Foreign Direct Investment (FDI)

Foreign Direct Investment (FDI)

Executive Summary

Foreign Direct Investment (FDI) has impacts on the economy of the host country at large. These effects range from the Investments, Industrial sector output, Technology, Employment, a country’s balance of payments and GDP at large. Different studies have shown that FDI promotes growth and development of industry, economic integration, and formation of human capital. Foreign Direct Investment affects the host country’s international trade and international relations thus has an impact on globalization. It has an aspect of technology transfers and firms’ reorganization. Whether these impacts are positive or negative impacts, they trickle down to the citizens of the host country and therefore affect their livelihood in one way or another. FDI has both merits and demerits on the host country. This paper inspects both the pros and cons of FDI on the host country, evaluating such effects caused on the main economic, social and political variables of the country in question. FDI has an end effect of a country’s both micro and macroeconomic aggregates. In this regard, all the effects surrounding the FDI will be connectedly related to the host country’s economic implication. The paper also assesses the causes of FDI, implication on globalization and the future out of the effects.



Foreign direct investments, FDI has been defined from countless perspectives by economists, banks, politicians, and philosophers. All the definitions, however, revolve around investment to build up a new business entity in a country where the entrepreneur in question is not a citizen, whether they live there or not. The direct foreign investment gives the investor direct control into, and ownership rights of the enterprise. It has to do with mergers and takeovers (MA’s), joint ventures and the opening of associate companies in foreign countries. Cases of profit repatriations are some of the reasons Foreign direct investment is viewed by economists as a form of economic neo-colonialism. However, most foreign companies pay higher wages compared to domestic firms, hence the perceptions on FDI can be really wide and varied among people of the host country. The topic on foreign direct investment covers every bit of a country’s economy because money circulation ensures the effects of FDI flows to every variable of a given economy.

  • Causes of Foreign Direct Investments

A country may encourage foreign direct investment due to various reasons. Basically, the benefits that come with foreign direct investment are enough to drive a country to embrace such a decision. In addition, the investors must have a motivation or two before they decide on an investment. Among other reasons, a country may engage in foreign direct investment to reduce the unemployment rate, establish international relations with the investor countries, to gain from technology transfers and cross-border investments.

1.1 Market seeking

Market-seeking is one of the significant reasons why entrepreneurs invest in foreign countries. This is motivated by the intention of supplying an existing market with goods or services that had been supplied with exports from locally produced goods (Hale, 2016). Market-seeking move may not be as a result of factor price differences that leads to such a move but the appraisal to the proximity to the foreign market.

  • Need for technology transfer

A country may want to embrace the open-door policy which encourages FDI into an economy so as to get access to the lacking technology. Advanced technology can be accessed by a country easily and efficiently if it allows for foreign direct investment. This is a significant advantage for allowing foreign direct investments. technology transfer can only occur if there is direct contact between domestic and foreign firms. Therefore, FDI is an important vehicle of technology transfer and it contributes to economic growth than domestic investment. (Ankomah, 2016). With access to advanced technology, firms’ output will increase and a county’s industrial output will grow. The case of China and Kenya for instance, Kenya needs advanced technology for construction of roads and infrastructure because it does not have such technology. it, therefore, has to allow Chinese companies to come into the production channel to offer such services. This way, Kenya will benefit from the transfer of skills and technology.

  • Human Capital

Human capital refers to skilled labor. This is a reason why an investor may decide not to invest in their own country but rather invest in a foreign country. Foreign direct investors are concerned with skilled labor force availability before they even invest in an enterprise. Even though with low skilled labor comes low costs during production, these costs can be deemed to be very high in relation to the time taken by such labor to adopt new skills and technology and apply them efficiently for maximum firm output. A more educated labor force can learn, adapt and apply new technology and skills faster and is generally more productive, which is good for profit maximization (Cleeve & Yiheyis, 2015)


  • Resource availability.

Another reason for foreign direct investment is resource-seeking. A country may want to seek for factors of production such as capital, human capital, labor and entrepreneurship. Such a country may be looking for factors which they do not have in a given sector of the field of economic production. Factors of production from foreign countries may be more efficient than those in the home country of the investor. (Abbas & Mosallamy, 2016). In some other cases, these resources may be unavailable either fully or partially. Resources such as cheap labor, skilled labor as mentioned before and natural resources such as minerals may not be available at all. For instance, countries such as China and India have found the vast country of Africa, Kenya to be their home due to the available cheap labor (Iamsiraroj & Ulubaşoğlu, 2015)

2.0 Impacts of Foreign Direct Investment in the host country.

Foreign Direct Investment has a gross effect on the host country’s economy. The standard theory of international trade argues, though lightly, on the partial equilibrium comparative-static approach to examine how marginal increment in FDI are distributed within the economy channels of the host country. (Narula & Pineli, 2017). From implication, a marginal increment in foreign direct investment causes a marginal increase in the productivity of labor while leading to a marginal decline of capital productivity. Generally, the host country’s economic aggregates such as employment, the balance of trade and balance of payments are all affected, and consequently, the output GDP and political spheres of the country are affected. It also has implications on the lives of citizens of the country

