Dunning, is still a powerful framework for a multi-perspective approach, that take under account factors related to country and firm advantages. Thus, the OLI paradigm provides a general theoretical framework for the understanding of the FDI determinants from emerging economies.

    The main advantages of the framework lie in the fact that it allows to integrate two main analytical dimensions; the dimension that focuses on the country specific advantages CSA , and the dimension that considers the firm-specific advantages FSA. Rugman has emphasized the importance of the two dimensions and their interaction for the analysis of MNCs strategies. Therefore, in the case of emerging economies, there are different and specific reasons for the successful internationalization of their firms. Different authors have investigated the differences in the path and pattern between EMNCs and MNCs from developed countries Cuervo-Cazura, , , suggesting a higher level of complexity, and a need for a more multi-approach to analyze their strategies and determinants.

    The CSA are related to the location advantages and how they contribute to international competitiveness of firms.

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    Although the CSA can be related to the L-advantages, the concept is however different. The Home Location advantages are home-market specific assets that turn such location positive for the firm to create, or to enlarge its ownership advantages, especially, regarding factor endowments, economic performance and institutional quality. Thus, the country specific advantages CSA are related to home and host country factors. It means that to understand the patterns and determinants of OFDI it is recommended to take under account, in large scale, the economic and institutional changes in the home country, that shape the strategy of growth and competitiveness of the firm on global level.

    On the other hand, to address FDI determinants, o host county perspective is also relevant, in that sense that the changes and the configuration of market and competition affect the strategy of the firm in the host country. The host country perspective provides relevant insights for the understanding of how the MNC adapt, adjust and manage the cultural, economic and institutional differences between home and host country. Thus, FSA are inherent to the company and crucial to the internationalization, because they are a matter of differentiation among firms, they are related to the intangible assets and the position conquered by the firm, such as innovation capacity, qualified labor and financial status that allows it to compete in foreign markets.

    In the attempt to understand the pattern and path of the international expansion of MNCs from emerging economies, we present and discuss some few propositions. Proposition 1: A MNC from a emerging country, with a short period of experience of internationalization and limited ownership advantages will be influenced more likely by psychic distance factors when internationalizing into new markets. MNCs from developed countries, with specific ownership advantages, legitimacy that is related to the advantages of the home market, high accumulated knowledge about processes of entering into foreign markets, and inserted in networks relationships worldwide will reduce the costs and disadvantages related to the liability of foreignness.

    On the other hand, EMNC, with a short period of experience of internationalization and limited ownership advantages will be influenced more likely by psychic distance factors when internationalizing into new markets. In this case, due to their limited technological and managerial capabilities, EMNCs are more likely to face higher costs to manage the LOF in culturally distant market, or in not stable institutional environments, which may concentrate their investment projects in regionally or culturally closed host countries.

    Proposition 2: MNCs from advanced economies, due to their international experiences, accumulated knowledge about foreign markets, and learning abilities, are better than EMNCs at coping with weak institutional environments. The internationalization of the firm will depend, not only on the interaction between ownership, location and internalization advantages, as discussed in the eclectic paradigm, but also including variables from the institutional approach. It means that introducing factors related to the institutional environment, in which firms operate and develop their resources and capabilities, may contribute to explain how location and ownership advantages interact; creating the conditions to overcome the disadvantages to be acting in a foreign market.

    Company from a emerging country, by learning to operate in an unstable institutional environment may acquire a competitive advantage that makes the firm to have a sort of ability in working in such environments, when firms from developed countries, have more difficulties to operate in them. However, due to accumulated knowledge in foreign markets, and business experiences in different cultural environments may provide the MNC from advanced economies a better advantage to manage their value-added activities in countries presenting weak institutional arrangements; this is a way to overcome the liability of foreignness.

    It is further argued that due to the nature of rent extraction, FDI carries the connotation that the capital-rich countries exploit capital-poor countries despite the fact that FDI may also prove to be ultimately beneficial to the host country. In contrast, the network approach to FDI highlights the exploitation of network resources for internationalization. Even a small and seemingly weak firm may engage in FDI as long as it can successfully leverage external resources. Through FDI, an investor builds new relationships in a foreign country in order to secure those essential relationships.

