When FDI crosses our minds, a picture of investing in another country comes in mind. That is true but it all depends on several factors such as the political stability of a country, the corporate tax rates, expected population growth rate, etc.
So, what are foreign direct investments?
Foreign direct investment (FDI) is simply a situation where an individual or company in one particular country starts a fully functioning company, invests in a particular company or expands its operations in another different company. This is done to increase the target market basis of the services or products of the original company.
However, even though this happens for the initial benefit of the investors, the host and recipient countries benefit from the business idea.
Benefits of FDI to the recipient country.
In what way does a recipient country stand to benefit by attracting foreign direct investment?
- Economic growth.
When investors come into a country and expand their operations or invest in an existing company, they have to employ more people for effective operations in the company. As a rule, to invest in a particular country, a certain percentage of employees have to come from the recipient country. This translates to the creation of job opportunities in that country. When a huge percent of citizens in a country are employed, it means that the country is able to raise enough revenue for its expenditures through taxes.
This is what leads to the economic growth of that country. We have seen this happened in African countries such as Chad.
- Development of rural areas.
All developing countries have those undeveloped areas where people with low wages, the unemployed or uneducated live in. By attracting Foreign Direct Investment FDI, these are the most favorable areas for the construction of warehouses and manufacturing stands. This is what attracts the development of such areas. Schools, hospitals, etc, are established so as to cater to the needs of the employees that work in such companies. Some companies also develop transport and infrastructure in such rural areas.
- Increase in exports.
When a multinational is investing in a particular country, it does so to broaden its market in that particular country. However, it does not all end there. Some of these multinationals are targeting to export these goods to other countries. This helps a country to increase its revenue through all these exports. Moreover, the increased exports make a country’s currency strong and able to compete favorably in the stock exchange.
- Creation of competition in the market.
FDI is one way of eradicating monopoly in any particular market. The increase in the good or service prices is due to the monopoly in the market. This is where a particular company exploits its market because they are the only providers of particular goods or services and lack strong competition from other similar companies.
By attracting FDI from multinationals that have been in the industry long enough, competition is on the rise meaning that commodity prices go down. This relieves the country’s citizens from the burden of high food prices.
By the above benefits, you can tell the reason why developing countries have been competing to attract FDI. It is a win-win situation for the recipient country and the investors.