Advantages And Disadvantages Of FDI | What is FDI?, Foreign Direct Investment Advantages and Disadvantages

FDI Advantages and Disadvantages: Foreign direct investment (FDI) allows companies in developing countries to get multinational funding and expertise to boost their operations and ensure improved performance. When business enterprises execute acquisitions of business assets or expand operations in another country, the investment made by investors is termed as FDI. It implies that an international company can be directly involved in the management of company operations in another country.

Foreign direct investment can be in terms of money as well as knowledge, technology, and skills. Foreign direct investment is a crucial factor in a developing country’s economy by offering opportunities for more employment and participation in global business. FDI allows investors to have an influence over the company’s affairs including policies and operations. Companies in developing countries benefit from foreign direct investment as they get the funding and expertise to expand and grow their business on an international platform.

What is FDI? Advantages and Disadvantages of FDI 2022

Foreign Direct Investment (FDI) refers to the investment in business made by an individual or an organization located in another country. These foreign companies offer private investments in various sectors that increase job opportunities and income levels of people, thereby contributing to overall economic growth. The levels of FDI depend on the type of business and the reasons for the investments. A company in a country may receive FDI if the foreign investor takes ownership of the company to continue operations in the country. There can be scope of investments to another company through mergers or acquisitions, setting up a new venture, or expanding the operations of an existing one. Foreign Direct Investment can also result from the acquisition of shares in an enterprise or participation in a joint venture with companies at an international level.

Advantages of FDI

  • Economic growth: One of the most important advantages of foreign direct investment in a developing country is the boost in the economy with the creation of more job opportunities in the manufacturing and service sectors. FDI is the primary source of external capital as well as increased revenues for a country. It often results in the opening of global opportunities leading to better exports and economic growth.
  • Human capital development: Human capital development happens with an enhancement of the knowledge and competency level of a workforce. Foreign initiative in skills development of employees through training and experience can improve the potential of the human capital of a country, contributing to overall business growth.
  • Technology: Acquired businesses get access to the latest tools, technologies, and working practices from across the globe. The application of new and advanced technologies will result in improved performance resulting in enhanced efficiency and effectiveness of the business operations.
  • Increase in exports: FDI allows the manufacturing of goods that have demand in global markets, apart from domestic consumption. The creation of export-oriented business units helps investors to get better returns.
  • Exchange rate stability: The funding in business through FDI generates a continuous flow of foreign exchange in the country, helping to maintain a reserve that results in stable exchange rates.
  • Improved Capital Flow: The inflow of capital through FDI supports the industrial development of a country having limited domestic resources as well as for nations with restricted opportunities to access global capital markets.
  • Improve living standard: Increased employment leads to higher incomes and more buying powers, thereby improving the overall standard of living.
  • Creation of a Competitive Market: The establishment of new businesses by foreign companies helps create a competitive environment by breaking domestic monopolies. To gain a competitive advantage, firms try to enhance their processes and product performance. As a result, consumers also gain access to a wider range of competitively priced quality products.

Disadvantages of FDI

  • Hindrance of domestic investment: Due to FDI in new industries and organizations in other countries, the development of domestic companies is affected as the resources are shifted elsewhere and local companies start losing investments in their domestic products.
  • The risk from political changes: The change in the country’s political scenario may not be favorable for foreign investors to invest in assets and property and there may be risk factors involved.
  • Higher cost of products: Foreign direct investment into building of capacity and resources may sometimes lead to higher pricing of manufactured products to get the return on investment.
  • Economic non-viability: Foreign direct investments in some businesses may initially be found capital-intensive from the point of view of the investor, but later it can be found economically non-viable.
  • Lack of positive response: Many countries feel that foreign direct investment would result in some kind of economic colonialism with overall control over markets and economy which makes host countries non-responsive to the need for foreign companies’ investments.

Comparison Table for Advantages and Disadvantages of FDI

Advantages Disadvantages
Foreign direct investments (FDI) facilitate the economic growth of a country through the inflow of capital, technology, knowledge and other resources by setting up new businesses and industries. Foreign direct investments (FDI) for business growth in other countries make investors shift focus from the domestic companies and they suffer lack of investment and growth opportunities.
FDI in a country leads to the building of new factories and expansion of existing operations utilizing local resources that creates more employment opportunities, especially in service and manufacturing sectors. FDI for developing and implementing new technology and work practices may sometimes affect the medium-scale local industries as they fail to cope up with the changes.
FDI in technology and knowledge development allows the workforce to gain access to better opportunities for skill enhancement. As more and more resources acquire skills, they can train others and create the development of human resources in the country. FDI, as expected to be beneficial for companies in a country, may not materialize due to political intervention and government policies prevailing in the country.
FDI can provide the recipient country access to the latest developments in technology and operational practices. The adaptation of emerging technologies and processes helps the overall industrial sector to be more efficient over time. FDI to the manufacturing sector may lead to higher pricing of products as investors look for more return against investment on modern plants and machineries.
FDI helps to create a more competitive business environment by allowing exposure to the global market. Manufacturing and service sectors are encouraged to improve their standard and quality to remain at a competitive edge, which in turn becomes beneficial for customers. FDI may lead to significant influences of foreign investors in a company’s policies and operations that may result in loss of jobs for a certain category of the workforce.

FAQ’s on Advantages And Disadvantages Of FDI

Question 1.
How does FDI lead to better employment opportunities?

Foreign direct investment (FDI) in new ventures or business expansion in other countries lead to the setting up of new factories that create the requirement of more workforce to employ thereby increasing the job opportunities.

Question 2.
What are situations that can result in FDI by investors?

When an individual or organization becomes owner or partner to another company’s operations in other countries through mergers or acquisitions, the company is expected to receive foreign direct investments.

Question 3.
How does FDI affect the growth of local companies?

The investors may be more interested in the expansion of new ventures in other countries, thereby losing focus on domestic activities.

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