Liberalization policy in developing world since the 90s has revolutionized the economy and provided a fillip to their Gross domestic productions. Developed countries poured money in the form of foreign direct investment into South American and East Asian nations to transform them from an agrarian outpost to industrial economies. FDI, the acronym of foreign direct investment has proved to be a boon for the countries however it has its own disadvantages. Let’s find them out.
Positive effects of FDI:
• Foreign direct investment in the economy of a country helps to make it more competitive. Multinational corporations while setting up offices bring in cutting edge technologies that help to boost the business and provide employment to a large number of people.
• A nation cannot generate huge investments on its own to upgrade the infrastructure in construction and power industries.
• It should be sourced from other countries that have huge foreign exchange reserves.
Elimination of monopoly:
• By inviting FDI, the government can eliminate monopoly of the local companies and benefit the customers because they can avail quality products.
• Moreover, it will force the companies to chart out the business strategy and deliver customer-centric services.
• The foreign company trains the local human resources to enhance their skill sets, thereby bridging the gap between education and employability.
• It plays an important role in enhancing the productivity of the employees.
Revenue to the host country:
• The nation receiving FDI benefits from the technology transfer of the foreign company.
• Moreover, it also pays taxes to the host country and sources raw material from the local suppliers to manufacture the finished goods.
• It is a wonderful option for the developing nations to improve the economy apart from becoming major exports destinations.
• Organization with FDI uses the local employees because they are cost effective and provide quality output.
• Therefore, it improves the balance sheet by eliminating the production overheads in the form of high wages.
Negative effects of FDI:
• Lax labor laws combined with unemployment in the developing countries leads to exploitation of workers by multinational corporations.
• They shift the manufacturing base from higher income nations to lower ones in order to save money nevertheless the working conditions at the new places are anything but good.
Draining of money:
• In spite of foreign direct investment coming into the country by the company is basically deployed to earn profits from the native customers.
• Therefore, the net amount earned is transferred to the parent nation.
• In addition, the human resources are forced to work for long hours with the absence of health insurance.
Loss of business for local companies:
• International corporations bringing in FDI are awash with funds compared to the local companies.
• The latter is forced to play second fiddle or wind up after some time because they do not have the required financial muscle. It is an unfortunate situation as the country can never develop a local industrial base.
FDI is beneficial in industries requiring the infusion of cutting-edge technologies from the high-income countries. It can only be permitted when the local companies are competitive to ensure a level playing field.