|
|
| Foreign Direct Investment |
|
|
| |
|
| |
Foreign direct investment is an investment of foreign assets into domestic structures, equipment, and organizations. Unlike equity investments which can leave at the first sign of trouble, FDI is considered durable and generally useful whether things go well or not.
Both economic theory and recent empirical evidence suggest that foreign direct investment has a beneficial impact on host countries especially on the developing nations by allowing the transfer of technology—particularly in the form of new varieties of capital inputs—that cannot be achieved through financial investments or trade in goods and services. FDI can also promote competition in the domestic input market. Furthermore, recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human capital development in the host country. Finally, the profits generated by foreign direct investments contribute to corporate tax revenues in the host country.
FDI is also a corporate governance mechanism that makes it possible for foreign investors to exercise management and control over host country firms. This transfer of control may not always benefit the host country because of the circumstances under which it occurs (problems of adverse selection, or excessive leverage). Hence, a country should assess its potential impact carefully and realistically.
Policy recommendations for developing countries should focus on improving the investment climate for all kinds of capital, domestic as well as foreign.
|
|
|
