Question

 If you were counseling the president of a country with a developing economy, would you recommend placing restrictions on investments from foreigners?

Answer 1

A country with a Developing Economy

Foreign Direct Investment (FDI) is an investment in a business by an investor from another country for which the foreign investor has control over the company purchased. The Organization of Economic Cooperation and Development defines control as owning 10% or more of the business. Businesses that make foreign direct investments are often called Multinational Corporations or Multinational Enterprises.

An Multinational Enterprise may make a direct investment by creating a new foreign enterprise, which is called a greenfield investment, or by the acquisition of a foreign firm, either called an acquisition or brownfield investment.

One key to the role of FDI in economic growth in the link between FDI and trade. In today's globalized economy FDI and trade are most often complementary activities, and countries which high inflows of FDI tend to be more open to trade. This complementarity reflects the spread of the "global factory" and efficiency seeking FDI.

Spillover Effects : FDI contributes to capital accomulation and economic growth and trade, but its full impact and development includes unique productivity-enhancing effects. Under the right conditions, major spillovers take place through technology transfer, human capital formation, and competition and enterprise development.

FDI financed foreign affiliates, their suppliers and their host economy rivals are all potential recipients of such spillovers.

FDI brings new capital and improved technologies, production processes and approaches to firm management and organization. This may be the most strategic single effect of FDI, since by definition developing countries face a technology gap, and multinational enterprises can supply know-how that helps these countries catch up.

For affiliates, FDI provides technology and knowledge inputs that directly raise productivity firms with FDI perform better than those without it.Technology transfer is also likely through vertical spillovers from foreign affiliates to local suppliers. Training and technical advice to upgrade suppliers productivity and product quality are the source of these inter industry vertical spillovers.

By contrast, intraindustry technology transfers-horizontal spillovers from foreign affiliates to local competitiors through demonstration effects and labor mobility seen less frequent. For all spillovers to work, the distance between initial levels of technology in host country firms and those in foreign affiliates must not be too pronounced.

The size of foreign ownership shares in affiliates may also have an effect. For example, joint ventures may promote more local sourcing and thus stronger vertical linkages than do wholly-owned foreign affiliates. Intensity of competition, the quality of education in host countries, training and personal policies in foreign affiliates, and labor market structure and flexibility all influence the effectiveness of technology transfer. A strong market-orientedpolicy framework is also critical.

Disadvantages of Foreign Direct Investment

Hindrance to Domestic Investment : As it focuses its resources alsewhere other than the investors home country, foreign direct investment can sometimes hinder domestic investment.

Risk from Political Changes : Because political issues in other countries can instantly change, foreign direct investment is very risky. and most of the risk factors that you are going to experience are extremely high.

Negative Influence on Exchange rates: Foreign direct investments can occasoinally affect exchange rates to the advantage of one country and the detriment of another.

Higher Costs : If you invest in some foreign countries, you might notice that it is more expensive than when you export goods. So, it is very imperative to prepare sufficient money to set up your operations.

Economic Non-Viability : Considering that foreign direct investment may be the capital-intensive from the point of view of the investor, it can sometimes be very risky or economically non-viable.

Expropriation : Political changes can also lead to expropriation, which is a scenario where the governmentwill have control over you property and assets.

Negative Impact on the Country's Investment : The rules that govern foreign exchange rates and direct investments might negatively have an impact on the inbvesting country. Investment may be banned in some foreign markets, which means that it is impossible to pursue an inviting opportunity.

Modern-Day Economic Colonialism : Many third world countries, or at least those with history of colonialism, worry that foreign direct investment would result in some kind of medern day economic colonialism, which exposes host countries and leave them vulnerable to foreign companies exploitation.

Conclusion:

Investing into another country's economy , buying into a foreign company or otherwise expanding your business abroad can be extremely financially rewarding and might provide you with the boost needed to jump to a new level of success.

However, foreign direct investment also carries risks, and it is highly important for you to evaluate the evaluate the economic climate thoroughly before doing it. Also it is essential to hire a financial expert who is accustomed to working internationally, as he can give you a clear view of the prevailing economic landscape in your target country. He can even help you monitor market stability and predict future growth.

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