Advantages and Disadvantages of Foreign Direct Investment

Foreign Direct Investment is an investment which is made by a company or an individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in other countries, such as controlling ownership & interests in a foreign company. There are different forms of foreign direct investment which are depending on the types of companies and the reasons for investment. A foreign direct investor might purchase a company in a target country by means of a merger [Why do companies merge?] or acquisition and set up a new venture or expand the operations of an existing company. Foreign direct investment is important for developing and emerging countries. Those countries’ companies need investors’ funding and expertise to expand their international sales. There are many advantages & disadvantages of foreign direct investment.

Advantages and Disadvantages of Foreign Direct Investment:

Advantages:

1. Beneficial Project: Foreign direct investment is beneficial for the global economy, as well as investors and recipients. Investors seek the best return of their money with least risks. It gives a competitive advantage and reduces the effects of politics, cronyism, and bribery.

2. Economic Development Stimulation: Foreign direct investment can stir up the target country’s economic development. It can create a more favorable environment for the investor and benefits for the local industry.

3. Easy International Trade: Many countries have their own import tariff and for this, they face difficulty during trading. Alongside, there are industries which require their presence in the international markets to ensure their sales and goals will be completely met. FDI will make these easier for international trades.

4. Development of Human Capital Resources: Because of foreign direct investment, human capital resources will be developed. The attributes gained by training and sharing experience through FDI would increase the education and overall human capital of a country.

5. Resource Transfer: Foreign direct investment will allow transferring resources and will also allow exchanging knowledge to the target countries. As a result, those target countries will be benefited from these.

6. Increased Productivity: The facilities and equipment which are being provided by foreign direct investment would increase the productivity in the target countries.

7. Increase in Income: This is a huge advantage of foreign direct investment. With the help of FDI, target countries’ income will be increased. Adding more jobs and having higher wages, the national income will be increased.

Besides these, FDI has few more advantages. These are:

  • Favorable balance of payments
  • Increase competition that benefits the economy
  • Access to markets
  • Reduces cost of production
  • Consumer Benefits
  • Reduced Disparity Between Revenues and Costs
  • Tax Incentives
  • Employment and Economic Boost

Disadvantages:

1. Hindrance to Domestic Investment: Sometimes foreign direct investment can hindrance domestic investment. Because of FDI, countries’ local companies start loosing interests to invest in their domestic products.

2. The risk from Political Changes: It is one of the big advantages of FDI. It is a big threat because other countries’ political movement can be changed constantly which will hamper the investors. Plus, most of the risk factors that investors will experience are extremely high.

3. Higher Costs: When investors invest in foreign countries, they might notice that it is more expensive than they export goods. They may have to invest more in machinery and intellectual properties than in wages of the local people.

4. Expropriation: Constant political changes can lead to expropriation. In this case, those countries’ government will have control over investors’ property and assets.

5. Poor Performance: Multinationals have been criticized for poor working conditions in foreign factories. For example Apple’s factories in China.

FDI possesses several more disadvantages except for above ones. They are:

  • Economic Non-Viability
  • Negative Impact on the Country’s Investment
  • Modern-Day Economic Colonialism
  • Unstable Economic Conditions
  • Low levels of research and development
  • Risk of increase capital outflows
  • Erosion of host culture

From my point of view, investing in other countries and expanding the businesses abroad can be an extreme success which will take investors to a new level. Everything possesses risks and foreign direct investment is not also excluded from this. My opinion will be, it is important to evaluate those risks thoroughly at first. It can be done by hiring an expert who has better knowledge in international finance and can guide investors properly.

There have been many debates regarding the positive and negative effects of foreign direct investment. On the one hand, the host country has to appreciate the various contributions, especially economic contribution that foreign direct investment can make. On the other hand, allowing investments from abroad gives fears of dominance, interference, and dependence. However, when foreign direct investment is being handled properly, investors can be sure that they will obtain great benefits from foreign direct investment.


REFERENCES:

  • https://www.thebalance.com/foreign-direct-investment-fdi-pros-cons-and-importance-3306283
  • http://connectusfund.org/17-big-advantages-and-disadvantages-of-foreign-direct-investment
  • http://study.com/academy/lesson/what-is-foreign-direct-investment-definition-advantages-disadvantages.html
  • https://en.wikipedia.org/wiki/Foreign_direct_investment

Recommended Reading:

  1. Importance of Planning
  2. Types of Business Risks
  3. Importance of Strategic HR
  4. What is SHRM?
  5. Risk Management Process Steps

Sadnan Bin Sattar

Sadnan is one of the top contributors of Gotabout Business Strategy and Analysis. He is an undergrad student of North South University; major is Finance and Accounting. He has a strong interest in strategy development.