CHAPTER ONE

INTRODUCTION

• Background of the Study

Foreign direct investment (FDI) began as a worldwide phenomenon in the 19^th and early 20^th centuries. Even then, it formed only small portion of foreign investment for decades, as a greater percentage took the form of portfolio investment.

This was the case for example in 1914, when 90% of all foreign investment flows took the form of portfolio investment. Sornarajah (2004) as cited by Mujih. FDI has become a major form of net international borrowing for Japan and United State [the World’s largest international lender and borrower, respectively]. Direct investment has grown even more rapidly of late within Europe [Froot, 1993]. Developing countries, especially in Africa, recently considered the role of FDI as essential to their development. FDI also improve the management capacity of local firms.

Since the early 1990s, an increasing number of emerging market economies has opened their countries FDI in the hope of stimulating development and growth. Latin America alone net FDI flows climbed from $18 billion in 1990 to more than $85 billion in 1999. The firms making these investments constitute over 13 percent of manufacturing employment in Brazil and more than 17% in Latin America. In central and eastern Europe, FDI has risen from negligible levels in the early 1990s to nearly $20 billion in 1999, and again countries in that region have relied heavily on FDI as a stimulus to their growth prospect.

The relationship between FDI and economic growth has been extensively discussed in the economic literature. Theoretically, FDI is considered as a significant factor for economic growth due to many reasons. It plays a key role in transferring advanced technology which is available in developed countries to developing countries. FDI improves human capital and institutes in host country stimulating domestic investment. FDI provides relatively more stable funds,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        increase  employment and trade; creaated backward and forward linkages across sectors with the new production process. Further it is argued that high-tech knowledge, technology, and managerial skills can be spill-over from foreign firms to domestic firms improving the productivity of local firms (Athukorala, 2003; Balasubramanyam et al.,1996; Hakimi & Hamdi, 2016; Haruna, 2012; Iamsiraroj & Ulubaşoğlu, 2015; Mahmood, 2013; Makki & Somwaru, 2004; Tsai, 1995; Zilinske, 2010)

FDI has been one of the factors that has triggered economic growth processing in many countries. Exporters would try through competition to enter foreign markets by using innovation and production technology. The FDIs increase the exporting capability in the host country and lead to profit increase at a foreign exchange mostly in developing countries. They also increase the provision of funds for domestic investments, encourage the creation of new jobs, reinforce the technology transfer, and increase in total economic growth (Dritsaki&Stiakakis, 2014).

There is a widespread belief among international institutions, academicians, policymakers, and researchers that foreign direct investment has a huge positive impact on the economic growth of developing countries. Foreign Direct investment plays a major role in economic expansion when there is a shortage of domestic savings (Ali & Hussain, 2017). Foreign Direct Investment (FDI) has emerged as the most important source of external resource flows to developing countries over the years and has become a significant part of the capital formation in these countries, despite their share in the global distribution of FDI continuing to remain small or even declining (Falki, 2009).

The view of FDI today has undergone a real transformation. In fact, in the early 1970s, FDI was considered as a new form of colonization. Thus, the rights of countries succumb to the obligations of foreign companies, reinforced by the ambient protectionism and commitment to a considerable development of local industries. But due to the multiple crises recorded by developing countries and the need for trade liberalization advocated by the WTO in 1994, the call for multinationals was increasingly urgent for these countries. The rights of firms were increasingly more than the obligations of host countries (Brewer & Young, 1998).

Foreign direct investment (FDI) is a key element of economic integration and international economics. FDI has been especially significant since the 1990s when globalization accelerated due to trade liberalization, decreasing transport costs, alleviation of trade barriers, technology, and the development of new financial instruments. This led to an escalation of FDI flows towards developing countries. FDI is considered to be a transfer from foreign companies to host economies of both physical capital and intangible assets such as technology, knowledge and innovations. Because of these characteristics, the concept has been perceived as an essential part of increasing economic growth in countries according to the neoclassical growth theory. The theory emphasizes a positive perception of FDI impact in countries where FDI can provide financial stability, promote, economic development and also enhance social well-being. However, the impact of FDI might only be possible if the country has the right policy framework (Mochevičius, 2014., OECD, 2008., Wang & Wong, 2009).

Global FDI flows have continued to grow since the 1990s, reaching $1,762 billion in 2015, but the distribution of FDI in the world is uneven between regions as well as between countries (UNCTAD, 2016). This can sometimes be explained by market preference, as countries often have different ambitions and motivations to attract FDI inflows. The theory of FDI stimulating economic growth has led to developing countries being especially motivated to attract FDI. This is because, for developing countries, it is a particular important way to increase resources inflows to fill the savings and foreign exchange gaps, which will ultimately allow them to attain sustainable development. Developing countries demonstrate a great deal of confidence in FDI’s ability to solve some of their economic problems. This confidence is to reinforce the country since FDI does not create additional debt for the country. It has been crucial for Africa continents to increase the external resources since most countries are low-income earners (Adams &Opoku, 2015; Williams, 2015).

