Disadvantages of FDI
Foreign direct investment is advantageous to the USA however there are also limitations of FDI to a home country. Some of the most widespread limitations consist of the loss of employment. The main reason as why production takes place in foreign countries is because the company benefits from cheap labour and material sourcing costs. Other problems comprise of repatriations. This means that problems occur when "returning foreign-earned profits or financial assets back to the company's home country”. (Buzzle, 2011) Another drawback of FDI to a home country is the competition that ascends. The developing significance of FDI has compelled host countries into competition. The intention of this is to escalate the amount of FDI’s, but at the same time, to condense the long-term benefits per dollar of investment. (Tearfund, 2010) The Organization for economic cooperation and development, (OECD), states that FDI bring competition in the domestic market as the competition laws and frameworks in the host country are weakly executed. (OECD, 2002) Moreover, whilst FDIs upturn and accumulate, the demand of FDI also increases and has an impact on the environmental policy of that country. This means that the less developed countries have restricted environmental regulations which mean that there is a lack in enforcing the policies regarding FDI. (Tearfund, 2010) Another limitation of FDI is that high returns are extracted. Cost may be a significant aspect of FDI but it also one of the greatest drawbacks as direct investment is more perilous than the provision of loan capital. Therefore foreign investors expect higher returns. (Tearfund, 2010) Furthermore, Oman, contributes by adding that FDI has become considerably vital in the balance of payments. This is due to the fact that most developing countries have immense debt repayments and a deficit in the current account. The deficit as a consequence must then be invested with capital inflows as an excess of...
Please join StudyMode to read the full document