    FDI facilitates linkages between the domestic and overseas networks, allowing an investor to internalize some technical and managerial assets within its organization while gaining access to a pool of external resources. These new resources propel the firm to make further investments Chen Other important actors include entry and development methods which concern the choice between exporting, licensing, and FDI. The most strongly FDI-oriented sectors include electronics, pharmaceuticals, oil and food, drink, and tobacco.

    In other cases of anti-dumping allegations, the firms involved may decide to establish manufacturing plants in those countries they export to such as in cases of Korean and Japanese firms Young et al. It is argued that enterprises in developing countries generally start the innovation and learning process by importing new technology and then investing in building their capabilities to master the tacit elements.

    How much they invest depends on the incentives thrown up by markets, mainly by the competition faced in foreign and domestic markets, as well as, on the ability to access complementary supporting activities. Enterprises draw on internal and external resources—both foreign and domestic—to build their capabilities The process starts with capabilities needed to master the technology for production purposes and may deepen over time into improving the technology and creating new technology.

    It is further argued that linking, leveraging, and learning capture what enterprises—and countries—have to do to enable their technological development. Thus, linking is connecting with outsiders to acquire needed technologies and skills; leveraging is going beyond arms-length transactions to squeeze as much as possible from the new relationships with those outsiders; and learning is making many efforts to master process and product technologies, consciously building the foundation for improving current technologies and creating new ones UNIDO It has been observed that repeated application of linkage and leverage processes may result in the firm learning to perform such operations more effectively organizational learning.

    Competing in global value chains can build foundations and learning. Particularly in manufacturing, the insertion of local activities in wider networks is an opportunity for developing countries to upgrade their capabilities. FDI is an effective conduit for technology transfer through technology spillovers to domestically owned firms in the host country. Managi and Bwalya analyzed the nature and occurrence of technology spillovers from foreign to local firms in the manufacturing sector in Kenya, Tanzania, and Zimbabwe. Support was found for horizontal intra-industry productivity spillovers and vertical inter-industry technology spillovers from foreign firms in upstream sectors to local firms in downstream sectors in the case of Kenya and Zimbabwe.

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    However, support was only found for regional technology spillovers that industrial clustering speed up the rate of technology diffusion to local firms in the case of Tanzania. Le and Pomfret , in a study of Vietnam firms, found that domestic firms gain technology spillovers through vertical linkages with foreign firms, but the effect of the horizontal presence of foreign firms on the productivity of domestic firms was negative. They argued that it suggested that potential technology transfer between foreign firms and their local competitors is more than offset by the competition induced by the entry of foreign firms and the existence and strength of horizontal and vertical spillovers depended on industry and firm characteristics and on the types of FDI.

    Abor et al. This was attributed to the fact that FDI brings on board improved technologies and management skills that would translate into efficiency and productivity. In addition, firms with foreign capital injection may be in a better position to finance the sunk cost involved in entering the export market and also foreign-owned firms may have links with foreign markets and therefore would be motivated to export.

    On the one hand, Modarress et al. However, they did not find conclusive evidence of the relationships between technology transfer and income inequality or economic growth. The dilemma faced by governments in developing countries is what they can do to facilitate technological learning in such a dynamically changing global technology environment. It is postulated that technology policies would be analyzed in three perspectives: market mechanism, technology flow, and time. Three components related to market mechanism are identified.

    It is argued that unless there is a competitive market, there will be little investment in innovation activities, as innovation is usually uncertain and risky. The first sequence involves technology transfer from abroad through such formal mechanisms as FDI, the purchase of turnkey plants and machinery, foreign licenses Flesh , and technical services Hobday ; Kim and Dahlman Dynamic perspective is added as the third dimension to reflect the impact of technology flow and market mechanism changes as industries in developing countries advance through different stages of development over time.

    It is argued that effective diffusion of imported technology within an industry and across industries is a second sequence in upgrading technological capability of an economy. These efforts are crucial to augmenting technology transfer and expediting the acquisition of technological capability. Technology may be transferred to a firm from abroad or through local diffusion, but the ability to make effective use of it cannot.

    It should be pointed out that technology and innovation approach offers a more holistic strategy to competitiveness in the developing countries than previous perspectives Hobday ; Kim and Dahlman ; Wignaraja a. It is argued that understanding the process of technological diffusion and innovation is critically important for any country that desires to join the group of core innovators.

