Free Essay: Benefits Of Foreign Direct Investment For Developing Countries

The World Bank defines Foreign Direct Investment as “the net inflows of investment to acquire a lasting management interest… in an enterprise operating in an economy other than that of the investor.” Experienced foreign investors provide technology, knowledge and techniques in different sectors that benefit the host country.

Foreign Direct Investment has evidently brought a lot of positive impact especially in developing countries. Most developing countries are lacking in technological know-how. The developing countries are always in need of capital to start new enterprises or boost already existing ones.

The theory behind the Foreign Direct Investment concept is that foreign investment in technology, knowledge and techniques will spill over to the local firms. The foreign investors will teach the locals better practices to make them generate better products and services as well as revenue. The essence is that Foreign Direct Investment is supposed to advance domestic industries.

Critics however share a different opinion concerning the impact of Foreign Direct Investment in developing countries. Some researchers have reason to believe that Foreign Direct Investment will in the long run harm the domestic markets in developing countries.

Between the 1960s and 1990s most developing economies at the time like South Korea, Taiwan, Hong Kong and Singapore benefitted from Foreign Direct Investment. During this time, Foreign Direct Investments were the main source of external financing in developing countries. These countries experienced a rapid economic growth and they are presently the Asian tigers.

Between the 1997 and 1998 global financial crisis, Foreign Direct Investments played a major role in the East African economy. These investments were stably flowing into the region. East African countries still largely depend on foreign investment and aid to date. Most of the foreign investors in the region come from the European and American countries.

A research conducted in Venezuela revealed that there were there was no supporting evidence to show that Foreign Direct Investments caused a net technological benefit to the domestic firms. There was no way of telling whether any progress the domestic Venezuela firms had made within the given period was as a result of the foreign investors. However, there was evident impact caused on specific small firms. These are small firms that received the Foreign Direct Investment. The other domestic firms suffered from the competition that foreign owned firms brought into the market.

Critics argue that as much as Foreign Direct Investment indeed brings new ideas, knowledge and techniques to developing countries, it is not accurate to generalize the benefit. There are some sectors that benefit. However, the perceived benefits of Foreign Direct Investment in developing countries has somewhat been blown out of proportion. For the developing countries to attract foreign investors they normally provide a lot of subsidies including tax waivers and attractive tariff rates to the foreign investors. When all these factors are considered against the final perceived benefit, the percentage of the benefits greatly reduces.

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Online Resources:

Imf

https://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.htm

Footnote

http://footnote1.com/does-foreign-investment-benefit-developing-countries/