The Effect of Foreign Direct Investment Inflow on the Economic Growth in Somalia

Introduction

In general, underdeveloped and developing states are not able to attain economic development only with the domestic capital like the developed states. Therefore, foreign direct investment (FDI) has become as one of the fundamental drivers of capital mobility and cross-border investments as well as one of the active means of economic growth in a host country. Furthermore, FDI could be termed as the direct investment equity flows in a recipient economy. It is the total of equity capital, reinvestment of earnings and other sorts of capital forms. FDI is a classification of cross-border investment related to a resident in one economy possessing control or an important degree of influence on the management of an organization which is a resident in another country. Having an ownership of 10% or more of the general shares of voting stock is the main criteria for determining the existence of a direct investment correlation. FDI shall be addressed as a formation of capital, technology, management and entrepreneurship which enables the operation of a firm in a non-domestic market. Many developing countries facilities and apply incentive policies to retain the international commerce and to amplify the volume of the foreign investments. Different elements that affect FDI have been commonly researched such as the country stability, the cost and the quality of the workforce as well as governance indicators to draw more FDI inflow. The size of the market, cost of labor, quality of infrastructure, economic stability, commercial openness, currency value and gross capital formation are principal determinants of FDI inflow. FDI should contribute directly and indirectly to the economic development of host countries by enabling the transfer of technological and organizational know-how, augment laborship, skill acquisition as well as the introduction of new managerial applications and firm arrangements Henceforth, the economic state of the recipient country are significant to the favorable effect of FDI on economic growth. Such conditions rest on the economic policies, adopted by governments. Government policies such as free market promotion, labor and capital market regulations as well as commercial liberalization and public investments related to infrastructure development are significant to accomplish economic growth (Benghoul & Aydın, 2019; Luu et al., 2017; Khalid & Marasaco, 2019).

Foreign direct investment refers to direct investment of equity flows to an economy. It is the accumulation of equity capital, reinvestment of earnings and other sorts of capital. Foreign direct investment could be termed as a set of investments in which a resident organization in one country constitutes a long-term interest in another organization outside of its country frontiers. FDI is a classification of cross-border investment related to a resident in one economy having control or an important degree of impact on the management of an organization which is resident in another country. Ownership of 10% or more of the ordinary stakes of voting stock is the criteria for determining the existence of a direct investment ownership. FDI can be broadly defined in two types: 1. Green field investments which involve the constitution of new operational facilities from the ground up and 2. mergers & acquisitions (M&A) involves foreign businesses obtaining existing assets from domestic businesses. The impact of FDI in the host economy could enhance the volume of employment opportunities, productivity, exports and encourage the speed of the technology transfer. FDI may also facilitate the utilization and exploitation of local minerals, introduces modern methods of management and marketing, ease the access to new technologies, decrease foreign account deficits by capital formation as well as improves the value of human capital by on-the-job training (Maune & Matanda, 2019; Stokavac & Skocevic, 2013).