BENEFITS OF FDI

 BENEFITS OF FOREIGN DIRECT INVESTMENT

The benefits from and concerns about FDI are widely discussed and well documented. While recognizing the fact that there are also benefits and costs to the home country from capital outflow, in this unit we focus only on host-country effects of FDI with particular attention to the developing countries. Following are the benefits ascribed to foreign investments:

1. Entry of foreign enterprises usually fosters competition and generates a competitive environment in the host country. The domestic enterprises are compelled to compete with the foreign enterprises operating in the domestic market. This results in positive outcomes in the form of cost-reducing and quality-improving innovations, higher efficiency and increasing variety of better products and services at lower prices ensuring wider choice and welfare for consumers

2. International capital allows countries to finance more investment than can be supported by domestic savings. The provision of increased capital to work with labour and other resources available in the host country can enhance the total output (as well as output per unit of input) flowing from the factors of production.

3. From the perspective of emerging and developing countries, FDI can accelerate growth and foster economic development by providing the much needed capital, technological know-how, management skills and marketing methods and critical human capital skills in the form of managers and technicians. The spill-over effects of the new technologies usually spread beyond the foreign corporations. In addition, the new technology can clearly enhance the recipient country's production possibilities.

4. Competition for FDI among national governments also has helped to promote political reforms important to attract foreign investors, including legal systems and macroeconomic policies.

5. Since FDI involves setting up of production base (in terms of factories, power plants, etc.) it generates direct employment in the recipient country. Subsequent FDI as well as domestic investments propelled in the downstream and upstream projects that come up in multitude of other services generate multiplier effects on employment and income.

6. FDI not only creates direct employment opportunities but also, through backward and forward linkages, generate indirect employment opportunities.This impact is particularly important if the recipient country is a developing country with an excess supply of labour caused by population pressure.

7. Foreign direct investments also promote relatively higher wages for skilled jobs. More indirect employment will be generated to persons in the lower-end services sector occupations thereby catering to an extent even to the less educated and unskilled persons engaged in those units.

8. Foreign corporations provide better access to foreign markets. Unlike portfolio investments, FDI generally entails people-to-people relations and is usually considered as a promoter of bilateral and international relations. Greater openness to foreign capital leads to higher national dependence on international investors, making the cost of discords higher.

9. There is also greater possibility for the promotion of ancillary units resulting in job creation and skill development for workers.

10. Foreign enterprises possessing marketing information with their global network of marketing are in a unique position to utilize these strengths to promote the exports of developing countries. If the foreign capital produces goods with export potential, the host country is in a position to secure scarce foreign exchange which can be used to import needed capital equipments or materials to assist the country's development plans or to ease its external debt servicing.

11. If the host country is in a position to implement effective tax measures, the foreign investment projects also would act as a source of new tax revenue which can be used for development projects.

12. It is likely that foreign investments enter into industries in which scale economies can be realized so that consumer prices might be lowered. Domestic firms might not always be able to generate the necessary capital to achieve the cost reductions associated with large-scale production.

13. Increased competition resulting from the inflow of foreign direct investments facilitates weakening of the market power of domestic monopolies resulting in a possible increase in output and fall in prices.

14. Since FDI has a distinct advantage over the external borrowings, it is considered to have a favourable impact on the host country’s balance of payment position, and1. Better work culture and higher productivity standards brought in by foreign firms may possibly induce productivity related awareness and may also contribute to overall human resources development.

15. Better work culture and higher productivity standards brought in by foreign firms may possibly induce productivity related awareness and may also contribute to overall human resources development.