The Positive and Negative Effects of Foreign Direct Investment in Uganda

Considering the effects of Foreign Direct Investment (FDI), the effect does not just land on developing countries. There is a considerable effect on home countries too. The existence of multinationals originates from a series of reasons, and they are in charge of various functions, as presented through economic theory. In considering the various roles, multinationals affect the working conditions and wages from multiple contexts. Foreign direct investment negatively and positively impacts developing host countries such as Uganda.

FDI plays four key economic roles (Lipsey 2004, pp. 333-382). The first aspect is the influence it has on workers’ wages and working conditions. This comes in the form of inputting extra capital into the host country’s economy. Secondly, FDI introduces improved technology for improving the lives of domestic firms. It leads to the provision of a competitive platform for the equilibrium of trade. The third context is that FDI presents the advancement of production techniques to host countries, which can positively affect the labor market (O’Neill 2003, pp. 16-27). Multinationals use their parent countries to host their activities abroad, offering advanced support for subsidiaries, and in some instances, they subcontract their activities to developing countries. The fourth aspect of the FDI is that it is large in capacities and, therefore, possesses the power to set wages and prices to a level that may not be viable for perfect competition.

This evaluates the relationship between foreign direct investment and economic development in Uganda as a developing host country. Host countries such as Uganda have much of their survival and development based on the capacity of support gained from foreign investment (Brown, Deardorff, & Stern 2004, pp. 279-329). There is support for dependency theory to justify the influx of foreign direct investment. This makes the developing economies have their focus on the amount of investment rendered by multinationals as their source of survival. FDI can have a positive impact on host countries and, in turn, lead to economic growth. At the same time, economic and political contexts play a key role in influencing micro and macroeconomic policies. Economic and political transparency is also an aspect to consider when dealing with the effects of FDI in a country like Uganda. This is the same in considering political stability and policy consistency as economic growth factors.

Historically, there has been a dependence on developing countries on foreign direct investment. The physical capital of host countries increases through the input of FDI. However, the empirical evidence for the relationship between economic growth and foreign direct investment (FDI) remains inconclusive (Lipsey 2004, pp. 333-382). There have been recent studies analyzing the factors which affect this relationship. However, the role and characteristics of FDI still remain inconclusively handled. The foreign direct investment forms the basis for financing developing countries. It forms the backbone for supporting globalization and the interdependence of economies. There is a major concentration on the importance of FDI in developing countries.

In the case of Uganda, the process of development is ongoing. The country is still struggling with economic and political issues, which affect its speed for the constriction of institutions that can transform and transition the economy into world-class standards (O’Neill 2003, pp. 16-27). There was a decline in economic growth and development in Uganda in the 1990s. However, the rates later reversed as Uganda increased its exports, leading to a rise in its GDP. The increase resulted from the influence of FDI, which led to positive growth and development.

There is little focus on the consequences that FDI has on host countries. FDI increases the participation of developing countries, thereby increasing their formation of global production networks. However, this is not an equal phenomenon in all developing countries. There is a difference in regional distribution of the flow of FDI, with the Middle East and Northern Africa forming the major locations of FDI capitals compared to Sub-Saharan African countries (N. a, pp. 1-13). This presents the fact that economic forces drive FDI performances in the process of globalization. Such instances only lead to the need for deliberating on the roles FDI has in the economic development of developing countries. However, if there is positive reception of FDI in developing countries such as Uganda, an increase in development expectations becomes practical.

Uganda became open to foreign direct investment letting go of closed economic policies, which allowed foreign capital to penetrate its boundaries leading to an increase in revenue. However, the political turmoil faced by Uganda had initially rendered economic advancement in the country impossible. The governmental control over the economy made it hard for private businesses to thrive up to the point of implementing economic recovery that led to the development of monetary stability and fiscal discipline (O’Neill 2003, pp. 16-27). The incentive structures of the country improved, and there was a viable investment environment for trading. The country also rehabilitated its political, economic, and social structure by developing liberties for exchange rates, external trade systems, and interest rates. The country implemented an investment code, diversified exports, and privatized the central bank. Further, Uganda’s economic growth records are attributes of promoted democracy in the country.

There is an unprecedented pace in the level of economic growth indicated by globalization. This comes from the influences of varying capacities of advancements in economic policies and technology. Such variations produce differences in speed, intensity, geographical reach, and economic growth volume. The case of Uganda is unique since following its earlier political instability, there was an interrupted democracy with president Museveni taking over and implementing necessary changes to spur growth in the country (O’Neill 2003, pp. 16-27). The unchanging nature of government presented consistency in policy and led to an integration of stabilization of the economy, which attracted foreign capital investment into the country. The transformation in Uganda’s economic and political fronts played a major role in attracting foreign direct investment.

