How does foreign direct investment affect economic growth?

Foreign direct investment (FDI) is an investment in a business by an investor from another country, for which the foreign investor has control over the company purchased. Businesses that make foreign direct investments are often called multinational corporations (MNC) or multinational enterprises (MNE).

According to the foreign direct investment concept, there are a lot of advantages and disadvantages. I think that FDI can give some perfect advantages for the MNE, but in the opposite direction with the foreign country in which to invest. On the other hand, sometimes the deal can work out better for the foreign country, depending upon how the investment pans out. It would be ideal if the benefits derived from FDI profited both countries, that is, those which make investments as well as the countries in which the investor is investing them.

First of all, I think that foreign direct investment generates positive productivity effect on economy. For example, FDI can be an effective way for you to enter into a foreign market. Oil companies, for example, often make tremendous FDIs to develop oil fields. To my mind, some countries restrict the access of foreign companies to their domestic markets. I think FDI is also a mean for you to reduce your costs of production if the labour market is cheaper and the regulations are less restrictive in the target foreign market. For example, it's a well-known fact that the shoes and clothing industries have been able to drastically reduce their costs of production by moving operations to developing countries. So FDI can play important role in modernizing a national economy and promoting economic development.

Also, the FDI create new jobs, boost wages, increase exports, strength manufacturing and services. For example, if a large factory is constructed in a small developing country, the country will typically have to utilize at least some local labour, equipment, and materials to construct it. This will result in new jobs and foreign money being pumped into the economy. Once the factory is constructed, the factory will have to hire local employees and will probably utilize at least some local materials and services. This will create further jobs and maybe even some new businesses.

In my opinion, FDI has an immediate impact on the technology level of the country through greenfield investments and foreign ownership participation. Developing governments can use this capital infusion and revenue from economic growth to create and improve its physical and economic infrastructure, such as building roads, communication systems, educational institutions, and subsidizing the creation of new domestic industries.

In the other hand, there can also be some disadvantages due to foreign direct investment. The first is unstable economic conditions, for example, much of FDI takes place in the developing world, which is so named because it is just developing its economic systems. The market conditions in the developing world can be quite unstable and unpredictable. The second is unstable political and legal systems. There you can find unstable or underdeveloped political and legal systems. Additionally, the legal system may be underdeveloped. Contracts and property rights may not be easily established, for example.

Finally, learning is an indirect advantage for foreign countries. FDI reveal national and local governments, local businesses, and citizens’ new business practices, management techniques, economic concepts, and technology that will help them developing local businesses and industries. All in all, I think that FDI is more productive than domestic investment because it brings in new research, technology and skills and contributes to rising productivity and contributes economy growth.

Radvinė Skobaitė

 [artigo de opinião produzido no âmbito da unidade curricular “Economia Portuguesa e Europeia” do 3º ano do curso de Economia (1º ciclo) da EEG/UMinho]