Foreign Direct Investment and Trade: Influence of Fdi on World Trade Flows and on an Economy of an Individual Country.

New trend in Foreign Direct Investment (FDI) became Central and Eastern Europe since the end of 1980s. That happened because of those countries starting transformation to ma market economy and chose as one of the priorities in it integration to a global economy.
Such instrument as FDI has its advantages as well as disadvantages. Firstly, FDI is a source of supplementary productive capital that is really scarce source in terms of deep structural changes of a whole economy.
Secondly, FDI provide transfer of new technologies, advanced methods of management and marketing that facilitate effective productive sources usage both in companies with foreign interest in business and in national companies of receiving economy. The last one could be done in different ways: by buying patents and licenses, by hiring foreign top-managers, by organizing joint production and so on.
Thirdly, FDI is developed form of international cooperation and thus it is effective means of integration national economy into global one. They usually favor rise in receiving country’s foreign-trade turnover, expansion in volume and diversity of production and scientific and technical collaboration forms.
There are some negative impacts of FDI to a recipient’s economy, of course. For instance, Such form of investment could establish unprofitable in a long-run specialization of the receiving country in a world commerce. That could bring receiving country into a raw materials export that has happened to a Russian Federation.
Competition between investing country’s companies and receiving ones could lead to ousting weak national firms by strong and developed foreign. That could entail reducing of workplaces and serious social consequences.
In the 1950s according to models of Ricardo and Hecksher-Oilin-Samuelson it was considered that economic growth is determinates by scale of its world commerce. Country should extend export of those goods in which production it has comparative cost advantage. In a framework of this approach developing country is supposed to have available land and minefields to its capital-intensive exploitation and provide export infrastructure of raw materials. Later on oligopoly market structure and discrimination pricing of developed countries cause revision of this theory and creation of new conception.
It came out in the 1960s and the main source of economic growth of developing country was considered as expansion of its national basis material-production industries and shrinkage of depending on world trade though import substitution by own production. That leads to government monopolization of the national markets and complication of management machinery. Deems that causes of failure of such policy are
• Low capacity of developing countries in their market closure and ignoring the production scale effect;
• Restriction of competition as a consequence of protective measures.
Modern model of economic growth is based on extension of developing countries’ participation in world labor division by increasing production and export of labor intensive goods. That is close to the models of Ricardo and Hecksher-Oilin-Samuelson. In the contemporary model the comparative advantage of developing countries contains in extra supply of cheap and low-skilled workers. In terms of low transport costs and sufficient delivery of capital and technology from developed countries by means of multinational companies we can say that labor intensive light industry become profitable for developing countries.
According to this approach government encourage FDI, carry out financing of infrastructure developing and promote private business. With more or less success this conception is used nowadays.

Classical and neo-classical conceptions of world trade theory (Ricardo, Hecksher-Oilin-Samuelson) issued from that fact that world migration of factors of production including FDI relatively not-significant and could be left out of account of world trade analysis. Theoretical base for this thesis is factor of production’s price leveling as a result of trading. Following Mandell’s theorem there is full substitution good’s trade by factor of production’s trade.
Crucial for theory of world trade is a general economic equilibrium approach. Volume of world trade, volumes of export and import of each country are considered as equilibrium at level of each separate economy and world economy at all. Taking into consideration that Walrace’s model has among its precondition perfect competition; constant return on scale; non-differential products; no transaction costs; it seems difficult to include FDI into analysis. It is hard to factor into classical and neoclassical models such objective facts like a market power of investing firm, advantage of internalization.
The simplest way to include FDI into a model is to consider them as a form of international migration of factors of productivity and that is what model of Hecksher-Oilin-Samuelson describes.

Other research approach include FDI so far as they transfer specific combination of resources for this industry. This feature of FDI lets to include them into general equilibrium model because it doesn’t deny the precondition about constant return on scale and about perfect competition. This method is applied in model of world trade with specific resource by Ricardo-Wainer.

National economy is consist of plenty separate households aggregated determine the level of national welfare. To study welfare in this way we should factor into analysis effectiveness of household interaction. In other words we should take into consideration effective allocation of production resources and final goods between households and firms that allow having acceleration of welfare without extension use of production resources.
Mentioning this we should say some words about effectiveness. Standard definition of effectiveness is based on Pareto theory. Effective allocation of resources and goods according to this theory is means that
• That is impossible to increase production of one of the products in one’s economy without decreasing production of at least one other;
• That is impossible to improve welfare of any participant of transaction without reduction of at least one other participant.
According first fundamental theory of economic theory of welfare in some terms general economic equilibrium with a condition of perfect competition is Pareto effective.

In the McDugall model influence of FDI on welfare of receiving economy is analyzed in a framework of simple model of general economic equilibrium, including two countries, one final product and two production factors – labor and capital. That has standard preconditions for such model’s type: perfect competition and constant return on scale. In such terms countries are fully specialized on one good but differ from each other by relative provision of production factors that cause gap in those prices. In that terms import of capital is always profitable for receiving country because it makes price of using capital lower. That what is called “rent effect”.