Pros & cons of foreign direct investment in developing countries
Foreign Direct Investment is the investment of funds by an organisation from one country into another with the intention of establishing undying interest.
In other words, it is an investment in form of a business in one country by an entity based in another country.
Companies in developing countries need multinational funding and expertise to expand, and guide their international sales.
Below are the advantages and disadvantages of FDIs in developing countries;
FDI boosts the manufacturing and services sector which results in the creation of jobs and helps to reduce unemployment rates in the country. Increased employment translates to higher incomes and equips the population with more buying powers, boosting the overall economy of a country.
Human capital development
Skills that employees gain through training and experience can boost the education and human capital of a specific country. Through a ridge effect, it can train human resources in other sectors and companies.
Targeted countries and businesses receive access to the latest financing tools, technologies, and operational practices from all across the world. The introduction of newer and enhanced technologies results in company’s distribution into the local economy, resulting in enhanced efficiency and effectiveness of the industry.
Increase in exports
Many goods produced by FDI have global markets, not solely domestic consumption. The creation of higher percentage of export oriented units help to assist FDI investors in boosting exports from other countries.
Exchange rate stability
The flow of FDI into a country translates into a continuous flow of foreign exchange, helping a country’s Central Bank maintain a prosperous reserve of foreign exchange which results in stable exchange rates.
Improved capital flow
Inflow of capital is beneficial for countries with limited domestic resources, as well as for nations with restricted opportunities to raise funds in global capital markets.
Creation of a competitive market
By facilitating the entry of foreign organizations into the domestic marketplace, FDI helps create a competitive environment, as well as break domestic monopolies. A healthy competitive environment pushes firms to continuously enhance their processes and product offerings, thereby fostering innovation. Consumers also gain access to a wider range of competitively priced products.
Increased employment opportunities
As FDI increases in a developing country, its service and manufacturing sectors receive a boost, which in turn results in the creation of jobs. Employment results in the creation of income sources for many. People then spend their income which enhances a nation’s purchasing power.
Development of human resources
FDI aids with the development of human resources. Employees are provided with adequate training and skills, which help boost their knowledge on a broad scale. As more and more resources acquire skills, they can train others and create a ripple effect on the economy.
Development of Backward Areas
FDI enables the transformation of backward areas in a country into industrial centres. This in turn provides a boost to the social economy of the area.
Hindrance of domestic investment
FDI hinder domestic investment because local companies start losing interest to invest in their domestic products due to harsh competitive environment created which forces them to close.
The foreign company may not reinvest profits in the host country but instead send it back to the home country which results in capital outflows for the host country.
Negative exchange rates
Foreign direct investments affect exchange rates to the advantage of one country and the detriment of another.
Investors have less moral attachment
Foreign investors strip the business of its value without adding any. They can sell unprofitable portions of the company to local and less sophisticated investors.
Investors exploit human and other natural resources as they may pay less labor, or practice deforestation to set up factories as well as dump hazardous waste into the environment.
Limited job creation effect
Foreign companies bring in their own managers and specialists instead of hiring local workers hence promoting unemployment.
In the increasing globalized economy, opportunities for foreign direct investment is growing.