June 29, 2010Foreign Direct Investmentby EconomyWatch

Benefits of Foreign Direct Investment

One of the advantages of foreign direct investment is that it helps in the economic development of the particular country where the investment is being made.

This is especially applicable for developing economies. During the 1990s, foreign direct investment was one of the major external sources of financing for most countries that were growing economically. It has also been noted that foreign direct investment has helped several countries when they faced economic hardship.

An example of this can be seen in some countries in the East Asian region.

It was observed during the 1997 Asian financial crisis that the amount of foreign direct investment made in these countries was held steady while other forms of cash inflows suffered major setbacks. Similar observations have also been made in Latin America in the 1980s and in Mexico in 1994-95.

 

For host countries, inward FDI has the potential for job creation and employment, which is often followed by higher wages.

Resource transfer, in terms of capital and technical knowledge, is also a key motivator that encourages inward FDI.

In recent years, FDI has been used more as a market entry strategy for investors, rather than an investment strategy. Despite the decline in trade barriers, FDI growth has increased at a higher rate than the level of world trade as businesses attempt to circumvent protectionist measures through direct investments. With globalization, the horizons and limits have been extended and companies now see the world economy as their market. 

Additionally for investors, FDI provides the benefits of reduced cost through the realization of scale economies, and coordination advantages, especially for integrated supply chains. The preference for a direct investment approach rather than licensing and franchising can also been viewed in terms of strategic control, where management rights allows for technological know-how and intellectual property to be kept in-house. 

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