Benefits and costs of foreign direct Investment

Benefits and costs of foreign direct Investment Foreign direct investment (FDI) according to Hill(2007) takes place when a firm invests directly in facilities to produce and/or market a product in a foreign country. The facilities could include resources such as the factors of production; land, labour and capital. It could be said today’s major players in business seek not only to expand their territories in their home market but also have through FDI sought effective ways of improving existing products and breaking into new foreign markets. For example the import tariffs in China make it very challenging for other countries to serve the Chinese market through exports. Hill (2007). Via the use of FDI strategies foreign organisations are able to access pool of economic possibilities. Through the assessment of various sources the essay is going to critically assess the impacts of foreign direct investment (FDI) on a host country. It will critically discuss the benefits and disadvantages FDI has on the growth of a country. Ac cording to Gorg and Greenway (2004) foreign direct investment is a key driver of economic growth and development. FDI assists in the economic progression of the country where the investment is being made. According to Mencinger (2003), a vast number of countries through various ways desperately seek to attract as much foreign direct investment as probable in the hope of advancing their economic growth. The economic growth could be advanced in that FDI leads to the creation of factors such as jobs and more investment into the economy. However it could be argued that the efficient adoption of FDI is most effective under certain conditions. For instance FDI contributes to economic growth only when a sufficient absorptive capability of the advanced technologies is available in the host country. Borensztein, Gregorio and Lee (1998). FDI strategy is more successful if it is carried out in economically developing countries. Developing host countries compared to developed countries are usua lly more keen to attract foreign investments in order to reap the benefits that come with it and this usually reflected in the legislation of one’s country. One could find that a business is more willing to first invest in a developing country as the legislation is more lenient compared to the first world countries. However it is important to note that this does not apply to all countries. China for example has a highly regulated environment, which can prove to be difficult when it comes to carrying out business transactions, and shifting tax and regulatory regimes. Hill(2007). It could be said that when making legislation those in power should regard the relative impact of the laws passed on potential FDI. On the other hand one could argue that more countries are becoming more aware of the importance of creating more favourable conditions for FDI. Gorg and Greenway in their report state that in 1998 legislation changes made by 60 countries, more than 90 percent of those chan ges created a more positive environment for FDI. FDI if managed efficiently should aid to the hosts county’s economic development. â€Å"FDI inflows have been a major source of investment and economic growth in China†¦accounting for perhaps as much as 30 percent of the county’s growth.†(Hill, page 242, 2007). The mixture of cheap labour and tax incentives usually found in developing countries make an attractive base for foreign investors. The new economic investment brought in by foreign businesses will help in increasing the host country’s national income, at the same time bringing other economic benefits known as spillovers that will result in the increase of productivity within the country. Gorg states that, â€Å"†¦theoretical literature identifies four channels through which spillovers might boost productivity in the host country: imitation, skills acquisition, competition and exports.† These channels if recognised and implemented pr operly could lead to the increase of the host country’s productivity and economic growth. Through the imitation of foreign goods, services and processes the host country can increasing improve its processes, facilities and the way business is contacted in its own business environment. One of the worries for many foreign investors when wanting to invest in developing countries is that the host country will not have the facilities ( for example the equipment or the right business structure for the manufacturing and deploying of products) they need in order for business affairs to run smoothly. Through the imitation of the way foreign organisations handle their business affairs, host countries can improve their processes and facilities, arguably to the extent that they will make their country enticing to FDI. Imitation of products will improve the quality and range of products of the local organisations, making them competitive an appealing to customers. The increase of the prod uctivity of more high quality products could lead to the attraction of not only local customers but global customers and this could also lead to more FDI in the host country.