Foreign Direct Investment : Advantages & Disadvantages

  • July 12, 2016
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FDI – Foreign Direct Investment, “refers to an investment made to acquire permanent or long-term interest in enterprises operating outside of the economy of the investor”.  That investment is known as direct investment because a foreign person/company/group of entities, is seeking to control, manage, or have significant influence over the foreign enterprise.

FDI is a major source of non-debt financial resources for economic development of the country. That investment may be made either “inorganically” by trading a company in the target country or “organically” by growing operations of an existing business in that country. It is a key source of capital, innovation, job creation and cross-border trade.

Since 2006, The United States has been the world’s largest recipient of foreign direct investment. It is also the world’s largest source of direct investment. The United States has a longstanding history of foreign direct investment as a driver of economic growth.

In year 2013, the amount being directly invested grew by 9% world. Various levels and forms of foreign direct investment exists, depending on the type of companies concerned and the reasons for investment. However, when it comes to assuring sustainable development the world may face a sizeable gap. Now, the important question is – why we need to do foreign direct investment? And, what are its advantages?

Advantages of Foreign Direct Investment

Here are some advantages of FDI, which helps you understand the concept completely.

  • It helps to improve the competitiveness of countries in the domestic economy with advancement in technology and process.
  • The other important factor is foreign expertise that improves the existing technical processes in the country.
  • It increases the attempts to better human resources, and improve the quality of products and process in particular sectors.
  • It reduces the unemployment by creating jobs, in an effort to improve productivity. Thus reduce social problems as well as.
  • It improves expertise, research and development that require the high cost of developing technology.
  • It helps to make the international trade more easy and efficient.
  • The foreign direct investment will allow resource transfer and other exchanges of knowledge, where various countries are given access to new technologies and skills.
  • It can reduce the disparity between revenues and costs, production costs will be the same and can be sold easily.

Disadvantages of Foreign Direct Investment

Apart from its excellent advantages, there are also have some disadvantages (given below) of FDI.

  • The entities or companies that made foreign direct investment need to ensure that they comply with environmental regulations in these countries.
  • When the flow of the direct investment affected, the part of the country which is economically backward is always comfortable.
  • It is risky because political issues in other countries can instantly change.
  • Foreign direct investments can irregularly affect exchange rates to the advantage of one country and the detriment of another.
  • The Investment may be banned in some foreign markets, which means that it is impossible to pursue an inviting opportunity.