Foreign Direct Investment Paper – III (B)

Definition of foreign direct investment

Investment from one country into another (normally by companies rather than governments) that involves establishing operations or acquiring tangible assets, including stakes in other businesses.
The purchase or establishment of income-generating assets in a foreign country that entails the control of the operation or organisation.

Advantages of foreign direct investment

• It can stimulate the economic development of the country in which the investment is made, creating both benefits for local industry and a more conducive environment for the investor.
• It will usually create jobs and increase employment in the target country.
• It will enable resource transfer, and other exchanges of knowledge whereby different countries are given access to new skills and technologies.
• The equipment and facilities provided by the investor can increase the productivity of the workforce in the target country.

Disadvantages of foreign direct investment

• Foreign direct investment can sometimes hinder domestic investment, as it focuses resources elsewhere.
• Occasionally as a result of foreign direct investment exchange rates will be affected, to the advantage of one country and the detriment of the other.
• Foreign direct investment may be capital-intensive from the investor’s point of view, and therefore sometimes high-risk or economically non-viable.
• The rules governing foreign direct investment and exchange rates may negatively affect the investing country.
• Investment in certain areas is banned in foreign markets, meaning that an inviting opportunity may be impossible to pursue.