Advantages and Disadvantages of Foreign Investment on Recipient Country

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
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ECONOMICS ASSIGNMENT1
Introduction
Foreign investment is the investment of goods and services from one country to another.
It consists of investment in capital flow that deals in granting exclusive ownership in the assets
of domestic companies. Foreign investment denotes that the revenue and profits of domestic
companies are more or less dependent on the level of investment made by the foreign companies
by providing capital and other advanced technology. Foreign investment has acted as a catalyst
for bringing out the economic growth in countries in the near future because investment implies
the output supply of firms. All the firms try to improve their quality and quantity of the product
for the enhancement of diversification of commodities. Thus, foreign investment plays an
important role for the growth of businesses and management team.
However, foreign investment may create negative impacts on the domestic economy.
When a foreign company opens its franchise in domestic economy, it takes away its profit to the
foreign companies which is a loss for domestic companies and countries (Buettner et al. 2018).
Therefore, foreign investment has both positive and negative impact on the recipient country.
The aim of this paper is to bring about the advantages and disadvantages of foreign investment
on the recipient country.
Discussion
A trend found in multinational firms to gather the maximized profit is by the net foreign
investment from various countries. Domestic firms who extend their businesses in foreign
countries has seen significant growth. This is because foreign investment not only improves the
quality of the business, it also creates a strong competition among firms leading to an increase in
aggregate demand of the product.

ECONOMICS ASSIGNMENT2
Types of foreign investment
The inflow and outflow of capital flow, falls under two types- foreign direct investment
(FDI) and foreign portfolio investment (FPI). Foreign investment is known as the investment
made by a firm in domestic economy to open and control ownership in other countries. The
foreign company has a direct control over the company operating in domestic economy.
Whereas, foreign portfolio investment is the investment of stocks, bonds and financial
assets in foreign country. It involves money deposited by foreigners in foreign bank account or
buy stocks, shares, corporate bonds and government bonds in foreign market by the non-
residents. The foreign investor does not have any direct ownership of the financial asset and
depending on the volatility of market assets are relatively liquid and less risky. The amount of
foreign portfolio investment made by investors is measured in country’s capital account in the
balance of payments by the inflow and outflow of money within a specific time period. Investors
are benefitted from the diversification of stocks and understanding the share markets of the
invested company.
Advantages of foreign investment
Foreign investment creates great opportunities to improve the market conditions of the
respective economy. Developed countries can grow its market capitalization power and benefit
from a rise in revenue and profits. The developing countries get ample scope for development
and creation of new opportunities to stimulate economic growth (Lee 2013). Developed
countries are able to get huge quantity of valuable inputs from the developing countries at a
cheap rate. Industries benefit from the lower production cost and higher supply of output at a low