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What are the Advantages of Foreign Direct Investment?

written by: Aunindita•edited by: Rebecca Scudder•updated: 12/31/2010

Making a foreign direct investment is a popular option in the market. But, before your company allows a foreign company to actually make an investment, it is best to understand the advantages of foreign direct investment your company and the country are going to receive.

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    The advantages of foreign direct investment come from a long-term relationship between two countries. This happens when a country involves itself in the other country by transferring technology, expertise, or otherwise has an impact on its economy. This can spur the growth of that country’s economy and give birth to multinational corporations. Foreign direct investment is also known as FDI. It has an extraordinary role in maintaining the growth of global business as it can provide new markets and cheaper production facilities. The country at the receiving end benefits from the following types of resources.

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    Transfer of Technology

    technology The transfer of technology isn’t just restricted to actual technologies. It involves sharing skills, manufacturing methods and even entire facilities. It can also refer to the knowledge passed by scientific research institutions. Countries generally have a government organization that handles and identifies potential commercially viable technology. These types of organizations are also present in big companies and universities. The advantages of foreign direct investment and the transferring of technology for the receiving country is great, as those countries usually don’t have access to research facilities or the knowledge otherwise.

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    Development of Human Capital Resources

    One of the biggest is the development of human capital resources. This is probably also understated as its effects are not immediately apparent. Human capital is the knowledge and competence of those able to perform labor, also known as the workforce. The attributes gained by sharing experience and training increases the education and overall human capital of a country. The human capital resource is not a tangible asset that is own by a company, but rather something that is on loan. Therefore, countries with FDI benefit greatly by increasing the development of their human resources while maintaining ownership.

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    Increment in Income

    Increment in Income Another of the advantages of a foreign direct investment is the rise of the income for the receiving country. With higher wages and more jobs, the income of the entire country rises as well. This in turn spurs economic growth. Large corporations usually offer higher salaries than what you would normally find in that country; this leads to an increase in income.

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    Creation of New Jobs

    Foreign direct investment assumes the creation of new jobs, as well. As investors build new corporations in these countries they create new job openings and opportunities. This leads to an increment in income and the development of competition. New jobs offer more buying power to the population of that country which in turn leads to economic boosts.

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    Overall Economic Growth

    All the above factors of foreign direct investment lead to economic growth. This is the increase of real gross domestic product, also known as the GDP. This growth is a percentage that changes from one year to the next. Economic growth can also be negative, but a country with the advantages of foreign direct investment will generally have positive economic growth. Economic growth is heavily impacted by changes in technology and the introduction of new technology. A very good example of an economic-growth-boosting technology is the introduction of the Internet.

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