Effects of Foreign Direct Investment Essay

The possible positive and  negative effects of FDI  inflows Ing. Tomà ¡Ã… ¡ Dudà ¡Ã… ¡, PhD. Possible positive effects FDI provides capital which is usually missing  in the target country Long term capital is suitable for economic  development Foreign investors are able to finance their  investments projects better and often cheaper Foreign corporations create new workplaces Possible positive effects FDI bring new technologies that are usually  not available in the target country. There is empirical evidence that there are spillover effects as the new technologies usually spread beyond the foreign corporations Foreign corporations provide better access to  foreign markets Ex. Foreign corporations can provide useful  contacts even for their domestic subcontractors Possible positive effects Foreign corporations bring new know-how and  managerial skills into the target country Again, there is a spill-over effects – as people leave the corporations they leave with the knowledge and know-how  they accumulated Foreign corporations can help to change the economic  structure of the target country With a good economic strategy governments can attract  companies from promising and innovative sectors Possible positive effects â€Å"Crowding in† effect The foreign corporations often bring additional  investors into the target country (ex. their usual subcontractors) Foreign corporations improve the business  environment of the target country Ethical business or rules of conduct Possible positive effects Foreign corporations bring new â€Å"clean†Ã‚  technologies that help to improve the  environmental conditions Foreign corporations usually help increase the  level of wages in the target economy Foreign corporations usually have a positive  effects on the trade balance Possible negative effects Foreign corporations may buy a local company  in order to shut it down (and gain monopoly  for example) â€Å"Crowding out† effect We can see this effect if the foreign corporations  target the domestic market and domestic  corporations are not able to compete with these  corporations Possible negative effects Foreign corporations may cut working  positions (privatization deals or M&A  transactions) Foreign corporations have a tendency to use  their usual suppliers which can lead to  increased imports (no problem if the  production is export driven) Possible negative effects Repatriation of the profits can be stressful on the  balance of payments The high growth of wages in foreign corporations  can influence a similar growth in the domestic  corporations which are not able to cover this growth  with the growth of productivity  The result is the decreasing competitiveness of domestic  companies Possible negative effects Missing tax revenues If the foreign corporations receive tax holidays or  similar provisions The emergence of a dual economy The economy will contain a developed foreign  sector and an underdeveloped domestic sector Possible negative effects Possible environmental damage  Ã¢â‚¬Å"Incentive tourism†