Foreign Investment: Advantages and Disadvantages

Foreign direct investment refers to the investment made by an individual or business in another country, enabling investors to have a direct control over their investments. It can be measured as the capital's movement across national borders, resulting in net foreign direct investment inflow. Foreign direct investment plays a significant role in developing countries, providing long-term capital and advanced technologies. However, it also poses risks such as political changes, negative impact on exchange rates, non-viability of economy, and modern-day colonialism. Real-world examples include China becoming the largest recipient of foreign investment, overtaking the US, while the global economy's delicacy, geopolitical risks, and policy uncertainty have led to a reduction in foreign direct investment.

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Foreign Investment
It is related to the investment which is made by an individual of foreign or by a business in the
constructive capacity of some other country. It can be measured as the capital’s movement across
national borderlines in such a way that enables the investors to have a direct control on the
investment. The business firms which provides foreign direct investment are known as
multinational companies. The investors can directly invest in the businesses which are the
existing ones and can also promote them. There are two types of foreign direct investment i.e.
outward and inward (Lall et al., 2013). The accretive of both results in net foreign direct
investment inflow. Foreign direct investment is allowed freely in most of the sectors except few
like defense, coal, and lignite, etc. as foreign direct investment is not permitted beyond the
ceiling.
Foreign direct investment plays the significant role in the developing countries. As they enact the
source of long term for the capital and as a source of developed and advanced technologies as
well. Foreign direct investment helps in maximizing employment and the international trade. The
investment is non-volatile and non-debt, and the received returns are mostly spent on host
country for the development (Moran, T. H. 2012). The developing country i.e. Asia fascinated
more foreign investment that the United States and the European Union. The developed countries
also require the investment for the cross border but for distant reasons. In 2014, the world foreign
direct investment reduced 16 percent to $1.2 trillion. After increasing 9 percent to $1.46 trillion
in 2013. The foreign investment is in various forms like foreign loans, portfolio investment, etc.
The foreign loans are used for the infrastructure. The foreign investment and economic growth
are interlinked (Yarbrough et al., 2014). As the countries require a large inflow of foreign
investment in order to gain a sustainable competitive advantage.

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The Advantages of Foreign Investment to the Recipient Country
 Easy International Trade-
The countries have an own tariff on import, and this makes the trading difficult. But the recipient
country gets an advantage of foreign investment as the international trade becomes easy in order
to make sure that the goals and sales are adequately met.
 Boost in Employment and Economy-
The recipient country gets the advantage in order to develop new jobs, and the new companies
are built in that country to explore new opportunities. Further, the income and buying power of
people is maximized, and this boosts the economy.
 Development of Human Capital Resource-
The recipient country gets the advantage of developing the human capital resource. As it is a
knowledge of people, who works as labor. The characteristics which are achieved by the training
and development helps in maximizing the human capital of the country.
 Reduction in Disparity between Cost and Revenues-
The recipient country gets the advantage of the foreign investment in order to ensure that the cost
of production will be equal and would be easily sold by reducing the disparity between revenue
and cost.
 Increment in Income-

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The recipient country gets the biggest advantage from the foreign investment as the income gets
incremented. As the jobs are increases with the higher salaries and wages which further
maximizes the national income. And as an outcome, the economic growth is encouraged.
Therefore, the recipient country gets the management of best practices, legal guidance and
accounting from the investors (Blomstrom, M. 2014). They can use the new technology and
innovations in the practices of operations.
The Disadvantages of Foreign Investment to the Recipient Country
 Risk of Political Changes-
The recipient country faces the political issues because the changes occur instantly and the
foreign investment becomes risky. And also the factors which rise because of the changes are
very high.
 Negative Impact on the Exchange Rate-
The foreign investment impacts the exchange rate occasionally in order to benefit the recipient
country and damage the other.
 Non-Viability of Economy-
The foreign investments are the capital intensive according to the perception of investors of the
recipient country, it becomes non-viable and risky sometimes.
 Negative Affect on the Investment of the Country-

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The recipient country gets impacted negatively because of the rules and regulations which are
governed by the foreign exchange rate. As a result, the investment might get banned and will
become impossible to chase an opportunity.
 Modern-Day Colonialism of Economy-
Various countries of the third world are afraid that the foreign investment would impact in
various types of modern day colonialism of economy that further uncloak the recipient country
and leave them endangered in order to explore new opportunities.
Therefore, the countries should not enable much foreign ownership of the businesses in the
significant industries (Moosa, I. 2016). As this reduces the advantage of comparative of that
recipient country.
Real World Example
China overhauls the US as one of the leading recipients of foreign investment. In 2014, China
became the largest recipient of foreign investment by overhauling the US since 2003. The
UNCTAD (United Nations Conference on Trade and Development) stated that the foreign
investment inflow of china was maximized by 3 percent to $129 billion in the year 2014.
Whereas, the US faced the reduction in foreign investment inflow to $86 billion. The sales of
cross-border merger and acquisitions in the US reduced from $10 billion in the year 2014.
Therefore, the UN body was liable for the international trade. The Hong Kong, region of China
received $111 billion of inflow of foreign investment in 2014.
The foreign direct investment reduced because of the delicacy of the global economy,
geopolitical risks and the uncertainty of the policy. The flow of foreign investment decreased by

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14 percent because of the high divestment in the US. Further, the recovery of the economy in the
US reduced the prices of oil and the policy of monetary in the Eurozone in order to encourage
flow of foreign investment ("The Wall Street Journal & Breaking News, Business, Financial and
Economic News, World News and Video," 2016). According to the UN body, the outlook for the
global economy, volatility in the commodity and the currency of the market and upraised risks of
the geopolitics negatively impacts the flows of the foreign investment.

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REFERENCES
Blomstrom, M. (2014). Foreign Investment and Spillovers (Routledge Revivals). Routledge.
Lall, S., & Narula, R. (Eds.). (2013). Understanding FDI-assisted economic development.
Routledge.
Moosa, I. (2016). Foreign direct investment: theory, evidence, and practice. Springer.
Moran, T. H. (2012). Foreign Direct Investment. John Wiley & Sons, Ltd.
The Wall Street Journal & Breaking News, Business, Financial and Economic News, World
News and Video. (2016). The Wall Street Journal. Retrieved 3 November 2016, from
http://www.wsj.com/
Yarbrough, B. V., & Yarbrough, R. M. (2014). Cooperation and governance in international
trade: The strategic organizational approach. Princeton University Press.