In the above section, we have seen that a wide variety of benefits may result from an inflow of foreign direct investment. These gains do not occur in all cases, nor do they occur in the same magnitude. Despite the arguments which vehemently favour direct investments in host countries, many are highly critical of the impact of foreign capital, especially on developing economies. They argue that foreign entities are highly focused on profits and have an eye on exploiting the natural resources and are almost always not genuinely interested in the development needs of host countries. Foreign capital is perceived by the critics as an instrument of imperialism, or as a perpetrator of dependence and inequality both between nations and within nations.
Following are the general arguments put forth against the entry of foreign capital.
1. FDIs are likely to concentrate on capital-intensive methods of production and service so that they need to hire only relatively few workers. Such technology is inappropriate for a labour-abundant country as it does not support generation of jobs which is a crucial requirement to address poverty and unemployment which are the two fundamental areas of concern for the less developed countries.
2. The inherent tendency of FDI flows to move towards regions or states which are well endowed in terms of natural resources and availability of infrastructure has the potential to accentuate regional disparity. Foreign capital is also criticized for accentuating the already existing income inequalities in the host country.
3. In the context of developing countries, it is usually alleged that the inflow of foreign capital may cause the domestic governments to slow down its efforts to generate more domestic savings, especially when tax mechanisms are difficult to implement. If the foreign corporations are able to secure incentives in the form of tax holidays or similar provisions, the host country loses tax revenues.
4. Often, the foreign firms may partly finance their domestic investments by borrowing funds in the host country's capital market. This action can raise interest rates in the host country and lead to a decline in domestic investments through ‘crowding-out’ effect. Moreover, suppliers of funds in developing economies would prefer foreign firms due to perceived lower risks and such shifts of funds may divert capital away from investments which are crucial for the development needs of the country.
5. The expected benefits from easing of the balance of payments situation might remain unrealised or narrowed down due to the likely instability in the balance of payments and the exchange rate. Obviously, FDI brings in more foreign exchange, improves the balance of payments and raises the value of the host country's currency in the exchange markets. However, when imported inputs need to be obtained or when profits are repatriated, a strain is placed on the host country's balance of payments and the home currency leading to its depreciation. Such instabilities jeopardize long-term economic planning. Foreign corporations also have a tendency to use their usual input suppliers which can lead to increased imports. Also, large scale repatriation of profits can be stressful on the balance of payments.
6. Jobs that require expertise and entrepreneurial skills for creative decision making may generally be retained in the home country and therefore the host country is left with routine management jobs that demand only lower levels of skills and ability. The argument of possible human resource development and acquisition of new innovative skills through FDI may not be realized in reality.
7. High profit orientation of foreign direct investors tend to promote a distorted pattern of production and investment such that production could get concentrated on items of elite and popular consumption and on non-essential items.
8. Foreign entities are usually accused of being anti-ethical as they frequently resort to methods like aggressive advertising and anticompetitive practices which would induce market distortions.
9. A large foreign firm with deep pockets may undercut a competitive local industry because of various advantages (such as in technology) possessed by it and may even drive out domestic firms from the industry resulting in serious problems of displacement of labour. The foreign firms may also exercise a high degree of market power and exist as monopolists with all the accompanying disadvantages of monopoly. The high growth of wages inforeign corporations can influence a similar escalation in the domestic corporations which are not able to cover this increase with growth of productivity. The result is decreasing competitiveness of domestic companies which might prove detrimental to the long term interests of industrial development of the host country.
10. FDI usually involves domestic companies ‘off –shoring’, or shifting jobs and operations abroad in pursuit of lower operating costs and consequent higher profits. This has deleterious effects on employment potential of home country.
11. The continuance of lower labour or environmental standards in host countries is highly appreciated by the profit seeking foreign enterprises. This is of great concern because efforts to converge such standards often fail to receive support from interested parties.
12. At times, there is potential national security considerations involved when foreign firms function in the territory of the host country, especially when acute hostilities prevail.
