Corporate Finance Strategy

Corporate Finance Strategy

Foreign Direct Investment

Foreign Direct Investment is a concept that benefits the countries. It is important, efficient and profitable for the countries who are involved in it and helps the economies to grow. Following are the advantages and disadvantages of FDI:

Advantages

There are some very specific benefits of FDI flows from developed countries to less developed. One is to facilitate the transfer of technology. If the foreign subsidiary introduces new products or processes in the receiver of FDI market, that company workers acquire skills that increase the human capital of the country. At the same time, companies that are suppliers, customers and even competitors from foreign companies indirectly perceive the effects of technological diffusion. Although there are cases where this does not occur; technology diffusion, empirical research has shown that spillovers occur and its effects are beneficial to the host economy. This increased participation of foreign capital in the economy not only improves the performance of the company receiving the investment, but also to other companies, which may be favored by the diffusion of knowledge and new technologies incorporated in these capital flows (www.globalpolitician.com) .

In addition to bringing new technologies, there is evidence to suggest that FDI usually increases the productivity of the recipient economy. The argument is that these companies, who have more experience, better technology and more sophisticated capital city, show higher productivity than their local competitors, and their presence forces other companies to raise their own levels of productivity. Here the argument is more complex and less conclusive results, because there is a bias caused by the fact that multinationals tend, first, to invest in more productive sectors. It is also possible that this effect is given only in the same sector or investment in sectors where they operate their suppliers and customers.

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