Impact of FDI: Advantages & Disadvantages

What is FDI?

Foreign Direct Investment (FDI) is an investment in a certain business by a corporation from another country. It is usually in the form of ownership in the company and in economies having an open environment. The important feature to note is that FDI is very different from portfolio investments in which the investor purchases only the equities of a company through indirect methods like bonds and stocks.

For developing nations especially, FDI is very beneficial. It generates capital, reduces employment rate, helps in curbing inflation and with enough profit it improves the business standard and skill set of the labors. But FDI has had a mixed response even after so many years of existence. Taking a stand on FDI is difficult, but a detailed analysis clears the picture.

Advantages of FDI

Government revenue increases

As investment flows in, the revenues of government increase significantly. In India alone, there is expected to be an increase of 25-30 million dollars in the coming year.

Better economic environment

With a supporting economic reform and a positive atmosphere, the disparity between revenues and cost diminishes; better human capital resources are produced.

Increases employment rate

The FDI brings a lot of new companies to the host nation and helps in reducing the employment rate. It also helps in making the workers skilled. In any sector the FDI enters, employment is generated.

Promotes innovation

Every company wants to outplay its competitors and innovation is essential for it. With a good workforce, a company can decide to make new and efficient products while replacing the obsolete ones. This ultimately serves the whole nation.

Increased wages

With increased demand for skilled workers and a competitive atmosphere in the sector, the minimum wage for both skilled and unskilled workers will rise. This results in a better quality of life for the labors.


Higher costs

Exporting goods is cheaper than investing in the business of a foreign country. So, setting up operations for the investment will not be pocket-friendly. Therefore, these investments come only from wealthy companies because no other company will make the gamble of investing in another country.

Political changes

Expropriation is a scenario when the government can take charge of a company which it considers a threat to the nation. This is a huge risk for investors as they have to make sure that the corporation they are investing in is not a liability.

Economic colonialism

With an important influx of money, the investors assume influential power over the company. Without understanding the vision of the business, this difference of opinion may lead to a failed venture. It’s possible that the profit earned will be sent back to the where the investment came from, leaving the business vulnerable. Countries with a history of colonialism fear this strategy of modern-day colonialism through FDI.

Bad for domestic businesses

When the best labors and resources go towards the companies having sufficient investment, domestic businesses take a huge hit. They are left with little choices and some ventures may shut down. FDI does not motivate domestic companies unless they make a lot of profit.

Not a good long-term plan

Because of the above points, a business takes a serious decision over FDI. It may prove to be risky and can also lead to ideological clashes. Exchange rates are also affected by FDI. Considering this, FDI doesn’t prove to be the long-term plan the business is looking needs.

The effect

FDI is welcomed in developing nations like India and China. It is very important for their economy as it proves to be the backbone of many businesses and affects the overall economy of the country. With an increase in employment and better quality products, the country gets a faster rate of growth.

A lot of countries and companies have acknowledged the benefits of FDI. The disadvantages of FDI can be controlled and a positive atmosphere can be made. As of now, with the world economy on its knees, it is significant in helping the countries in improving the financial system. It must not be misunderstood as a blunder, while carefulness and complete analysis of its effect on business must be considered.

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