Role of foreign direct investment in the economy of developing countries

Global driver of economic integration

When we analyze businesses and see companies such as Walmart, Tata, and Amazon, we can observe how they are able to expand their operations to various regions and countries. We can also ascertain how they utilize technology and resources to operate in national, international, and local markets. The simplest answer we can provide is foreign direct investment, also known as FDI, which is a global driver of economic integration and development.

Foreign direct investment (FDI)

It has the power to provide companies and governments access to new market opportunities, along with less technological analysis of the phenomenon.

In a straightforward manner, foreign direct investment (FDI) is when an individual or a country invests in a business or asset that may not be located in their own country. This means investing in another country. It is quite different from buying stocks or bonds of a foreign company in the stock market. FDI has broader implications, as you may own and control some part of the business.

Business situated in another country

Opt for an option of FDI; it is a cross-border investment that depends on long-lasting interest and control in foreign enterprises. For example, if you are living in India and decide to open a startup in the United States or another country, that is an example of foreign direct investment. You can directly invest resources, along with money, in a business situated in another country. This can take place due to various rationality.

Some people may want to forge potential growth in a foreign land, while others may wish to be involved in a more developed ecosystem. This can be due to various reasons, such as the availability of skilled human resources in that foreign land.

Technology knowledge skills and ….

Now we have to understand what is the role of FDI. Economic development and growth can be achieved through direct investment and it also develops to Nation the host countries or the investor it also transfers various aspects across the border such as Technology knowledge skills and it also develops an environment that can take place.

Four types of Foreign Direct Investment (FDI)

There are mainly four types of Foreign Direct Investment (FDI). One of them is vertical FDI, which is an investment in a foreign country where various stages of the production process can be achieved through cost efficiency. Another type is platform FDI, which involves investing internationally to leverage various levels of exports and serve as an export hub.

Horizontal FDI refers to expanding your operations overseas to replicate an existing production system that you have already established. In contrast, conglomerate FDI involves venturing into diverse industries specifically in a foreign market to rise to the next level.

Speak about some examples of direct investment. For instance, a Japanese car manufacturer decided to build their factory in Korea to produce vehicles that can serve the Korean market.

Type of direct investment

They may acquire versatile things such as land and infrastructure, buy some equipment, hire workers, and establish factories. This is a type of direct investment where a company directly invests in the Korean economy.

Another example for the technology sector is a Silicon Valley-based company that wanted to establish their research and development center somewhere in the Philippines. They wanted to fund a set of facilities and also conduct research to hire local talent and develop new products to improve existing ones. This kind of investment brings capital to the Philippines, along with a transfer of technology knowledge and contributes to the growth of these tech industries.

The benefits of FDI?

What are the benefits of FDI? First of all, we have been highlighting that it is fundamental to faster economic growth. It brings capital, technology, and exports from a foreign country to developing countries. It is also something we need to emphasize for those countries that are underdeveloped or developing, where job creation can take place, and host countries may reduce their unemployment.
Beneficial for the country’s development.

As we have already given the example of the Philippines, if a Silicon Valley company wanted to establish a research and development center there, it would bring various potential for growth and technology transfer. This would enhance productivity and competitiveness. Furthermore, it would also develop and focus on infrastructure, as foreign investors may contribute to roads, ports facilities, and utilities, which would be beneficial for the country’s development.

Issues in the foreign country

As we have already highlighted, how fit I can be something that brings potential prosperity to a country, specifically the host country. All foreign investment flows can be highly vulnerable and fluctuate; if there are issues in the foreign country, it can impact the host country as well.

It can be a dismissive aspect. Along with that, we have also depicted that foreign investors sometimes exploit local resources and labor, which may be detrimental to the environment and affect the economic aspect.

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