The relations between countries are very broad. It is a vast area that includes Political, Social and economical constructs.
Countries have economic relations as well. After the two devastating world wars, every country in the world wanted the support of the other countries to recover. Foreign Direct Investment can be identified as a tool that many countries use to help other countries.
In this post, I’m going to discuss about Foreign Direct Investment, its advantages and disadvantages.
What is Foreign Direct Investment?
If a firm or an individual in one country has the interest to invest in another country, that can be identified as a Foreign direct Investment. Here, the investing firm or the individual can establish a foreign business operation or can access the foreign business assets in a foreign company. For example, Unilever started its investments in India can be identified.
Foreign Direct Investments are well matched with open economies which have no barriers for the investors. Also more investors like to invest in foreign countries which offer skilled labour forces.
Foreign Direct Investment is not only capital investments. It can be Technology or management also.
Advantages of FDI
- It boosts International Trade.
Foreign Direct Investments increases International Trade because it allows the spread of the global chain throughout the world. For instance, Apple produces its iPhone using many components shipped from everywhere in the world. According to the Supplier list for fiscal year 2020 issued by Apple, it used many components produced in many countries such as Taiwan, China, South Korea and Germany.
This increased the economy of many countries because of the International trade increased.
On the other hand, FDI creates new job opportunities for the labour forces.
- Reduce Regional and Global tensions
One of the best factors that can be used to establish peace between countries is economic integration.
Once any two countries have economic relations, which means depending on each other, it reduces the chances of getting into a war.
This also can happen on a regional or global level.
- Sharing Technology and Knowledge
One of the benefits of the FDI receiving country is knowledge and technology. When a firm or an individual likes to invest in another country, they should provide knowledge and technology to that country.
This can be used by the receiving country to enhance their economy. Also on the other hand this can be used to other industries in the receiving country as well.
Disadvantages of FDI
- Foreign control
Many less developed countries have a fear of foreign control when they accept FDI. Most of the time, many countries minimize their rules to attract more FDI to increase their economic growth. But, at the same time they have a risk of foreign control.
When the land and labours are cheap in a particular country, the investing firm or individuals try to get more parts. As a result of that, the investing country can control the receiving country.
- Loss of Domestic Jobs
When a country, firm or an individual likes to invest in a foreign country, it transfers the domestic money and job opportunities to a foreign country instead of investing it domestically.
As an overall, Foreign Direct Investment is very important to less developed countries to increase their economic growth. But it should not go beyond the sovereignty of the countries.
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