Foreign Direct Investment (FDI) is an investment from a party in a particular country to a business in another country with the aim of lasting interest. It can be either financially investing in a foreign country or expanding one’s business to another country. A lasting interest is triggered when an investor has 10 percent of the voting power in a company. In a deep context, control is the critical factor for FDI. Besides, the practice has a significant effect on an emerging economy. In most cases, an emerging economy goal is to ensure sustainable growth is promoted across the business, which is vital for economic development. As a result, the thirst to have positive contributors in the economy act as the driving force to economic growth. Consequently, the presence of FDI in an emerging economy has a huge impact.
Impact of Foreign Direct Investment
FDI imports capital to the host country
It is a stimulus to the macroeconomic factors of the host country. It creates the opportunity to inject into the economic development process of a country and enhance growth(OECD, 2002). The imported capital influences productivity of the nation’s economy, promoting sustainable economic growth in the region. It works through the link between the FDI’s capital and the trade flow of the region (OECD, 2002). It can be viewed as additional capital to the growth of the host country and increased investment opportunities in the host country. From a broader perspective, FDI is less volatile compared to other forms of investment, affirming positive capital inflow to the emerging economy.
FDI creates employment
Additional job opportunities are the most immediate impact of FDI on emerging economies. It creates the chance to influence employment which is essential for the spending habit of the host country’s economy (Meyer, 2015). On the other hand, when many are employed, productivity is increased across the different levels of economic production. FDI offers the chance to influence growth and various sectors of a firm which is essential for growth anddevelopment(Meyer, 2015). On the other hand, it is a mechanism of triggering full employment, meaning that the host country will have minimal unemployment cases. Therefore, it maximizes the potential output of the macroeconomy and results in increased consumption, creating confidence for more business investment.
FDI increases the gross domestic investment
FDI plays an essential role in the financial development process. As a result, it is most likely to increase domestic capital accumulation by fostering the creation of attractive policies that influence investment(Aigheyisi, 2017). The capital inflow cannot be assumed since it encourages investment by ensuring the exchange rate increases, resulting in more international borrowing triggering a crowded local investment approach (Aigheyisi, 2017). Increasing consumption through employment creation provides the confidence of investing in the economy, which is essential for growth and development.
FDI generates exports
The impact of FDI on the host country’s exports can be direct and indirect. The direct effect is experienced when the Multinational Enterprises (MNEs) creates production companies in the host country and uses it to increase its product distribution capacity (Goswami & Saikia, 2012). One of the significant examples is Apple which has manufacturing companies in China, South Korea, and many other countries to improve product supply in the market. The indirect effect is the spillover effect, whereby foreign companies present the opportunity to influence technological advancement in the host country and offer the avenue for skills improvement in the labor market (Goswami&Saikia, 2012). Consequently, these factors end up improving a nation’s productivity leading to increased exports.
FDI leads to technological transfer
MNEs tend to have the highest level of technology due to the effect it has on product quality and efficiency in production (OECD, 2002). As a result, when FDI is present in an emerging economy propelled by the desire for MNEs to increase their supply, these advanced technologies will be transferred to the economy and boost technological advancement in the region (OECD, 2002). From a broader perspective, it leads to increased efficiency in the host country and can result in significant development in the technological spectrum of the host country. It is one of the significant spill over effects triggered by FDIs.
FDI leads to Human Capital Enhancement
FDI can profoundly influence the labor market. In most cases, once individuals are employed by MNEs, they undergo training or job learning programs to enhance their skills (OECD, 2002). Through such efforts, the labor market is widely improved. Also, the companies that are linked with the MNEs either through supply or other factors tend to benefit through employee enhancement procedure that makes the labor market efficiency. It should be noted that most nations foster the improvement of the labor market by either transforming education curriculum to attract FDIs, which is also a mechanism of human capital enhancement in the region (OECD, 2002). It is a broader development approach.
FDI triggers enterprise development
FDI has the potential of influencing enterprise development in the host country. In most cases, FDI propels the achievement of synergies with MNEs leading to increased efficiency and propelling identification of new activities (OECD, 2002). Through insights and spillover effect, the host country markets become full of opportunity that triggers the process and mechanisms of development in the region. In a deep context, the spillover effect can be experienced with companies unrelated to the MNEs, leading to a profound transformation in the enterprise development process (OECD, 2002). It generally gives rise to important efficiency in the host market and enterprises opportunity.
FDI triggers competition
FDI presence may exert a significant effect on the competition of the host market. MNEs trigger a spillover effect influencing business opportunities and even improve product quality. As a result, competition increase in the host country market due to increased productivity, product quality, and new business opportunity (OECD, 2002). It, therefore, influences lower prices to attain a competitive advantage easy resource allocation methods. However, it can negatively affect the level of concentration in the market-leading to decreased competition (OECD, 2002). For this reason, the host country is supposed to ensure that it offers an avenue for a standardized concentration of MNEs either by influencing quality labor or technological advancement.
FDI effect is significant to an emerging economy. A healthy business environment is promoted by FDIs, and transformation is profoundly significant. It should be noted the effects are not instant.
Aigheyisi, O. (2017). The Effect of Foreign Direct Investment on Domestic Investment in Nigeria: Any Role for Financial Development and Human Capital?. Amity Journal Of Economics. Retrieved 25 April 2021, from https://amity.edu/UserFiles/admaa/dd681Paper%201.pdf.
Goswami, C., &Saikia, K. (2012). FDI and its Relation with Exports in India, Status and Prospect in North East Region. Procedia – Social And Behavioral Sciences, 37, 123-132. https://doi.org/10.1016/j.sbspro.2012.03.280
Meyer, K. (2015). Foreign Investment: Direct. International Encyclopedia Of The Social & Behavioral Sciences, 324-326. https://doi.org/10.1016/b978-0-08-097086-8.71046-4 OECD. (2002). Foreign Direct Investment for Development. Retrieved 25 April 2021