Africa does only receive $54 billion in 2015 out of the total $1,762 billion, while Europe and Asia are the continents that receive the highest amount of FDI inflows. The distribution between developed and developing countries is almost equal, as developing countries receive a combined 43. 4% of the global FDI inflow. Nevertheless, the regional gaps between the amounts of inflows are large even though the distribution of FDI inflow is uneven, the theory suggests that FDI will create economic growth due to capital inflow towards the host country. Countries have therefore promoted liberalization policies in order to attract more FDI inflow. FDI can occur through two main foreign entry modes, either from Greenfield investment or from cross-border merger and acquisitions. Previous studies usually focus on examining the relationship between total FDI flow and economic growth. Because FDI is expected to generate economic growth, the assumption is that the various modes should have similar impact on economic growth in the host countries.

Let’s have an overview of the eclectic paradigm theory which have a connection with FDI. An eclectic paradigm, also known as the ownership, location, internalization (OLI) model or OLI framework, is a three-tiered evaluation framework that companies can follow when attempting to determine if it is beneficial to pursue foreign direct investment (FDI). This paradigm assumes that institutions will avoid transactions in the open market if the cost of completing the same actions internally, or in-house, carries a lower price. It is based on internalization theory and was first expounded upon in 1979 by the scholar John H. Dunning. The eclectic paradigm takes a holistic approach to examining entire relationships and interactions of the various components of a business. The paradigm provides a strategy for operation expansion through FDI. The goal is to determine if a particular approach provides greater overall value than other available national or international choices for the production of goods or services. Since businesses seek the most cost-effective options while still maintaining quality, they may use the eclectic paradigm to evaluate any scenario which exhibits potential. For FDI to be beneficial, the following advantages must be evident:

The first consideration, ownership advantages, include proprietary information and various ownership rights of a company. These may consist of branding, copyright, trademark or patent rights, plus the use and management of internally-available skills. Ownership advantages are typically considered to be intangible. They include that which gives a competitive advantage, such as a reputation for reliability. Location advantage is the second necessary good. Companies must assess whether there is a comparative advantage to performing specific functions within a particular nation. Often fixed in nature, these considerations apply to the availability and costs of resources, when functioning in one location compared to another. Location advantage can refer to natural or created resources, but either way, they are generally immobile, requiring a partnership with a foreign investor in that location to be utilized to full advantage. Finally, internalization advantages, signal when it is better for an organization to produce a particular product in-house, versus contracting with a third-party. At times, it may be more cost-effective for an organization to operate from a different market location while they keep doing the work in-house. If the business decides to outsource the production, it may require negotiating partnerships with local producers. However, taking an outsourcing route only makes financial sense if the contracting company can meet the organization’s needs and quality standards at a lower cost. Perhaps the foreign company can also offer a greater degree of local market knowledge, or even more skilled employees who can make a better product. (Bloomenthal,2019)

At the end of colonialism, Cameroon like any other former colonies of British and France depended on the legislation received from their colonial master as means of attracting foreign investment into the country. Taking advantage of some provisions of the treaty of Rome, which favored overseas colonies. It engages in trade relation with the former colonial master, Britain and France (Hallstein W,1957).

1.2 Statement of the Problem

When a country is facing economic misery, the government of that country usually undertakes some structural adjustment programs aiming at revamping its economy. In the late 1980s, the advent of economic crisis forced the government of Cameroon to undertake some structural adjustment programs favor by both the world bank and international monetary fund (IMF) in exchange of financial assistance and loans to the country. Numerous of these structural adjustment program involved the need for FDI.

Foreign direct investment can significantly play a great role in economic development in Cameroon if properly utilized. The short comings resulting from the poorly utilized funds invested by foreign donors may lead the country into more economic misery. FDI may result to the liberalization of the economy, privatization, devaluation of the country’s currency, removal of subsidies in agricultural products, and lay-off of civil servants in both public and private firms. It is possible that between the periods of 1970 to 2018, FDI would have contributed to the economic growth and development of Cameroon. Also, due to the financial market in Cameroon, the Douala stock market is still to develop properly and the government cannot cope with providing the huge capital desired for growth and development in the key sectors of the economy, the government and other investors have no other options than to rely intensively on externally soured funds (Forgha, 2009). The statement of the problem leads to the following research questions.

1.3 Research Question 

 Main Research Question

What is the impact of foreign direct investment (FDI) on the economic growth of Cameroon?

 Specific Research Questions

• To what extern does FDI affect the economic growth of Cameroon?
• How does gross fixed capital formation (GFCF) affect the economic growth of Cameroon?
• What is the impact of broad money (BM) on the economic growth of Cameroon?
• To what extern does gross domestic product (GDP) impact the economic growth of Cameroon?
  • Objective of the Study

The overall objective of this study is to investigate how Economic growth is affected by FDI in Cameroon. The objective includes:

• Examine the impact of FDI inflows on GDP growth in Cameroon
• Evaluate the impact of GFCF on the economic growth of Cameroon.
• Determine the impact of BM on the economic growth of Cameroon