    FDI has come to swamp all other financial flows and has faced a lot of shifts and instability. Kenya has become a favored business hub, not only for oil and gas exploration but also for manufacturing exports, as well as consumer goods and services. The main factors influencing investment decisions in third world countries include political risk, economic freedom, business freedom, fiscal incentives, trade freedom, government expenditure, inflation, corruption, property rights, state of financial system, and labor regulations Kayonga His study points out that policy framework of a country are the most important aspect—these are rules and regulations governing the country and operations of foreign investors.

    Further, the liberalization of national FDI frameworks in developing economies has been substantially successful in attracting FDIs in those countries. According to a index of economic freedom assessment, economies that are more open have a better investment environment than liberalized economies Ngowi In addition, FDI creates services that can be used as strategic inputs in the traditional export sector to expand the volume of trade and to upgrade production through product and process innovation Todaro The achievement of these goals will contribute to human development and economic development.

    One main source of these capital investments is FDI, since in Kenya and most African countries, the private sector is perceived as an engine of growth in their National Development Strategies. Hence, FDI will play a critical and crucial role in the achievement of these goals or at least in economic growth World Bank The Government of Kenya is focused on sustaining a stable investment climate for private sector participation in energy, developing expanded transmission and distribution networks to deliver power to customers, maintaining a creditworthy off-taker, maintaining cost-reflective tariffs, and reducing inefficiency in the sector to support more affordable end-user tariffs USAID In addition, a history of productive capital investments and sustained regulator and government support for signed PPAs provide a roadmap for future projects.

    Power Africa, an initiative led by the US Government, which aims to increase the number of people in of sub-Saharan Africa with access to power, is such an FDI initiative that has potential for spurring growth and technology transfer. Power Africa awards grants for innovative energy projects across sub-Saharan Africa. In addition, with a unique private-sector-led model, Power Africa draws on the combined expertise and abilities of 12 US Government agencies, the World Bank Group, the African Development Bank, the Government of Sweden, African governments, and private sector partners.

    It is expected that with US expertise in energy technology and regulatory reform, combined with US Government and private financial resources, Power Africa will help drive quick-impact interventions and policy reforms to push for sustainable energy development. This is therefore an FDI initiative that has contribution to technology transfer. According to Power Africa update , July , the USA is supporting the development of the energy sector through financing, grants, technical assistance, and investment promotion.

    Froot and Jeremy examine whether hard infrastructure, in the form of more highways and railroads, or soft infrastructure, in the form of more transparent institutions and deeper reforms, leads to more FDI. Soft infrastructure is a more important determinant of FDI than hard infrastructure. Grossman and Helpman examine the effect of government infrastructure on both the probability that a country receives FDI and separately on the amount of FDI received for countries receiving any FDI.

    They find that countries failing to achieve a minimum threshold of effective governance are unlikely to receive any US FDI. More FDI is likely to occur in countries with good physical infrastructure such as bridges, ports, and highways. It also seems likely that there are some diminishing returns in infrastructure, at least in infrastructure of a specified type and especially for countries with poor infrastructure, and investing in improvements in infrastructure may be important for attracting FDI.

    Nonetheless, some countries with poor infrastructure may be unattractive hosts for FDI for a variety of other reasons, and even substantial investments in infrastructure might not bring FDI pouring in. But all else equal, a country with better infrastructure would be expected to attract more FDI Marwah and Tavakoli The positive effect of infrastructure on FDI has been found to be quite robust to time periods and countries considered, other control variables included, and the like.

    Technology is seen as a key determinant of productivity. New technology might on the other hand also decrease demand for labor by substituting large number of low-skilled employees with fewer high-skilled employees or by substituting capital for labor. Hence, technology policies will affect the degree of job creation. First, there are a number of channels through which FDI affects productivity of domestic firms.

    In the first, spillovers through demonstration effect take place when a domestic firm improves its productivity by simply observing nearby foreign firms and copying some technology. Second, another type of spillovers is through competition between foreign firms and domestic firms. On the other hand, increased competition with inward FDI can also reduce productivity of domestically owned firms, particularly in the short run.