Advancements of inventions and application of advanced production capacities, such as improvement of transportation systems and technology, lead to a variation in the boom of international trade. With such advancements, living standards and productivity rise, leading to a contemporary effect on the economy (Brown, Deardorff, & Stern 2004, pp. 279-329). Similarly, advancement in the communication sector also heightens connection levels between countries and leads to the convenience of ensuring increased growth among international communities. Technological development is a beneficial factor Uganda gains from foreign direct investment. The country offers the incentive for allowing foreign investors to do business there, providing room for transferring technology advancement into Uganda. By bringing formerly unavailable technology to the host country, foreign direct investment helps increase productivity and contribute to the economy’s overall growth.

However, the global reach of contemporary globalization determines the capacities of development recorded for any particular region. North America and Europe dominated trade and investment in the 20th century. This has since changed, with Asia taking a dominant position in the world economy (O’Neill 2003, pp. 16-27). There is a trend that makes the integration of international economies existent in certain geographic blocs, with development first heightening within home borders before extending to international boundaries. Market environments and investment entry points play a key role in enticing foreign investment. The political and economic system in a country provides room for development. With Uganda making a transformation in its system, it provided a welcoming gesture for foreign direct investment. It built confidence in foreign investors, which led to an increase in FDI in the country.

Wages and working conditions in developing countries face a multiplicity of exploitation. In some cases, workers operate under coercive conditions full of abuses and unsafe conditions. With the influx of FDI in developing countries, there is an effect on wages following the increased capacities of outsourcing done by host countries (Brown, Deardorff, & Stern 2004, pp. 279-329). Multinational firms subcontract their duties to developing countries to find cheap labor since they tend to provide a living wage that is way above the wage capacities of developing countries. This is detrimental to the economic welfare of developing countries in terms of creating a shift in employment desires, with the labor market having greater hopes for finding work in international organizations and neglecting local entities. Uganda devised market controls and taxes to give room for FDI.

The welfare of workers in developing countries has little consideration. They have minimal benefits and wages and receive infringed treatment in their places of work. This comes from the influences of market forces in a combination of government policies, which do not put considerable emphasis on the well-being and welfare of workers. There is acute subjection to poor pay and working conditions (O’Neill 2003, pp. 16-27). Addressing the wage issue in developing courtiers remains a major challenge to the multinational community. There is a lack of social accountability by multinationals to help in devising adequate distribution of income offers they make to their workers in developing countries. An imbalance in the income distribution between host and developing countries leads to a lack of social optimum.

Conclusion

Out of direct federal investment input, the relationships between rich and poor countries keep improving. Like in the case of Uganda, a country’s political and economic status affects its capacity to influence the interest of foreign investors. Uganda had to develop reforms on its political and economic fronts to improve foreign direct investors’ participation. This highly improved the development rates in the country (Brown, Deardorff, & Stern 2004, pp. 279-329). It had to develop consistency in policies and open its economic dealings with foreign countries to get the advantages offered by investors. This proves that direct foreign investment positively impacts the economic statuses of developing countries.

To alleviate the detrimental economic instabilities faced in developing countries, there is a need to improve working conditions and wage levels for workers. Corrective measures ought to conform with government policies to make domestic laws favorable for fair workers (Brown, Deardorff, & Stern 2004, pp. 279-329). Ways should be devised for dealing with wage issues in developing countries. Multinationals must follow a well-formulated code of conduct to address their need for accountability.

To regulate the income situation, there may be a need for developing optimal policies which offer direct income transfers to poor countries from their hosts. It also requires opening up markets so that developing countries can export their products to rich countries to increase their revenue. The evolution of economies requires continuous improvement of wages and working conditions to improve workers’ output. Adoptions of policies that can enhance the economies of developing countries become essential to ensure the welfare of workers and the economy’s advancement.

Expansion of companies into foreign markets occurs for varied reasons. The influencing forces may be internal or external forces, with some occasions considering both instances. Host countries must have the right environments to gain the advantages of foreign investment. In consideration of the influence of foreign direct investment on Uganda, it came out that in the period with unstable economic growth and political instability was rampant in the country, which hindered the penetration of foreign capital (Brown, Deardorff, & Stern 2004, pp. 279-329). However, following political stability, there was consistency in political and economic policies, which welcomed foreign investment. Empirically, foreign investment affected the economic growth in Uganda in a positive manner.

 

References

Brown, K, Deardorff, A & Stern, M 2004, The Effects of Multinational Production on Wages and Working Conditions in Developing Countries, The Challenges To Globalization: Analyzing The Economics. 279-329, University Of Chicago Press, http://www.nber.org/chapters/c9541 

Lipsey, E 2004, Home- and Host-Country Effects of Foreign Direct Investment, The Challenges To Globalization: Analyzing The Economics, 333-382, University Of Chicago Press, http://www.nber.org/chapters/c9543

  1. a, Managing in the global environment. Internationalization of the firm. 1-13. Durham University.

O’Neill, T 2003, Globalization:  Fads, Fictions and Facts. Fads are no substitutes for clear thinking about facts, pp. 16-27. Business Economic.

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