Is Foreign Direct Investment the New Aid

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Growing importance has been attributed to both FDI (Foreign Direct Investment) and Foreign Aid as primary means of promoting and fostering economic growth, economic stability as a result – in some of the cases – of minimizing or eliminating poverty in developing and developed countries. (Burnside and Dollar, 2000) Various academics and practitioners have been focusing over the last years on exploring and eventually identifying the merits and the essentials that underline both approaches to economic and consequently social and political environments. To this extent, the literature suggests that there are opposing views as to the effective impacts and influences that FDI and Aid can impose to nations, and more significantly that there are critical assumptions raised as to the degree in which there is emerging substitutability between the two.
Prior to analyzing the two modes of financial ‘enhancement’, there should be a reference to nature and the particular aims that each is sought to provide. Pantelides and Kyrkilis (2005) argue that Foreign Direct Investment from a generic perspective is a means of serving foreign markets as it merely involves the transfer of a ‘package’ of equity capital and intermediate resources of an international firm to a subsidiary or a branch abroad. From an economic perspective, however, FDI is largely viewed as a globalization product of capitalized economies that is eventually developed under the scope of providing benefits to both the multinational corporations and the host countries. Karakaplan et al. (2005) indicate that FDI has been a traditional tool of foreign financing in developing countries, that is continuously gaining a vital role in stimulating economic growth and public welfare. A major supporting view holds that FDI has significant complementarities with the host country’s economy, and thus it fosters further development in that country. Foreign Direct Investment, therefore, implies capital accumulation in the host state, a fact that&nbsp.underlines the expected increase in economic growth rate by encouraging the commitment of new inputs and technological infrastructures to the productivity of the nation (Pantelides and Kyrkilis, 2005). &nbsp.