The Effect of Foreign Direct Investment on Economic Growth of Developing Countries: The Case of Zambia

Abstract

Generally speaking, Foreign Direct Investment is undeniably necessary in almost all economies and can add to a country’s GDP when it is injected into an economy with a deeper view of the current economic situation as well as the assessment of appropriate variables of the economy in question. When dealing with developing countries like Zambia, careful measures should particularly be taken as the benefits of FDI can be illusionary. It is important to ensure that FDI is employed into a developing economy at the right time, with the right conditions, appropriate institutions and for the right reasons. Foreign Direct Investment, just like any other type of cash inflow, is said to add to a nation’s economic growth. In spite of the known numerous advantages that FDI brings to the host country, the level to which FDI benefits its recipients or the quality of benefits it brings into the host country is questionable in the case where the host country is a developing economy. It is vital to realize that the benefits that FDI brings to host countries can take many other forms and should be carefully examined before considering its injection into an economy. From another perspective, the flexibility that Foreign Direct Investment has during financial crises of an economy makes it to be considered as a private capital inflow of choice by multitudes. This study proves that FDI has similarities with other better capital flow approaches which are injected more indirectly into another nation’s economy (developing nation in this case) by using instruments and are more beneficial and less owner biased. Because Zambia and many more developing countries are more promising, have abundant minerals and have good, flexible institutions and policies, capital inflow to Zambia in the recent past has become increasingly dominated by FDI. Should Zambia encourage FDI while demoting other forms of cash flows? This research seeks to investigate the downside effects of FDI on aspects of the economy like employment sector and to analyze whether it is the best alternative of capital inflow for Zambia as a developing nation and if it can be replaced by better forms of capital inflow. This paper further answers the questions: “does FDI generally benefit a developing country like Zambia?” “To what extent does FDI actually benefit developing economies?” “Are there any other forms of capital inflows that can replace FDI in a developing economy like Zambia?”