Foreign direct investment is an investment made by a firm or individual in one country into business interests located in another country. It takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company.
Pros of Foreign Direct Investment
- Increase in income
A country is able to increase its income through foreign direct investment. There will be opportunities for more jobs and higher wages and as a result, there will be an improvement of the economy.
- Increases productivity
The investors will provide facilities that may increase the workforce in the target country hence an improvement in production.
- Reduces great difference between revenues and costs
With the reduction in differences between revenues and costs, the countries will make sure that production costs will be the same and can be sold easily.
- It allows resource transfer
When there is a foreign direct investment there will be resource transfer. There will be an exchange of knowledge as various countries will get accessed to new technology and skills hence improving productivity.
- Tax incentives
Foreign investors may receive tax incentives that may be highly useful in the selected field of business. It will provide additional expertise and technology hence high productivity.
- Development of human capital resource
Human capital is the competence and knowledge of those able to perform labor. The attributes gained by sharing education and training would increase the overall human capital in a country.
- Employment opportunities
The foreign direct investment provides more employment opportunities and thus helps to boost the country’s economy. This comes as a result of an increase in income hence there is a lot of buying power to people which boosts the economy of the country.
- Promotes international trade
When there is foreign direct investment, trading among countries will be made easier. This is because the tariffs that are normally put on the goods will be reduced and this will open the way for international trade to take place.
- It stimulates economic development
Foreign direct investment can stimulate the country’s economic development by allowing a conducive environment for the investors and this may make the investors boost even the local industries hence economic development.
- It increases competition
When there is a foreign investor, many people will compete with the investors and this will lead to the production of high-quality goods in the market as everyone will strive to produce goods that can fetch high prices in the market.
- Regional development
Foreign direct investment will facilitate regional development as there will be the availability of employment opportunities and this will enable people to improve their living standards hence the economy of the region will be improved as many will be able to pay tax creating regional development.
- Increase in exports
There will be in exports as there will be few barriers to international trade and this will create an available market for the goods produced in another country.
- Improved capital flow
There will be an improvement in capital flow to countries with limited domestic resources and for nations with restricted opportunities to raise funds in the global capital market.
- Stability of exchange rates
When there is a continuous flow of foreign direct investment in the country, then there will be a continuous flow of foreign exchange. This will enable the central bank of a country to maintain a comfortable reserve of foreign exchange hence stable exchange rates.
Cons of Foreign Direct Investment
- It hinders domestic investment
When there is a lot of foreign direct investment, it hinders domestic investment as it focuses its resources somewhere else instead of the investor’s home country. This hinders people to invest in their own country hence little domestic investment.
- Modern-day economic colonialism
Third-world countries have a fear that foreign direct investment would result in modern-day economic colonialism. This makes host countries vulnerable to foreign companies’ exploitation.
- It impacts on countries’ investment negatively
Investment may be banned in some foreign countries which would make it impossible to pursue an inviting opportunity. This may affect the investment of the investing country.
- The government may take control over your property
As most countries experience political instability, there may reach a time when the government may take the investor’s property and assets and use them and this may be a loss to the investor.
- Higher costs
Investing in other countries may be more expensive as compared to exporting goods. It is costly to set up operations in a foreign country hence the investor may end up not earning much from the business.
- Negative influence on exchange rates
Foreign direct investment can sometimes influence the exchange rates being advantageous to one country and disadvantageous to the other. This makes the investors not to invest in other countries as they do not know when the rates would be favorable.
- Political changes
Foreign direct investment is risky in countries that do not have a stable political system. This may be risky to invest in such countries as the attacks may arise at any time hence affecting the stability of the business.
- Economic non-viability
Foreign direct investment may sometimes not be successful and this may make the economy of the country not to benefit from the investment as it is expected.
- Low levels of research and development
When there are foreign investors in a country, the locals will only depend on the knowledge and skills brought about by the investors hence they may not invent something of their own affecting the level of research and development.
- Erosion of host culture
When the investors come to invest in another country, they may want the locals to adapt their lifestyle hence eroding the culture of the host country.
- Disruption of domestic business practices
When there is a foreign investor in the country, he or she will want to influence the business practices of the host country so that they may do business according to him or her hence influencing the business practices of another country.
Investing in another country can be beneficial if the country is stable politically. The investor may benefit financially. However, there are risks that come with investing in other countries that the investor should look into them and way whether it is safe to invest in the country.