    If imperfectly competitive firms have to incur fixed costs of production, a foreign firm with lower marginal costs will have an incentive to increase production relative to its domestic competitor. In this environment, entering foreign firms producing for the domestic market can steal demand from domestic firms, forcing them to reduce production Ngowi In terms of the first channel, this can be achieved directly through licensing or indirectly through foreign direct investment FDI.

    International knowledge flows raise growth in both models. Spillovers also depend on the difference in the level of technological intensity between MNEs and local firms and the degree of export-orientation of the FDI Hansen and Rand This has implications for the desired type of FDI. FDI featuring a slightly higher technology level than domestic firms might be more desirable than high-technology FDI which cannot establish relations to the domestic economy. Similarly, foreign firms that operate in isolation with little linkages to domestic enterprises are less likely to generate a lot of spillovers to local firms.

    Regarding the motivation of the investment, market-seeking FDI in developing countries facilitates more linkages than investment for other purposes. One reason is that affiliates which produce for the domestic market often have more freedom to choose suppliers than affiliates fulfilling their role in the international production system of their parent company UNCTAD Other factors relate to the size of the affiliate and the role assigned to the foreign affiliate. The occurrence of these direct and indirect effects and linkages has been extensively examined for FDI from industrialized countries to developing countries.

    For developing source countries, in contrast, rigorous empirical assessment of the development effects is to date scarce, and results are expected to contrast. FDI in an industry may create a market for local firms which can either be in the same industry or in different industries. Since the locations of foreign investments differ significantly between firms, it is possible to construct firm-specific weighted averages of foreign GDP growth. These firm-specific foreign economic growth rates can be used to generate predicted growth rates of foreign activity that are then employed to explain changes in domestic activity Hansen and Rand There are several channels through which foreign activities can influence the scope of domestic operations, including cases in which foreign production requires inputs of tangible or intellectual property produced in the home country.

    The same instrumental variable method used to identify the effect of foreign investment on domestic investment can also be used to identify the effect of foreign investment on other types of domestic activity. The use of weighted foreign economic growth rates as instruments for changes in foreign investment has the potential to produce misleading results if the foreign investments of firms planning rapid expansion of domestic investment are disproportionately attracted to economies expected to grow rapidly Hanson et al.

    The effect of foreign operations on the domestic activities of multinational firms therefore remains an open question Blonigen Much of the recent theoretical and empirical work on multinational firms emphasizes alternative motivations for foreign direct investment or the reasons why alternative productive arrangements are employed, the importance of vertical specialization to international trade patterns and the expansion strategies of multinational firms.

    The findings of this research that multinational firms exhibit high degrees of integrated production are consistent with sizeable effects of foreign operations on domestic activity Hubert and Nigel There are a variety of ways in which globalization affects labor: the most important ones are through increased trade, FDI, and international technology transfer. FDI can also lead to increased employment amongst local firms as a result of backward or forward linkages so that the direct employment by foreign affiliates may underestimate the total impact.

    There may also be spillovers to domestic firms as a result of training by foreign investors or technology transfer. Foreign firms that are subject to pressures in their home countries may also bring with them higher labor standards and wages than the norm for the host economy Mwega and Ngugi Not only the direct employment effects of FDI in developing countries have been unsubstantial but also the indirect effects have been minimal and possibly even negative.

    The outcome in terms of indirect effects depends on the balance between the crowding-in effects of FDI creating new markets for local investors and the crowding-out affects that arise when foreign affiliates displace local competitors. Foreign investors in developing economies have created very limited local linkages since they import most of their inputs Rasiah and Gachino Primary data was collected using semi-structured questionnaires.

    Secondary data was collected through documentary analysis on effects of foreign directs investment in the energy sector on economic growth in Kenya between the years to The study questionnaire was developed based on the study objectives, and then the questionnaire was tested for validity. This was achieved by pre-testing the instrument that was used to identify and change any ambiguous, awkward, or offensive questions and technique as emphasized by Cooper and Schindler In this study, reliability was ensured by using the internal consistency test to measure the extent to which the items in questionnaire reflected the concepts or variables for the study.