2.1 Positive impacts of FDI

First, foreign direct investment encourages economic development through an increment of productivity. exports of a country that encourages direct foreign investment are also likely to increase, ceteris paribus. Such impact is due to skill imitation, competition enhancement and technology transfer between firms (Marinova, 2018.). The host country firms benefit from indirect technology transfer that takes place between domestic and foreign business enterprises (Nabende, 2018).  Additionally, local firms can compete more efficiently and confidently in the export markets due to production capability that enhances higher quality commodities giving them higher bargaining power in the international market.  This is possible due to the copying of production and management techniques and the use of better skills in management and production.

There is the issue of exposure too. The host country’s firms gain more exposure to foreign markets after the inception of FDIs in the country. This is because of the induction effect such that during the day to day trade rounds, domestic firms learn more about international markets and thus their expertise on such markets keep growing day in day out. the managers and employees too, acquire better managerial and technical skills. This enhances efficiency increment by domestic firms. The end result of improved firms’ output and export trade can be traced to the country’s GDP growth and economic development (Zekarias, 2016)

The fact that foreign direct investment involves multinational firms is also another merit for a country to embrace FDI. When multinational companies expand their existing markets, the local firms are stimulated to become more efficient by investing in both physical and human capitals. Such a move extends to the employment side by recruiting more labor and promoting labor skill advancement in a bid to enhance higher and efficient production (Pineli, 2017). This too improves resource allocation in the host country by entering markets which may have had many barriers to entry, termed as monopolistic markets. By sliding into new markets, such multinationals force the domestic firms to go for more proficiency in the production in a bid to retain their market shares. This improves the productivity and performance of the local firms, hence contributing to the host country’s GDP. This effect trickles down to the per capita income growth and better livelihood, ceteris paribus.

The labor market is also impacted positively by FDI. When the productivity of domestic firms increases due to technology and skills transfer, the labor wages will also increase. Additionally, an increase in the productivity of a firm increases its profits and cash flow. This translates to need for more growth and therefore more labor may be required. Employment opportunities are available as a result, which is a good thing for a country seeking to grow and develop economically.

The revenue of the host country is also boosted. The effect of FDI flows all the way to increment in productivity in industrial firms, productivity by households and all the other involved economic stakeholders. This has a long-run effect of increasing the revenue of the host country through taxes. FDI also enhances the strengthening of a country’s exchange rates. The reason is that the more foreign direct investments there are in a country, the more likely it is that other countries have a higher demand for the currency of such a country (Abbas, 2016).

  • Negative impacts of FDI on the host country

Foreign direct investment has a number of demerits on the economy of the host country. It comes with hampering of market controls due to the influx of firms and trade in the economy. As more and more foreign companies are invited into the market, the market structure deteriorates. It results in higher concentration levels in the economy which makes it difficult to control.  It also has a disadvantage due to environmental degradation. (Uctum, 2016). Companies have shifted to developing countries due to the increase in global trade competition. They have shifted their production bases in less developed countries. The investor firms engage in production activities such as food processing, mining, and refinery. Such activities have negative effects on the environment of the host country. Another impact is on technology. FDI has a negative effect on technology in the host company in that the technology borrowed may not be compatible with the conditions and situations in the country (Atta, 2016). For instance, if a country such as Kenya being labor-intensive invites a multinational firm from the United States, which is capital-intensive, Kenyans may suffer through the loss of jobs if Kenyan firms adopted the capital-intensive approaches of production. In addition, the laborers of the host country may not be comfortable with the foreign policies and customs of the investor employers. For instance, such FDI-born firms take advantage of the host-citizens and mistreat them through low wages, a lot of workloads and having them work on a 24/7 schedule. This they do in a bid to reduce their operational costs so as to maintain or grow their profits. The debt crisis cases such as the Kenyan case is another negative effect of FDI on the host country. China has been on the limelight for this blame (Onjala, 2018).

3.0 Effect of FDI on globalization.

Foreign direct investment enhances international relations. FDI is viewed as one of the drivers of globalization. More foreign direct investment for a country means more involvement and transaction with the global market. An increase of FDI in a country increases its GDP and consequently implies a greater share in the international trade (Doytch, 2016).

4.0 Conclusion

Foreign direct investment (FDI) has significant impacts on the economic variables and aggregates of the host country. The economic growth levels and development in terms of employment creation, better production techniques and the general output of a country can really be impacted by the level of foreign direct investments in such a country. The conclusion on whether the negatives outweigh the positive impacts lie on the evaluation of a specific country since different countries are affected differently by FDI.