Fdi: Advantages and Disadvantages

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Benefits of FDI

Foreign direct investment (FDI) occurs when a nation or corporation invests capital in another country. For low-income countries, FDI can have major effects on the amount of production in a country. According to the United Nations, FDI has greatly increased the growth rate of the economies of low- income countries, allowing them to grow more rapidly than developed countries. Foreign direct investment comes with its own costs and benefits, as the organization or business providing the funding is concerned with securing advantages in the nation in which it is investing.

Business Sectors

• Foreign investors may change the balance among types of businesses in a country. If investors from abroad decide that they want to invest in banks, rather than farms or manufacturing firms, the low-income nation will now have a more developed financial sector. This may not be the policy that the leaders or citizens of the country desire. Foreign direct investment may also focus on producing crops meant for export, such as coffee or tobacco, rather than crops the citizens of the low-income country need for their own consumption, such as corn or rice. This may lead to a famine if the farmers in the low-income country reduce production of staple crops.

Political Issues

• Politicians receive support from external investors. A company that wishes to invest in a low-income country can select a nation that does not have strong labor regulations or in which workers are not paid high wages. The foreign investor may support an authoritarian dictatorship because it protects private property rights and can forcibly increase productivity, according to the University of Pennsylvania. A foreign investor that invests in a dictatorship also provides additional funding for the army and other security forces, which serve to keep the dictatorship in power.

Regional Balance

• Foreign direct investment can alter the economic, demographic...
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