    X 1 , X 2 , X 3 , and X 4 represents the foreign direct investment issues such as infrastructure, technological diffusion, facilitation of trade, and increase in export markets and inflow of knowledge management. This section discusses the interpretations and presentations of the findings based on the research objective which was to establish the effect of FDI on economic growth in Kenya focusing on the energy sector between and Specific objectives were to establish the effects of infrastructures on economic growth in Kenya, to find out the contribution of the technology diffusion on economic growth in Kenya, to assess the contribution of the trade on economic growth in Kenya, and to determine the contribution of the knowledge management on economic growth in Kenya.

    The operational hypotheses in relation to FDI which were tested are also shown. Thus, in Ho1, there is no functional relationship between infrastructure and economic growth; in Ho2, there is no functional relationship between technology diffusion and economic growth; in Ho3, there is no functional relationship between facilitation of trade and access to export markets and economic growth; and in Ho4, there is no functional relationship between knowledge management and economic growth.

    The sample population was 60 respondents out of which 60 respondents completed and returned the questionnaires. In addition, there is a positive correlation between facilitation of trade and technology diffusion and hence economic growth in energy. Lastly, there is a positive correlation between knowledge management correlation coefficient of 0.

    R- square change. Predictors: Constant as infrastructure, technological diffusion, facilitation of trade, and knowledge management. Dependent: economic growth. This means that the model explains Thus, the independent variables are good predictors of the dependent variable, economic growth. The significance of the regression model is tested with an F -statistic.

    The hypotheses are as follows: H0: the regression model does not explain a significant proportion of the variation in the economic growth and Ha: the regression model explains a significant proportion of the variation in economic growth. Therefore, the null hypothesis is rejected. Thus, there is support that the regression model explains the dependent variable, economic growth. That is, it is significantly different from zero, and it implies that all independent variables are playing a useful role in the regression model. Thus, these four variables have a significant contribution to the economic growth.

    This section provides the summary of the findings, conclusions, and recommendations for study. In addition, there is a positive correlation between facilitation of trade and technology diffusion and hence economic growth. Lastly, there a positive correlation between knowledge management correlation coefficient of 0. The findings from the study also show that the independent variables infrastructure, technology diffusion, trade facilitation, and knowledge management explain This is in line with the studies by Zhang who found that there existed a positive relationship between FDI and economic growth.

    The findings also concur with Damooei and Tavakoli who found that FDI was critical as it provides a major source of capital which brings with it up-to-date technology contributing to economic growth. It is generally assumed that foreign investors produce a higher level of technology than local firms and therefore can stimulate such effects. Spillovers also depend on the difference in the level of technological intensity between MNEs and local firms and the degree of export-orientation of the FDI. In addition, the research findings show that there is a relationship between knowledge management and technology diffusion and infrastructure development and hence economic growth.

    The findings underscore the spillover effect resulting from technology transfer. The findings show that there is relationship between facilitation of trade and infrastructure development and technology diffusion. FDI in the energy sector has led to efficient procuring networks for production and sales of local goods internationally, transferring technologies and establishing markets for domestic production, increased domestic savings, and improved investment policies. In addition, it has led to attraction of new capital on favorable terms to the country, reduction of net debt flows, influencing the establishment of finance-related and trading networks upgrading of telecommunications services in Kenya, and also led to industrial upgrading in the country.

    Through the major investment in the energy sector, local firms use new technologies to increase their productivity and thus contribute to economic growth. However, most of the potential costs and benefits of foreign capital result from more indirect effects of FDI either through the transfer of skills and technologies. It can be concluded that foreign direct investment may promote economic development by contributing to productivity growth and exports in the host countries.

    However, the exact nature of the relation between foreign direct investment and the host economies vary between industries and countries. It is contended that FDI not only provides the countries with much needed capital for domestic investment but also creates employment opportunities and helps transfer of managerial skills and technology, all of which contribute to economic development. Thus, there is recognition for the need to foster a favorable climate for attracting FDI in order to contribute economic development.

    Indeed, the world market for such investment is highly competitive. Consequently, Kenya government should pay more attention to the measures that actively facilitate FDI. The distinctive combination of advantages and created assets that Kenya can offer potential investor remain very important economic determinants. A major implication of this study is that policy makers must devise policies that would create conducive environment to attract FDIs.

    The main objective of this study was to investigate the role of foreign direct investment on technology transfer and economic growth in Kenya. This study has not explicitly dealt with questions related to host country policies on foreign direct investment hence the findings of the study highlight the need for future research in this area. Empirical literature indicates that infrastructure, technological diffusion, facilitation of trade, and knowledge management elements of FDI have an effect on technology transfer and hence economic growth.

