Foreign direct investment (FDI) refers to long-term capital investment by a company in a foreign country. It typically involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: 1) Greenfield investment: establishing a wholly new operation in a foreign country; 2) Mergers and acquisitions: acquiring an existing company in a foreign country. The key features of FDI are lasting interest and control by the foreign entity. Lasting interest implies a long-term relationship and commitment to the host country. Control means significant influence by the foreign entity on the management of the foreign operation. FDI can provide capital, technology, management know-how, access to new markets and global production networks to the host country. It is an important vehicle for local economic development.
FDI brings advanced technology and know-how to host country
One of the biggest benefits of foreign direct investment is the transfer of advanced technology and know-how to the host country. Multinational corporations (MNCs) possess technology, managerial skills, innovative capacity and marketing expertise that may not be available locally. Through training programs and the process of technology diffusion, these can be transferred to the local economy. For developing countries in particular, access to such knowledge resources can provide a shortcut to building local technological capabilities.
FDI creates backward and forward linkages
FDI projects have extensive linkages with the local economy. Backward linkages refer to relationships with suppliers. MNCs often source raw materials, intermediate goods and services from local vendors. By creating demand, they support expansion of local companies. Forward linkages refer to relationships with buyers. MNCs sell goods and services into the local market. This not only creates market access for local companies, but also enables them to become part of sophisticated value chains.
FDI brings in capital investment
FDI represents a direct infusion of capital investment into the host country economy. This helps fill the domestic savings-investment gap and allows greater investment in productive capacity. The initial capital expenditure typically continues through the establishment of local supply chain partners. FDI can also stimulate greater capital investment by local competitors trying to match MNC capabilities.
FDI generates employment and skills
FDI projects generate direct employment in the foreign affiliates that are established. Jobs are also created via backward and forward linkages with local suppliers and distributors. The availability of quality employment can be transformational, leading to inclusive economic development. Worker training programs allow skills transfer to locals, who can then apply their learning across domestic industries.
In summary, foreign direct investment brings advanced technology, know-how, capital, access to markets, employment and skills to the host economy. It entails a long-term relationship and active management role by the foreign entity. By enabling lasting technology transfer and knowledge diffusion, FDI can catalyze sustainable local economic development.