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Essay: Foreign Direct Investment

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  • Subject area(s): Finance essays
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  • Published: 22 October 2015*
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  • Words: 557 (approx)
  • Number of pages: 3 (approx)

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Abstract – FDI have become the main trends of economic development in the world, especially in the globalization background, many developing countries are making great efforts to attract FDI in order to stimulate domestic economic development. Russia is not exception too, is modifying the law structure, taking to encourage policies to attract FDI, adopting favorable tax policy to incentive FDI’s scale expand. Although the total amount of FDI in foreign capital investment is very low and the proportion to GDP is still not very high, industry and regional distribution is not quite reasonable and further improvement in the investment environment has also being problem, but Russia will become one of the main foreign direct investment region in nearest future. This paper analyzes the current situation and characteristics of foreign direct investment in Russia and made the measurement analysis and empirical research, that the Russian Foreign direct investment cannot be fully considered as a purely foreign direct investment, due to Russia’s period of economic transition in the 90s of the last century the massive capital flight phenomenon, and the return of their original Russian funds again in the form of false FDI. The main factors which currently hindering the development of Russian FDI are: unstable political environment, backward of the current market system, and domestic monopoly power is too strong. FDI’s future development in Russia is mainly to adjust the economic structure, promoting efforts to focus on the development of modern agricultural production and the development of high-tech industry.
Key words: FDI, Russia, Economic structure adjustment
Barro and Sala-I-Martin empirical framework of neoclassical Solow-Swan model is specified to
determine the FDI impact on per capita growth in 62 Russian regions during period of 2000-
2011. The Arellano-Bond GMM-DIFF methodology, developed for dynamic panel data models,
is used in estimations. Results imply that in general FDI (or related investment components) do
not contribute significantly to economic growth in Russia in the analyzed period. Regional
growth in 2000-2011 is explained by the initial level of region’s economic development, the
2008 financial crisis, domestic investments, and exports. However some evidence of positive
aggregate FDI effects in higher-income regions is relevant. However FDI seems not to play any
significant role in the recent growth convergence process among Russian regions.
Key words: Foreign Direct Investment (FDI), Russian regional economy, and economic growth
JEL Classification: E22, F21, P27
Global flows of foreign direct investment (FDI) have grown rapidly ever since the late 1980s. However, the cross-country distribution of FDI has remained highly skewed, with mature economies which are both, largest recipient and source countries. Even more striking is the disparity within the group of emerging economies, with China standing out as the largest recipient. [1]
Picture 1. Total FDI for 2007-2013 in Russian Federation (per capita, in USD), Rosstat data
It has been widely recognized that Russia attracts a low level of inward FDI if compared with other former communist countries. FDI attractiveness of Russian Federation seems quite low also with regards to the country’s potential. Russia enjoys indeed a huge domestic market, an impressive natural resources endowments and the presence of a skilled and relatively cheap labor force. However a broadly recognized refrain for foreign investors is the institutional environment, which has been characterized by the fragility of property rights, the arbitrariness of fiscal policy and the unpredictability of the trade policies.

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