Foreign Direct Investment Pros and Cons

Foreign Direct Investment Pros and Cons

Foreign direct investment pros and cons highlight the advantages and disadvantages of investing in foreign countries. FDI is whereby multinationals or conglomerates acquire the largest shares or stakes of other companies in foreign markets. This gives the multinational or conglomerate powers to control the key operations of the acquired companies, despite the geographical disparities. Foreign direct investment can be done through mergers or joint ventures, direct acquisitions, strategic alliances among others.

Just like in other forms of investment, foreign direct investment requires that an investor first weighs out the options for success. There are quite a number of indicators that investors should consider in order to determine whether foreign direct investment would be a profitable avenue. Studying the cons and pros of FDI is one of the recommended avenues that investors should pursue in order to make better investment decisions.

An overview of Foreign Direct Investment Pros and Cons

There are various foreign direct investment pros and cons that should be noted by investors for effective decision making. For clarity, this paper will begin by describing the pros and then cons of foreign direct investment to businesses.

Pros of FDI

Foreign direct investment has several benefits that can ensure successful results to investors, if conducted properly. The following are some of the main advantages of foreign direct investment;

  • Stimulates economic development

Since the investment is aimed at creating businesses, it enables the involved parties to accumulate more wealth, thereby driving economic growth. Multinationals that acquire smaller companies employ people and also pay taxes to the respective governments. Those employed are able to earn wages and salaries while governments also benefit in the form of taxes levied on the businesses.

  • Enhances international trade

FDI involves investment in foreign countries, thereby encouraging trade between countries. In this way, new markets are created for both businesses, giving them a wider global platform for trade.

  • Development of Human Capital

Through direct foreign investments, there is exchange of expertise, technology and experience. Besides, some companies even offer training to their workforce in order to align their operations towards the set goals. This enables the businesses to acquire competent workforce that can effectively deliver the required results.

Apart from the above, FDI can also reduce the differences in revenues and costs of products and services. Besides, it can also improve productivity for both parties involved.

Cons of FDI

The following are some of the main disadvantages of foreign direct investment that may prevent businesses from enjoying the fruits of the investment.

  • Limits local investment and competition

Since FDI is mainly conducted by multinationals or larger companies, a huge percentage of the profits are channeled back to their home countries. This leaves companies in foreign countries with very little or no resources. Besides, the conglomerates can create a crisis in the market such that smaller companies find it hard to thrive and may even be phased out, thereby eliminating competition locally.

  • Risk of hostile political environments

The political temperatures change based on the government which is in power. In the event that political tensions arise in a foreign country where businesses are positioned, trading would be hindered, hence, losses to the both businesses.

  • Costly investment

Setting up a business or company in a foreign country is not cheap, considering that the parent company will need to re-organize the operations of its new acquisition. There are cases whereby the parent company will need to even import equipment, raw materials among other requirements. Besides, the investor also has to deal with issues of legislation and laws in the foreign company. Bringing all these together requires resources in terms of finance, workforce and time.

It is also argued that foreign direct investment can negatively impact foreign exchange rates and encourage economic colonialism by stronger economies.

Conclusion- Foreign Direct Investment Pros and Cons

Based on the foreign direct investment pros and cons discussed above, there is no doubt that it can be a profitable venture both to investors and host countries if done effectively. However, it is very important that investors consult widely and engage players in the industry in order to know how to tame the disadvantages for better results.

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