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Foreign Direct Investment (FDI) refers to the investment made by an investor from a different country in relation to the country where the individual makes their investment. It involves establishing a company in the foreign country, buying shares and assets of an existing company in the investee economy or making a joint venture with the existing company. FDI seeks to have a large influence and control in the operation of the country since it plays an important role in the world economies and brings immense benefits to the economy of the host country, especially in terms of finances. There are varying views on FDI depending on the political ideologies of the particular country as listed below:
This view was influenced by Marxist political and economic theory. It believes that a multinational enterprise is an imperialist dominion tool which takes advantage of the host country. It uses its resources and takes all the profits and benefits back to their home country. They employ their own nationals in key positions and in the process leaving nothing to the citizens of the host country. They also control the technology thus adding no value to the country.
Free Market View
This view is traced from Adam Smith and David Ricardo’s economics and trade theories believes that countries must concentrate in producing goods and services they can produce effectively.
Here, FDI is seen to have costs and benefits. The host country gets the finances in terms of capital while their citizens benefit from job opportunities as well as gain skills. There is also an advancement of technology although it comes at a cost since the profits are taken back to their home countries. FDI is allowed only when the host country is getting more than it is using in terms of the cost.
The benefits of FDI to the host country include
- There is exploitation of untapped natural resources since developing and underdeveloped countries have untapped resources which require the competence of developed countries to help exploit.
- FDI helps get the needed capability bringing income to country. Employment opportunities are created since FDI generates jobs for the citizens.
- Development of Technology as the host country benefits from the advanced in technology of the foreign country since they have high level technology.
- Improvement in management- since the companies have experienced managers from their home countries and local managers can learn from them a lot because they will run the companies in future since they understand the market better.
- Profits from FDI improve the economy of the host country.
The costs of FDI to the host country include
- It is a threat to small industries since FDIs have large capital and are well established across the globe. Due to their large production and cheaper prices, they can push the smaller players out of the market
- There is a high tendency of FDI exploiting and utilising the resources of the host countries and taking their profits to their home countries
- The FDIs also tend to employ their own people thus leaving the citizens of that host country poor and jobless
- FDIS may not convey the modern technology to the host country to avoid losing its competitive edge
Export Processing Zone is a form of promotion tool put in place by the government to encourage foreign investment and aid in exports of industrial goods. These zones are characterized by the exclusion of tax.
The benefits of EPZ include:
- Promotion of foreign investment thus bringing funds to the economy
- Creation of job opportunities for both skilled and unskilled labourers
- Attraction of foreign direct investment which lead to rapid development of industries and advancement of technology
- The firms benefit from tax exclusion thus able to produce goods cheaply and maximise the profit
- Women are better placed in terms of salaries and working conditions and can easily get employment with EPZ
- There is improved infrastructure like roads, electricity and water
There are also costs involved which are:
- Due to tax exemptions, revenues and income is lost by the government
- There is a large capital requirement for building infrastructure like the roads, sewage systems, electricity and buildings
- There might be less job opportunities creation compared to money invested
- There is also the cost of promoting and advertising the EPZ in foreign countries which involves a lot of funds
EPZ firms lack contact with the domestic economy due to the following reasons: Technology Transfer
Modern technology needs to be brought to the local firms because they lack the expertise. The EPZ firms do no fully give the advanced technology to the domestic firms because they fear losing out due to competition. If the local firms get the modern technology the EPZ firms will be driven out of business. The domestic firms does not benefit technologically hence there is no improvement in domestic economy.
EPZ firms import goods instead of using the local raw materials. The local products are not of the standard quality hence EPZ interaction with local firm is very small compared to foreign companies. Local firms only have inputs in the packaging materials. This benefits them and the economy minimally.
Wages and Working Conditions
Developing countries use low wages and cheap labour to attract EPZ. The EPZ takes advantage of these and exploit the workers with very minimal pay and poor working conditions especially women who work long hours which could pose health risk to them which further degrades the domestic economy. Reasonable pay should be given to improve the living standards of the citizens.