How Beneficial Is Foreign Direct Investment?

Foreign direct investment, or FDI, also known as direct investing, plays an essential role in boosting a country's economy. It increases employment, exports, and imports, and offers numerous other benefits to host countries and investors. 

 

Direct investing also facilitates the transfer of knowledge, technological skills, and innovation, leading to improved productivity, market competitiveness, and product quality. Read on to learn about direct investment, the different types of FDI, and more.

Foreign direct investment refers to the investments made by an individual, business, government, or entity from one country to another. These cross-border transactions improve: 

• Economic growth

• International trade

• Employment prospects

• Skill enhancement of human capital 

Foreign direct investment does not mean just investment of capital in the country. It includes investment in equipment, technology, knowledge, management, and other such options. 

 

Investors generally consider open economies that have a high potential for growth and offer a skilled workforce for their target projects. They are generally the decision-makers who are actively involved in the management of the firms/projects.

Here are some of the benefits of foreign direct investments: 

1. Economic Growth

Foreign direct investment is the primary source of external capital for a country. Thus, FDI inflow boosts the manufacturing and services sector of a country. This eventually results in job creation and greater economic growth.

2. Development of Human Capital

FDI infusion in a country facilitates training and upskilling of human capital. It may also have a ripple effect, benefiting the economy as a whole.

3. Transfer of Technology

The investment country generally receives the latest financing tools, operational parameters, and technologies with FDI infusion. The introduction of advanced technologies makes the invested industry more efficient and effective.  

 

While FDI offers a host of benefits, there are some drawbacks, too. These include:

4. Deter Domestic Investment

The infusion of foreign capital can hinder domestic investment. Because of FDI, investors in the country may lose interest in investing in domestic products.  

 

5. Negative Impact on Exchange Rates

FDI can also have a negative impact on the health of foreign exchanges in a country. This may also negatively impact exchange rates with the other country.

6. Twenty-First Century Imperialism 

Many countries of the Global South that have experienced colonialism in one sense or the other see FDI as a threat to their countries’ economic self-determination. Some even see it as modern-day colonialism.

India has seen quite a steady inflow of FDIs, with most sectors receiving substantial amounts of foreign investment. For example: 

• In June 2020, Google acquired 7.73% of ‘Jio Platforms’ for $4.5 Billion

• Japan’s SoftBank Group invested $150 Million in the online ed-tech firm, Unacademy in September 2020

• In September 2020, US equity and VC firm, Silver Lake invested $500 Million in Byju’s

Here is a detailed overview of the top benefits of direct investing:

1. Boosts Economic Growth

Direct investing significantly contributes to the economic growth of a nation by bringing in additional capital, enhanced technology, expertise, and more. FDI helps enhance the productivity and efficiency of various sectors. These investments also lead to higher imports and increased production, ultimately boosting the economic growth of host countries.

2. Increases Exports of Goods

Foreign direct investment leads to an increase in the production capacity of a country. This helps the nation boost the manufacturing or production of goods and services. Elevated production and manufacturing, in turn, lead to improved capacity for exports. 

3. Skill and Knowledge Development in Population 

Another benefit of foreign direct investment is the knowledge and skill enhancement of people. Through FDI and the opportunity it brings, individuals can understand and learn the manufacturing, production, and export processes of various goods and services. 

 

They can then use these technical learnings to enhance their knowledge and skills. This ultimately promotes the overall development of the host country's workforce.

4. Increases Employment Opportunities

When entities invest in foreign countries, they need to hire local talent to build their workforce for smooth operations, thereby creating employment opportunities. This is also what makes FDI a win-win situation for the parties involved. 

5. Develops Technology and Finance Sector

Another benefit of foreign direct investment is the development of the financial and technological sectors of the host country. Foreign companies often bring new technological tools, techniques, manufacturing units, and R&D capabilities, along with innovative ideas. 

 

The development enabled by these factors also encourages other foreign financial institutions to expand their operations in the host country. 

 

In conclusion, direct investments are a profitable avenue for investors and host countries. The growth of FDIs in India has risen in the last few decades. 

 

Since the government has opened some sectors for 100% foreign direct investments, the rise of these investments is expected to continue. This will ultimately benefit the consumers, companies, and the country’s economy.