Effects of Foreign Direct Investment

The possible positive and negative effects of FDI inflows Ing. Tomáš Dudáš, PhD.

Possible positive effects
FDI provides capital which is usually missing in the target country
Long term capital is suitable for economic development Foreign investors are able to finance their investments projects better and often cheaper
Foreign corporations create new workplaces

Possible positive effects
FDI bring new technologies that are usually not available in the target country.
There is empirical evidence that there are spillover effects as the new technologies usually spread beyond the foreign corporations

Foreign corporations provide better access to foreign markets
Ex. Foreign corporations can provide useful contacts even for their domestic subcontractors

Possible positive effects
Foreign corporations bring new know-how and managerial skills into the target country
Again, there is a spill-over effects – as people leave the corporations they leave with the knowledge and know-how they accumulated

Foreign corporations can help to change the economic structure of the target country
With a good economic strategy governments can attract companies from promising and innovative sectors

Possible positive effects
“Crowding in” effect
The foreign corporations often bring additional investors into the target country (ex. their usual subcontractors) Foreign corporations improve the business environment of the target country
Ethical business or rules of conduct

Possible positive effects
Foreign corporations bring new “clean” technologies that help to improve the environmental conditions
Foreign corporations usually help increase the level of wages in the target economy
Foreign corporations usually have a positive effects on the trade balance

Possible negative effects
Foreign corporations may buy a local company in order to shut it down (and gain monopoly for example)
“Crowding out” effect
We can see this effect if the foreign corporations target the domestic market and domestic corporations are not able to compete with these corporations Possible negative effects
Foreign corporations may cut working positions (privatization deals or M&A transactions) Foreign corporations have a tendency to use their usual suppliers which can lead to increased imports (no problem if the production is export driven)

Possible negative effects
Repatriation of the profits can be stressful on the balance of payments
The high growth of wages in foreign corporations can influence a similar growth in the domestic corporations which are not able to cover this growth with the growth of productivity
The result is the decreasing competitiveness of domestic companies Possible negative effects
Missing tax revenues
If the foreign corporations receive tax holidays or similar provisions

The emergence of a dual economy
The economy will contain a developed foreign sector and an underdeveloped domestic sector

Possible negative effects
Possible environmental damage
“Incentive tourism”