THE POTENTIAL BENEFITS OF FOREIGN DIRECT INVESTMENT

If there is any individual factor which commands principal responsibility for the astonishingly rapid globalization of the world economy, that factor is surely international investment, most particularly, foreign direct investment, which involves managerial control through 10 percent or more ownership of overseas operations. The growth in multinational organizations which has resulted from FDI has contributed to the fact that by the turn of 21^st century over a quarter of the global GDP was produced by just 200 companies.

1.      Human Capital Enhancement

The major impact of FDI on human capital in developing countries appears to be indirect, occurring not principally through the efforts of Multinational enterprises (MNEs), but rather from government policies seeking to attract FDI via enhanced human capital. Once individuals are employed by MNE subsidiaries, their human capital may be enhanced further through training and on-the-job learning. Those subsidiaries may also have a positive influence on human capital enhancement in other enterprises with which they develop links, including suppliers. Such enhancement can have further effects as that labour moves to other firms and as some employees become entrepreneurs. Thus, the issue of human capital development is intimately related with other, broader development issues.

Investment in general education and other generic human capital is of the utmost importance to create an enable environment for FDI. To achieve a certain minimum level of educational attainment is paramount to a country’s ability both to attract FDI and to maximize the human capital spillovers from foreign enterprise presence. The minimum level differs between industries and according to other characteristics of the host country’s enabling environment; education in itself is unlikely to make a country attractive to foreign direct investors. However, where a significant “knowledge gap” is allowed to persist between foreign entry and the rest of the host economy, no significant spillovers are likely. Among the other important elements of the enabling environment are the host country’s labour market standards. By taking steps against discrimination and abuse, the authorities bolster employees’ opportunities to upgrade their human capital, and strengthen their incentives for doing so.

2. Trade and Investment

As countries develop and approach industrialized-nation status, inward FDI contributes to their further integration into the global economy by engendering and boosting foreign trade flows. While the evidence is mixed, most analysts tend to argue that two factors are at play: the development and strengthening of international networks of related enterprises, and an increasing importance of foreign subsidiaries in MNE strategies for distribution, sales and marketing. In both cases, this gives rise to an important policy conclusion, namely that a developing country’s ability to attract FDI is significantly influenced by the entrants’ subsequent access to engage in importing and exporting activities. This, in turn, implies that would-be host countries should consider a policy of openness to international trade as central in their strategies to benefit from FDI, and that, by imposing restrictive practices towards imports from developing countries, home countries effectively curtail these countries’ ability to attract foreign direct investment. Moreover, host countries could consider a strategy of attracting FDI through raising the size of the relevant market by pursuing policies of regional trade liberalization and integration.

3.   Technological Transfer

Technology transfers are identified by economic literature as perhaps the most important channel through which foreign corporate presence may produce positive externalities in the host economy. MNEs are the developed world’s most important source of corporate research and development activity, and they generally possess a higher level of technology than is available in developing countries, so they have the potential to generate considerable technological spillovers. However, whether and to what extent MNEs facilitate such spillovers varies according to context and sectors. If, at the one extreme, foreign companies were wholly willing to diffuse certain technologies, then the host country would generally be able to acquire them via direct purchases or licensing agreements, rather than relying on the more indirect FDI route.