Foreign direct investment (FDI) is the net flow of investment into a foreign economy with the ultimate aim of acquiring a lasting interest in the business. This is achieved through different avenues such as purchasing shares in an enterprise of interest, incorporating an entirely owned subsidiary or enterprise or through a merger, as well as investing in equity joint venture in collaboration with other investors. The FDI inflow has both positive and negative effects on the competitive advantage of host countries. This paper will discuss these effects on entrepreneurship, efficiency, political, social and cultural issues.
FDI is responsible for the enhanced transfer of intangibles as well as the general development of host country economies. In entrepreneurship, FDI has revolutionized businesses and investment strategies in host countries. The new knowledge acquired by the host nations helps in the starting of new enterprises. This, in turn, leads to increased capital inflow.
In many countries, the local firms enjoy cordial relationships with many industry players and for foreign firms to achieve such status, they must be ready to share beneficial information for them to get a chance to compete on favorable grounds with locally owned enterprises. Other ways for the foreign investor to gain acceptance may be through joint ventures. This will, in turn, boost the local enterprises through the acquisition of new skills and a higher capital base (Terjesen, pg.839).
Workers in the foreign companies get a chance to acquire modern skills in management and operations and may, in turn, use these skills to start their enterprises. For instance, in Ireland indigenous entrepreneurship has taken precedence over the years since foreign software companies such as Apple and Microsoft invested in the country. The locally owned related companies benefited from outsourced deals such as disc duplication and printing of manuals. To this end, the locally owned enterprises export over 70% of all software output. This may never have been achieved had foreign investment not been allowed in the country in the first place (Terjesen, pg.839).
Foreign direct investment also hurts local enterprises. In many countries where foreign companies have invested, there have been reports of locally owned firms collapsing as a result of lacking the ability to compete favorably with the foreign-owned companies. This affects the economic development of such countries since the foreign companies repatriate most of their profits to the countries of origin. Large foreign investments may also take advantage of their size to engage in unscrupulous business practices that may be unfair for the survival of the small local firms.
The firms may also use their power to influence policy formulation in the countries they operate to favor their success. Most foreign firms have impacted negatively the entrepreneurial skills of locals as they tend to bring on board their experts instead of relying on the local experts in the host countries. This denies the locally trained experts the chance to access and acquire the more advanced skills used in running these firms (Bastova, pg.65).
In terms of efficiency, FDI has proved beneficial in improving technologies in countries they invest in. For instance, in most third world countries, outdated technologies have been in use particularly in government c corporations. With the inflow of foreign technology, such systems have been highly improved in terms of performance. The technological applications used by these foreign companies are also adopted by the locally owned firms hence improving their performance. Indirectly, the use of efficient systems by foreign investments arouses the local firms to improve efficiency to remain competitive (Bulcke, Verbeke, and Yuan, pg.260).
The efficiency element is not only in new improved technology but the technical skills and managerial prowess as well. There is strong evidence that improved efficiency in the communist economies of central Europe resulted from imported expatriate knowledge from the western world. Most of the foreign firms that invested in these countries brought with them western trained managers and other experts from whom the local managers gained relevant skills. This improved efficiency gives the host country a competitive advantage on a global scale.
The disadvantage of the modern efficient systems on an economy may arise out of incompatibility in her operation systems (Bulcke, Verbeke &Yuan, pg.261). For instance, the host country may lack the economic capacity to adopt a certain technology due to the cost involved or inadequate manpower to use the technology as well as the cultural attitude of the populace to such systems (Bulcke, Verbeke and Yuan, pg.261).
The impact of foreign direct investment on the political, social and cultural environment of the host country may be positive or negative. The political landscape of the host country may benefit from the acquisition of new knowledge that may influence policy formulation. New investments into a country may require some legal framework that may be lacking. For the government to accrue the benefits associated with such an investment, it has to enact the appropriate legislature.
On the other hand, FDIs have been accused of manipulating politics and sovereignty of nations for their selfish benefits. Owing to their international structure and connections the multinationals have the alternative of relocating at will. When faced with new legal demands in the host country that for instance might affect their profit margins, they may shift to other ‘friendlier’ countries. This may render many states helpless and avoid implementing such legislature in fear of losing such an investor (Blackhurst and Otten, Para, 60).
FDI influences the social and cultural environment of the host country is varied. The developmental advantages accrued from international enterprises benefit the host country in such ways as the creation of employment opportunities.in many countries, significant numbers of locals have benefited from the opportunities availed by the multinationals. They may benefit directly or indirectly as a result of a company setting base in their country.
Many sub-Saharan countries that for years depended on subsistence farming have benefited from multinational companies that have introduced technologically led agriculture which brings profits to them. This has revolutionized its social and cultural lifestyles. Similarly, foreign firms may introduce unique cultures that may affect surrounding communities. Workers in such firms may be introduced to foreign cultural and social practices that could have both negative and positive influences on their conventional way of living.
The economic status of the host country may also be affected by FDI leading to improved lifestyles of the locals due to increased income, infrastructural development, and provision of other major social amenities. Many foreign companies have also initiated projects for the benefits of the communities in which they operate. Similarly, foreign firms have interfered with the cultural environment of some communities especially when their establishment involves displacement of communities from their cultural dwelling (Dirk, pg.2).
Bastova, Magdalena. Foreign Direct Investment Effects on Urban Economy: A Case of the City of Pilsen, Czech Republic. , 2008.
Blackhurst, Richard and Adrian Otten. Trade and foreign direct investment. WTO News.1996.
Bulcke, Daniel, Alain Verbeke, and Wenlong Yuan. Handbook on Small Nations in the Global Economy: The Contributions of Multinational Enterprises to National Economic Success. Cheltenham: Edward Elgar, 2009.
Dirk, Willem. Tri-sector Partnership to Manage Social Issues in the Extractive Industries: Application of Theories of Foreign Direct Investment and Development. Overseas Development Institute. 2001.
Terjesen, Siri, Max Planck, and Zoltan Acs. Foreign Direct Investment and Indigenous Entrepreneurship: Evidence from Wales and Ireland. AGSE, 2007.