Pros and Cons of Foreign Direct Investment

There have been many debates regarding the positive and negative effects of foreign direct investment with the host government caught in a love-hate relationship. On the one hand, the host country has to appreciate the various contributions , especially economic, that foreign direct investment can make. On the other, allowing investments from abroad gives rise to fears of dominance, interference, and dependence.

Pros

  • Improved capital flows
  • Technology transfer
  • Regional development
  • Increased competition that benefits the economy
  • Favorable balance of payments
  • Increased employment opportunities

Capital inflows that result from foreign direct investment benefit all countries by making more resources available, but it particularly benefits those nations with limited domestic sources and restricted opportunities to raise funds in the world’s capital markets. Jobs are often the most obvious reason to cheer about foreign direct investment. For example, U.S. subsidiaries of global companies employ 5.3 million Americans, about 4.7 percent of private sector employment, and support an annual payroll of $408 billion.

The combined effects of all the benefits accruing from foreign direct investment can lead to overall improvements in the standard of living in the host country, as well as increasing its access to and competitiveness in world markets.

Cons 

  • Low levels of research and development
  • Risk of increase capital outflows
  • Stifling of domestic competition and entrepreneurship
  • Erosion of host culture
  • Disruption of domestic business practices
  • Risk of interference by foreign governments

From an economic perspective, capital inflows resulting from foreign direct investment are often accompanied by higher, longer term outflows that do not benefit the host government. For example, when multinational chains built hotels in the Caribbean, the shortage of local suppliers meant that much-needed foreign currency was spent on imported supplies. In other cases, multinationals prefer to use existing suppliers in their own countries rather than develop local supplier networks. Another frequent complaint is that investors fail to follow though on their promises.

Multinational companies are, by definition, change agents. That is, the products and services they generate and market bring about change in the lifestyles of consumers in the host country. For example, the introduction of fast-food restaurants to Taiwan dramatically altered eating patterns, especially of teenagers, who make these outlets extremely popular and profitable. Concern has been expressed about the impact on family life and the higher relative cost of eating in such establishments.

This is an excerpt from the book by: Michael R Czinkota, Ilkka A Ronkainen, and Michael H. Moffett. Fundamentals of International Business (New York: Wessex, 2015), 60.

17 thoughts on “Pros and Cons of Foreign Direct Investment

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