    The study suggests that an appropriate proxy for these variables be identified and measured to further develop on this research. The main limitation of the study was that more sectors across Kenya were not covered which would have facilitated comparative and a more broad-based analysis.

    Further, the study was not carried across all the stakeholders in the energy sectors to enable generalization of the study findings. The corresponding author HMO has written the article. The co-author PWK has contributed in the collection, analysis, and interpretation of the results. Both authors read and approved the final manuscript.


    Research Open Access. Role of foreign direct investment on technology transfer and economic growth in Kenya: a case of the energy sector. Koine 2. Abstract Foreign firms in Kenya have played a major role in enhancing economic growth in the agriculture sector, especially in floriculture and horticulture. Foreign direct investment Infrastructure Technology transfer Knowledge management and facilitation of trade and access to export market Technology diffusion. Concept of economic growth According to Klein and Rosengren , economic growth is the increase of per capita GDP or other measures of aggregate income, typically reported as the annual rate of change in real GDP.

    Therefore, the role of foreign direct investment is to improve economic growth of a country Empirical review FDI refers to long-term participation by a country in another country, and this involves participation in management, Zhang , joint-venture, transfer of technology, and expertise. It is postulated that how fast a country actually becomes a core innovator is a function of a complex set of factors that form the national environment of innovation. In FY , it was estimated that Wind and biomass energy are also significant potential sources for power generation. Power Africa is helping Kenya reduce reliance on expensive diesel-fueled generation and other high-cost fossil resources.

    Table 1 Energy demand. Table 2 Energy generated and corresponding capacity as of June A conceptual framework that was used in research to outline possible courses of action is presented in Fig. The FDI aspects independent variables of infrastructure development, technology diffusion and knowledge management, facilitation of trade and access to export markets and enhancing employment, and skills and management techniques and the influence they have on economy growth dependent variable as related to the energy sector are considered in the conceptual framework.

    Technological progress is critical to economic growth and welfare for any country, regardless of the level of development. Special attention is given to the role of technology transfer and diffusion in building productive, adaptive, and technological capacities and enhancing human resources in developing countries, in particular LDCs or low-income countries UNCTAD Descriptive studies portray the variables by answering who, what, and how questions Babbie The aim of this study was to determine a cause-and-effect relationship between effects of foreign direct investment on the growth of the economy in Kenya.

    Data was analyzed to estimate the result of the correlation r between the independent variables and the dependent variable and also multiple regression analysis to establish the strength of those relationships between the variables. The target population for this study was the directors and managers from Kenya Power and Kengen. Table 3 Sampling frame.

    Correlation and multiple regression analysis were used to evaluate the degree of relationship between the FDI and economic growth. Multiple regression analysis was used to determine the relationship between the independent and dependent variable to predict the score of the dependent variable from the independent variables. A multivariate regression model was applied to establish the effects of foreign direct investment on the economic growth in Kenya. Response rate The sample population was 60 respondents out of which 60 respondents completed and returned the questionnaires. Reliability tests The study used internal consistency reliability test to find out the extent the measures indicative of the homogeneity of the items in measure that taps the construct.

    The table shows that the alphas were all well above 0. Table 4 Reliability statistics. Variable Cronbach No. The Pearson correlation matrix which indicates the direction, strength, and significance of the relationships between independent and dependent variables was computed. Table 5 Pearson correlation analysis. Thus, multiple regression analysis provides a means of assessing the degree and the character of the relationship between the independent variables and the dependent variable; the regression coefficients indicate the relative importance of each of the independent variables in the prediction of the dependent variable Sekaran and Bougie Table 6 Model summary.

    F change 1 0. Dependent: economic growth a Predictors: Constant as infrastructure, technological diffusion, facilitation of trade and increase in export markets, and inflow of knowledge management. Dependent: economic growth a Predictors: Constant as infrastructure, technological diffusion, facilitation of trade and increase in export markets, and knowledge management. Table 8 Coefficients. B Std. Competing interest The authors declare that they have no competing interests. References Abor, J. How does foreign direct investment affect the export decisions of firms in Ghana?

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