Benefits of Foreign Direct Investment

     

  With its orientation to developing enterprises directly, foreign direct investment helps to strengthen economic potential. Sometimes, this is accomplished through greenfield investment, adding new and different economic activity and consequently diversifying the economy. Other times, this will be achieved through building up existing enterprises and enhancing their potential. Both of these activities will add a new and healthy element of increased competition to an economy, which is itself a powerful force for economic development.

       Competition is one of the ways a foreign direct investment can have a broader effect on the economy. It spurs other enterprises to increase their own efficiency and productivity. Competition plays a major role in improving the allocation of resources, boosting the economic prospects of the domestic economy and worldwide sustainable economic development. Technology transfers and the

development of human capital are often seen as two of the primary benefits of foreign direct

investment. Competition has a role to play in both, as it encourages domestic competitors of the

foreign investment to build up their own technological capabilities and the productivity of their labor

force. They will, among other things, learn from the technology of the foreign investor and the ways

in which it improves the productivity of its labor and management.

        The development of human capital can be one of the chief contributions of foreign direct investment. The foreign owners will bring their management skills and technology to their enterprises. In training the local workforce, they will pass on those management skills and technology. As their workers move on to other jobs in domestic firms, or start their own businesses, they will bring with them the management, working skills, and the technology that they have learned. Thus, in a very direct manner, the human capital of the host country can be developed by foreign direct investment, and the investment' technology transferred.

        Human capital development and technology transfer also occur through the foreign investment’s

relationships with its suppliers and the downstream users or sellers of its products. The investment

will require from its suppliers a certain standard of product, perhaps a higher standard than they are

accustomed to producing. In order to meet that higher standard, they will have to improve their

workers’ skill levels and their management system. They may also gain new technological expertise

needed for the required product standard from the foreign investment. The current trend toward

outsourcing and closer collaboration along the supply chain means that there will be a greater tendency to pass management, production and technology know-how to suppliers, enhancing the transfer of technology and skills. Enterprises that are downstream in the supply and sales chain will receive similar benefits, although less obviously and perhaps less frequently, both through the direct use of a higher standard product incorporating technological improvements, and through efforts by the foreign investment to maximize the value of its product.

        Foreign enterprises often incorporate foreign trade, either with the parent company or with customers, or both. Thus, another benefit that foreign direct investment brings is increased opportunities and avenues for trade. Trade and investment are increasingly integrated, as are their benefits.

        Foreign direct investment can also provide environmental and social benefits. Often, international investors will operate at higher environmental and social standards than their domestic competitors. Although they may not bring standards up to the highest level possible, they will have the effect of raising the standards above existing levels. These standards may also be adopted over time by domestic companies, further raising the country’s environmental and social standards.