13. FDI may have adverse impact on the host country's commodity terms of trade (defined as the price of a country's exports divided by the price of its imports). This could occur if the investments go into production of export goods and the country is a large country in the sale of its exports. Thus, increased exports drive down the price of exports relative to the price of imports.
14. FDI is also held responsible by many for ruthless exploitation of natural resources and the possible environmental damage.
15. With substantial FDI in developing countries there is a strong possibility of emergence of a dual economy with a developed foreign sector and an underdeveloped domestic sector.
16. Perhaps the most disturbing of the various charges levied against foreign direct investment is that a large foreign investment sector can exert excessive amount of power in a variety of ways so that there is potential loss of control by host country over domestic policies and therefore the less developed host country’s sovereignty is put at risk. Mighty multinational firms are often criticized of corruption issues, unduly influencing policy making and evasion of corporate social responsibility.
No general assessment can be made regarding whether the benefits of FDI outweigh the costs. Each country's situation and each firm's investment must beexamined in the light of various considerations and a judgment about the desirability or otherwise of the investment should be arrived at.
Many safeguards and performance requirements are put in place by developed and developing countries to improve the ratio of benefits to costs associated with foreign capital. A few examples are: domestic content requirements on inputs, reservation of certain key sectors to domestic firms, requirement of a minimum percent of local employees, ceiling on repatriation of profits, local sourcing requirements and stipulations for full or partial export of output to earn scarce foreign exchange.
9. A large foreign firm with deep pockets may undercut a competitive local industry because of various advantages (such as in technology) possessed by it and may even drive out domestic firms from the industry resulting in serious problems of displacement of labour. The foreign firms may also exercise a high degree of market power and exist as monopolists with all the accompanying disadvantages of monopoly. The high growth of wages inforeign corporations can influence a similar escalation in the domestic corporations which are not able to cover this increase with growth of productivity. The result is decreasing competitiveness of domestic companies which might prove detrimental to the long term interests of industrial development of the host country.
10. FDI usually involves domestic companies ‘off –shoring’, or shifting jobs and operations abroad in pursuit of lower operating costs and consequent higher profits. This has deleterious effects on employment potential of home country.
11. The continuance of lower labour or environmental standards in host countries is highly appreciated by the profit seeking foreign enterprises. This is of great concern because efforts to converge such standards often fail to receive support from interested parties.
12. At times, there is potential national security considerations involved when foreign firms function in the territory of the host country, especially when acute hostilities prevail.
13. FDI may have adverse impact on the host country's commodity terms of trade (defined as the price of a country's exports divided by the price of its imports). This could occur if the investments go into production of export goods and the country is a large country in the sale of its exports. Thus, increased exports drive down the price of exports relative to the price of imports.
14. FDI is also held responsible by many for ruthless exploitation of natural resources and the possible environmental damage.
15. With substantial FDI in developing countries there is a strong possibility of emergence of a dual economy with a developed foreign sector and an underdeveloped domestic sector.
16. Perhaps the most disturbing of the various charges levied against foreign direct investment is that a large foreign investment sector can exert excessive amount of power in a variety of ways so that there is potential loss of control by host country over domestic policies and therefore the less developed host country’s sovereignty is put at risk. Mighty multinational firms are often criticized of corruption issues, unduly influencing policy making and evasion of corporate social responsibility.
No general assessment can be made regarding whether the benefits of FDI outweigh the costs. Each country's situation and each firm's investment must beexamined in the light of various considerations and a judgment about the desirability or otherwise of the investment should be arrived at.
Many safeguards and performance requirements are put in place by developed and developing countries to improve the ratio of benefits to costs associated with foreign capital. A few examples are: domestic content requirements on inputs, reservation of certain key sectors to domestic firms, requirement of a minimum percent of local employees, ceiling on repatriation of profits, local sourcing requirements and stipulations for full or partial export of output to earn scarce foreign exchange.
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