Free Essay: Benefits of Foreign Direct Investment to Host Country
According to the World Bank, Foreign Direct Investment refers to “net inflows of investment to acquire a lasting management interest… in an enterprise operating in an economy other than that of the investor.” Foreign Direct Investment plays a major role in the global economic growth. Foreign investors from developed economies like those in the United States, Europe and Asia help emerging markets to expand by providing expertise and financial support. Mostly, Foreign Direct Investment is directed to developing countries. Emerging markets in the developing world get financial support of up to $130 billion from foreign investors.
Foreign investment initiated by big corporations operating in the developing countries is still referred as Foreign Direct Investment. This investment is normally directed to restructuring and refocusing the businesses. However, the concept behind Foreign Direct Investment is majorly to grow emerging markets as opposed to already big thriving corporations.
According to the International Monetary Fund a Foreign Direct Investment occurs when the domestic owner of a company holds over 10% ownership of the company. The other 90% contributed by the foreign investor is considered the Foreign Direct Investment. The investor may not have the power to control major functions in the business. However, they will have significant powers.
Economists argue that the perceived benefit of direct foreign investment is much higher than the actual benefit. There are various benefits of Foreign Direct Investment to the host country. The host country in order to attract foreign investors has to place tax waivers and other kinds of subsidies. In the long run the benefit after their efforts have been subtracted is quite minimal.
The host country will benefit new knowledge, techniques and technology from the foreign investor. Countries like Hong Kong, Japan and other major Asian economies are believed to grow due to foreign investors. They were able to learn new practices from the foreign investors and applied the same effectively to their domestic industries.
The host country will also benefit from the foreign investors in terms of diversity in the kind of goods and services in the market. Especially in socialist economies where the central government controls all the production and trade in the market, they are able to get new things in the market. Although the foreign investors may still operate under strict rules and regulations, they will introduce new things and maybe even better quality. The domestic producers will get competition and so they will be motivated to produce better quality goods and services.
The host country will benefit from collecting tax revenue from the foreign investor. In comparison to the domestic companies, the foreign investors will have to pay higher taxes. However, in some cases, the host country may have to reduce the amount of taxes the foreign investors pay in order to attract them to invest in their country in the first place.
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