Benefits

Benefits of FDI

One of the major benefits of Foreign Direct Investments is that it contributes in the economic development of the recipient country. The benefits of FDI extend both to the host country as well as to the home (source) country as well which are as follows-

Benefits of FDI to the host country

• Effects on Competition and Economic growth: When FDI is in the form of Green field Investment it increases the no. of players in the market thereby increasing the level of competition in the national market and bringing the prices down. The long term results may include increased productivity growth, product and process innovation and greater economic growth.
• Employment effects: FDI increases the employability both directly and indirectly. Direct effect is when the foreign MNE investing in the host country employs a number of host country citizens. Indirect effect is when jobs are created in the local suppliers serving the MNE and jobs are also created when these employees spend the money earned on to the local markets.
• Balance of payment effects: FDI effects the balance of payments of a country in three ways-

¨      First, the capital account of the host country is benefitted when an MNE establishes a foreign subsidiary although this is a one time effect only.

¨      Second, current account of the host country’s balance of payments improves if the FDI is a substitute for imports of goods or services.

¨      Third, when the MNE uses a foreign subsidiary to export goods and services to other countries the also the host country’s balance of payments account is benefitted.

• Resource transfer effects: FDI makes a positive contribution to the economic condition of the host economy by supplying capital and technology, and the transfer of improved management practices that would not have been available to boost country’s economic growth.

Benefits of FDI to the home country

• Effects on Balance of Payments: Capital account of the home country’s balance of payments is sure to benefit from the direct foreign currency earned by these companies abroad. The current account can also be benefited if the foreign subsidiary succeeds in creating demands for home country exports of capital equipment, intermediate goods, complementary products and alike.
• Reverse resource-transfer effects: This benefit arises when the home country MNE learns valuable skills from its exposure to foreign markets that can subsequently be transferred back to the home country.
• Employment effects: Benefits to the home country from outward FDI arise from the employment effects. This is because of the demand created in the home country itself to keep pace with the needs of the host country.